FIN 3312_Exam2REVIEW - Copy.pdf

FIN 3312_Exam2REVIEW - Copy.pdf - Review for 2nd Exam Risk...

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Review for 2 nd Exam Risk and Return: From Chapters 10 and 11 Computing Returns Expected vs. Required Return o Meaning of each E(R) is what you think you will get, most likely outcome Determined by: o Expected future CF- CF inc, then E(R) inc. o Price- CF inc., then E(R) dec Required Return is what you NEED to get, the minimum level of return to cause investment Determined by: o Risk o Other available opportunities Required Return= Risk Free Rate + Risk Premium o What happens when not equal Expected is usually greater than required. If expected is greater than required, you will buy more and so will others so the price will rise and E(R) will decrease. If expected is less than required, you won’t buy or you will sell if you already own and so will everyone else, the price will decrease and E(R) will increase. o Why must they be equal Because stock is in Equilibrium Market Efficiency and Changing Prices o How can the two exist together
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  • Fall '08
  • staff
  • Finance, Business finance, Intro Finance

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