{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

Corporate Finance Test 3 Summary

# Corporate Finance Test 3 Summary - To get the h istorical...

This preview shows pages 1–2. Sign up to view the full content.

To get the historical average of the individual values we add up the yearly returns and divide by 80. Average returns are nominal because we aren’t worried about inflation. Historical T-bills have had low real returns where as small stock have had relatively large real returns. T-Bills have the lowest maturity of any government bond. Because the government can always raise taxes to pay its bills, the debt represented by t-bills is virtually free of default risk over its short life. The we call the rate of return on t-bills the risk free return and we will use it as a benchmark. To calculate variance :1 st find average return = (r1 +r2 +r3…/3 or # of periods):Than find the deviatons (r1- avg ret), (r2-avg ret) etc…:Square the result and add them together: Variance can now be found by: (Sum of Sq. Deviations)/ (number of returns -1): After calculating Variance we can than calculate Standard deviation simply by taking the square root of the variance. Standard deviation is an ordinary %. Under normal distribution the probability we will end up within one STDEV of the average is 2/3, two STDEV is 95%, and more than three STDEV is less than 1%.The sharpe ratio = risk premium of the assets/ STDEV; it is the measure of return relative to the level of risk taken. If a market is in strong form efficient then all information of every kind is reflected in the stock prices. There is no such thing as insider information. Semistrong form efficient is the most controversial, it suggests all public information is reflected in the stock price. It implies that a securities analyst who tries to indentify mispriced stock using financial statement information is wasting time because that information has already been reflected in the stock price. Weak form efficiency suggests that at a minimum the current price of a stock reflects the stocks own past prices. Studying past prices in attempt to indentify mispriced securities is useless in weak form efficient. To calculate the variance of portfolio we first determine the squared deviations from the expected return and the risk free rate. We then multiply each possible squared deviation by its probability. Add these up and the result is the variance. The standard deviation, as always, is the square root of the variance. Portfolio Weights is the % of the total portfolio’s value that is invested in an asset. Using the portfolio weight we can calculate the expected portfolio return.(E(Rp)= Probability A x E(Ra) + Probability B x E(Rb)) The unanticipated or surprise/innovation part of the return is the true risk of any investment. Systematic Risk is one that influences a large number of assets each to a greater or lesser extent because systematic risk are marketwide they are often referred to as market risk . Types of systematic risk include: GDP, Interest Rates, and Inflation. Additionally, there is unsystematic risk or risk that affects a small group of assets. Because these risk are unique to companies we often call them

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### Page1 / 4

Corporate Finance Test 3 Summary - To get the h istorical...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online