Current Income:
cash or nearcash that is periodically rec’d.
Simple Interest:
paid only on initial deposit for time held.
Compound Interest:
paid on initial deposit and any interest accrued from one pd to next.
Continuous Compounding:
interest is compounded over the smallest possible interval of time.
Req’d Return
=
riskfree rate+risk prem.
RiskFree Rate
=
real rate of return+exp inflation prem.
HPR
= (current income+cap gain)/beg investment value;
Cap Gain =
end investment
valuebeg investment value.
Growth Rates
:
find growth rates on calc: enter beg valuePV, end valueFV, # of pdsN, CPTi/y.
Risk
:
uncertainty of:
Business:
an investment’s earnings/ability to pay returns.
Financial:
payments bc of capital structure
(more debt, greater the risk).
Purch Pwr:
inflation/deflation affecting returns.
Int Rate:
changes in int rates will affect returns.
Liquidity:
inability to liquidate investment easily/at reasonable price.
Tax:
unfavorable changes in laws can affect returns.
Market:
decline in returns because of mkt factors.
Event:
unexpected events affecting returns.
Standard Deviation
=
(return
√
j
exp return)²/n1.
Coefficient of Variation
= st dev/exp return.
Efficient Portfolio
: provides the highest return for a
given level of risk.
Portfolio Return
:
(w
1
*r
1
)+(w
2
*r
2
)+..+(w
n
*r
n
).
Portfolio St Dev
:
(k
√
1
k
avg
)²+(k
2
k
avg
)²+..+(k
n
k
avg
)².
Pos
Correlation:
2 series that move in the same direction (
Perfectly Pos Correl2 series that have a correlation coefficient of +1).
Neg
Correlation:
2 series that move in opposite direction (
Perfectly Neg Correl2 series that have a correl coefficient of 1).
Total Risk
=
NonDiversifiable Risk + Diversifiable Risk.
Beta
: measure of nondiversifiable risk (
beta should be bt .51.75, if b=.5 the return
is half as responsive as the mkt
).
CAPM
:
Req’d Rate of Return = riskfree rate+[
b
*(mkt returnriskfree rate)].
SML:
graph of
CAPM model (betax axis).
APT:
mkt risk prem explained by a # of factors – some cases replaces mkt return used in CAPM.
Traditional Port Mgmt:
“balancing” portfolio across range of industries.
Modern Port Theory
:
uses several statistics
methods:
exp returns & st dev
: emphasizes the efficient frontier & betas.
Port Beta
=
(w
1
*b
1
)+(w
2
*b
2
)+..+(w
n
*b
n
).
Risk Return
Tradeoff
:
positive relationship bt the risk of an asset and its exp return.
Public Offering:
offer to sell a set # of shares of stock
to the public for a set price.
Rights Offering:
offer of a new issue to existing stockholders to purchase new shares in proportion
to their current position.
Stock SpinOff:
conversion of a firm’s subsidiaries to a standalone firm by distributing stock of new
firm to existing shareholders.
Earnings per Share
:
EPS = (Net Profit After Taxes – Preferred Dividends) / Number of Shares of
Common Outstanding
Dividend Yield
:
DY = Annual Dividends Rec’d per Share / Current Market Price of Stock.
Dividend
Payout Ratio
:
DPR = Dividends per Share / Earnings per Share.
Dividend Reinvestment Plans (DRIPs):
plans in which
shareholders have cash dividends automatically reinvested into additional shares of the firm’s common stock.
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 Spring '09
 Upton
 Financial Ratio, Dividend yield, net profit

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