Study Guide for Exam 3 - required return and how a stock...

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Study Guide for Exam 3 Risk and Return Understand the difference between market risk and unique risk Be able to identify the type of risk which can be eliminated by diversification (and which kind can not) Be able to define and identify the different market indices (e.g., Dow Jones Industrial Average, S&P 500) Know the difference between the market risk premium and the risk premium on an individual stock Know the CAPM formula and how to use it to estimate the expected (required) return for an individual stock Be able to calculate variance, standard deviation and expected return for an individual stock as well as for a portfolio Be able to explain the impact of diversification on the standard deviation of a portfolio Be able to define beta, how beta impacts
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Unformatted text preview: required return and how a stock with a beta other than 1.0 will respond to changes in the market • Be able to calculate the beta of a portfolio given the betas and weights of individual stocks in the portfolio Cost of Capital • Know the definition and formula for the weighted average cost of capital (WACC) • Know how to determine the market value of each of the components of a firm’s capital • Know how to calculate the after-tax cost of debt given the market value of debt and the coupon rate • Understand how WACC should be adjusted for projects • Understand how the required return for a project is used to determine whether a project should be accepted or rejected given a projects IRR...
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