Finance Final Study Guide

Finance Final Study Guide - Finance-Final Study Guide...

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Finance—Final Study Guide Chapter 10 -Dollar Returns : if you buy any asset, your gain or loss from that investment is called your return on investment and usually has 2 components—1) you may receive cash directly while you own investment (income component) 2) value of your asset you purchase will often change—capital gain or loss -Total Dollar Return= Div. Inc. + Capital Gain (Loss) -Percentage Returns : How much do we get for each dollar we invest? DIVIDEND YIELD= D/P where D is the dividend paid on the stock during year and P is stock price at beginning of year; Second component is CAPITAL GAIN YIELD= (P 1 -P 0 )/ P 0 which is the change in price during year divided by beginning price; putting it together we get X in dividends and X in capital gains yield and our final % return is both added together -Average Returns : See Notes and PAGE 297—T-Bills, Gov. Bonds, Corp. Bonds, Lg./Sm. Stocks -Risk Premiums : excess return req’d from an investment in a risky asset over that req’d from a risk-free investment—T-Bills are RISK-FREE b/c gov. can always raise taxes to pay bills -Frequency Distributions and Variability : we need a measure of how volatile a return is, two common measures of volatility are: -Variance: avg. squared difference between actual and average return—bigger the number, more actual returns differ from average returns and more spread out returns will be -Standard Deviation: positive square root of variance -Normal Distribution : symmetric, bell-shaped curve that is completely defined by its variance and standard dev. SEE FIGURE 10-10 PG 307 -Geometric Average Return : average compound return earned per year over a multiyear period GAR= [(1+R 1 ) x (1+ R 2 ) x … (1+R 100 )] 1/T – 1 where R is return; will always be equal to or less than arithmetic average -Average Arithmetic Return : return earned in an avg. year over a multiyear period; simply just adding all returns up and dividing by number of years -Geometric VS. Average : to forecast up to a decade use AAR, if a few decades split difference between AAR and GAR, if long forecasts using many decades use GAR -Efficient Capital Market : market in which security prices reflect available info—basically saying there is no reason to believe price is too high or too low -Efficient Market Hypothesis (EMH): hypothesis that actual capital markets, such as the NYSE, are efficient; New info rapidly incorporated into price; Hard to “beat” markets by selection and timing; “buy and hold” strategy may be best Chapter 11 -Expected Return : return on a risky investment expected in the future; If you have Stock X for a number of years, you’ll earn 30% half the time and 10% the other half, therefore expected return is 20%--E(R)= .5 x 30% + .5 x 10%=20%; Risk Premium= Expected Return- Risk-free rate -Portfolio : group of assets such as stocks and bonds held by an investor -Portfolio Weight : % of a portfolio’s total value in a particular asset; if we have $50 in one asset and $150 in another, then our total portfolio weight is $200, the % of our portfolio in our first asset is $50/200=25%
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Finance Final Study Guide - Finance-Final Study Guide...

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