WOU-CF-T1 - TUTORIALONE TUTORIALONE 23Jan2011BBF304/05...

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TUTORIAL ONE TUTORIAL ONE 23 Jan 2011 -  BBF 304/05 23 Jan 2011 -  BBF 304/05 Corporate Finance Corporate Finance Presented by: Dato’ Howard Choo (23 Jan 2011) (20 Feb 2011) (20 Mar 2001) (17 Apr 2011) (15 May 2011) 1
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2 Capital Market Line Security Market Line CAPM Systematic Risks E R  - Single Asset Asset Diversification Realised Rate of Return (RoR) on Investment = % Capital Gain + Dividend Yield Risk-Return Theory (Roadmap) Unsystematic Risks  [can be eliminated] Risk-Return  Theory
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3 Investor Type - Characteristics Required Return on Risk Asset = Risk Free Rate of Return + Risk Premium ER = Rf + Rp Risk-Adverse Risk-Neutral Risk-Preferred  investment with lowest risk  avoid high-risk stocks  loses out on a bullish market  prefers index funds, government    bonds  receives lower returns  seeks higher return for same risk     or lower risk for same return  do not like to lose  overlooks risk  more concerned with returns  in bullish market will ignore risk    for returns  do not mind win or lose  takes on risks even if getting    lower returns  acquire investments of higher        risks  do not place concern on losing
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4 Risk – Return Concept (See pg.24 Fig1.2 StudyGuide) Risk of an asset is measured by standard deviation ( σ ) or variance (   σ 2 ) Risk Return L3 L1 L2 Theory (1)High Risk = High Return (2)Risk defined as the SD of an asset (3)Where SD is high, asset is more risky (4)Portfolio of assets created to benefit from risk diversification, provided correlation co-efficient is  negative 0,0 Formulae:    σ = ∑ P n   x  (R – R x ) 2 Variance= sum of [probability x (required return – expected return) squared]
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5 How to compute expected return [ER] and Risk Premium [Rp] Growth Rate Likelihood Rate of Return Calculation Scenario 1 8% 0.30 12% 0.3 x 12 = 3.6% Scenario 2 5% 0.45 7% 0.45 x 7 =3.15% Scenario 3 2% 0.25 3% 0.25 x 3 =0.75%
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This note was uploaded on 02/14/2011 for the course BBF 304 taught by Professor Tang during the Spring '11 term at Aachen University of Applied Sciences.

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WOU-CF-T1 - TUTORIALONE TUTORIALONE 23Jan2011BBF304/05...

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