Finance Chapter 11
Optimal portfolio choice
and the capital asset pricing model
1. The expected return of a portfolio
Portfolio weights: the fraction of the total investment in a portfolio held in each
individual investment in the portfolio, x i = value o
Finance Chapter 22
1. Real versus financial options
Previous discussed financial options give holder right to buy/sell a traded asset e.g. stock
real option: right to make a particular business decisions e.g. capital investment key
Finance Chapter 17
1. Distributions to shareholders
Payout policy; alternative uses for FCF retain: invest in new projects, increase cash
reserves/payout: repurchase shares, pay dividends.
Dividends public board determines amount of dividend
Finance Chapter 16
Financial distress, managerial
Incentives and information
1. Default and bankruptcy in a perfect market
Default; when a firm fails to make the required interest/principal payment on the debt
debt holders get certain assets of firm firm
Finance Chapter 24
1. Corporate debt
Leveraged buyout; public company becoming private/group of private investors
purchases all equity of a public corporation requires large amount of corporate debt.
Public debt corporate bonds are securiti
Finance Chapter 23
Raising equity capital
1. Equity financing for private companies
Private company must seek sources that can provide capital must also understand
outside capital will affect control.
Sources of funding raise outside equity capital.
Finance Chapter 29
1. Corporate governance and agency costs
Corporate governance: system of controls, regulations, and incentives designed to
prevent fraud conflicts of interest attempt to minimize it agency conflicts.
Finance Chapter 30
Insurance most common method to reduce risk property insurance: insure assets
against hazards other types: business liability insurance: covers costs that result if
some aspect of business causes harm to a t
Finance Chapter 14
Capital structure in a perfect market
1. Equity versus debt financing
Capital structure: relative proportions of debt, equity and other securities.
Financing a firm with equity project cash flows depend on overall economy (contain
Finance Chapter 15
Debt and taxes
1. The interest tax deduction
Interest expenses reduce amount of corporate tax firm firms must pay with leverage,
higher net income total amount available to all investors higher (able to raise more
capital initially) int
Finance Chapter 10
Capital markets and the pricing of risk
1. Risk and return: insights from 86 years of investor history
As horizon lengthens, relative performance of stock portfolios improves (performed
relatively better than Treasury) investors do not
6. Dont forget to show some basic summary statistics of the stocks in your report. Are
returns constant over time?
As you can see in the report, we included a lot figures and tried to e
1 Why are risk and return positively related?
Because of the risk-return tradeoff, you must be aware of your personal risk
tolerance when choosing investments for your portfolio. Riskier investments
must offer investors higher average returns t
*To start off could someone define a default?*
-a firm that fails to make the required interest or principal payments on the debt
*As long as a firms assets exceeds its liabilities it can repay their loans
*If they issue securities at a fair price and the
School of Business &
Place & Maastricht & 02-11-2015
Name, Schaible, R.
initials: Wang, N.
Chapter 14: Capital Structure in a Perfect Market
14.1 Equity Versus Debt Financing
The relative proportions of debt, equity, and other securities that a rm has outstanding constitute
its capital structure.
Financing a Firm with Equity
In the absence of a
Chapter 11: Optimal Portfolio Choice and the Capital Asset Pricing Model
11.1 The Expected Return of a Portfolio
We can describe a portfolio by its portfolio weights, the fraction of the total investment in the
portfolio held in each individual investment
Finance Chapter 12
Estimating the cost of capital
1. The equity cost of capital
The cost of capital is the best expected return available in the market on investments
with similar risk CAPM is practical to identify it estimate of beta is provided by SML
Finance Chapter 13
Investor behavior and
capital market efficiency
1. Competition and capital markets
Identifying a stocks alpha equilibrium, market portfolio efficient if market prices
remain unchanged, news would raise expected return of security change
Discuss the different sources of funds. Do they relate to the life cycle of the firm?
Angel investors are individual investors who buy equity in small private firms.
Because their capital investment is often relatively large, they typically rec