FinanceTest

# FinanceTest - study notes for test 2

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Chapter  2 Dollar return= amount received-amount invested Rate of return=dollar return/ amount invested Expected rate of return=  =P ř 1 r 1 + P 2 r 2 +…P n r n Deviation i =r i ř Variance=   σ 2 =sum(r i -  ) ř   2  P i Standard Deviation=  σ Coefficient of variation=CV=  / σ   ř RP M =r M -r RF RP i =(RP M )b i SML equation (CAPM)= r i  = r RF  + b i (r M  – r RF ) r RF  is the y-intercept Risk premium is the slope Inflation shifts the line up or down (equal change in the  rate of return on all assets) Change in the risk premium changes the slope of the SML Chapter  3 Two asset case: =w ř A   ř A +(1-w A ř B Portfolio Standard Deviation=  σ p =sq.rt.[w 2 A   σ 2 A +(1-w A )2  σ 2 B +2w A +(1-w A ) ρ AB σ A σ B CML=  ř p =r RF +((  ř M -r RF )/  σ M ) ) σ p Slope CML= (  ř M -r RF )/  σ M Beta under the CAPM= ρ iM ( σ i / σ M ) Total risk= variance=market risk+ diversifiable risk Chapter 4 Current yield= annual interest PMT/ current price Coupon rate= annual interest PMT/ face value Quoted market interest rate=r d =r*+IP+DRP+LP+MRP r RF =r*+IP TIPS=(approx)r* r T-bill =r RF MRP=interest risk rate+reinvestment risk rate Chapter  5 Constant growth stock: P 0 =D 1 /(r s -g) Capital gains yield=(P 1 -P 0 )/P 0 ř s

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