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4 - any one period(standard deviation =(variance 1/2 • 68...

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Lecture 10: Capital budgeting: 1. Key knowledge: Control and evaluation procedures Post completion audits 1. improve the quality of existing decisions 2. improve the quality of future decisions 3. enable corrective action on existing projects Problems in implementing post audits 1. measuring  incremental  cash flows 2. using accounting measures of performance Historical cost Accounting depreciation Inflation, unrecorded assets, creative accounting Share price behaviour and information efficiency: 1. Average return: Arithmetic average: Geometric average: 2. Two main characteristics of return: (arithmetic)  average return:  measures what you expect to earn each  period as things even out over time standard deviation of return  or  return variability  or  volatility:  gives a  measure of how far from the average you expect the return to be in 
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Unformatted text preview: any one period (standard deviation = (variance) 1/2 ) • 68% chance that stock return will be between mean – standard deviation and mean + standard deviation • 95% chance that stock return will be between mean -2 standard deviation and mean + 2 standard deviation. 3. Price behaviour and information efficiency: Types of information efficiency: 1. Weak-form efficiency Information set = previous price changes/returns 2. Semi-strong form efficiency Information set = publicly available information 3. Strong form efficiency Information set = all information, public and private Anomalies/regularities? – weekend effects – seasonal effects – post-earnings announcement drift (PAD)price momentum...
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