Mid Term Exam: FInance

Corporate Finance provide skills needed to identify corporate strategies and projects that add value to firmforecast the funding requirements of their company, devise strategies
agency problem managers may act on their own interest and not on owners (stockholder)
corporate governance is the set of rules that control a company’s behavior
primary objective shareholder wealth maximization, maximizes fundamental stock price
employment growth is higher in firms that try to maximize stock price
employment goes up in firm that make managers into owners, owned by government but sold to private investors
intrinsic value is sum of all future expected free cash flows
tick marks at ends of periods so Time 0 is today, Time 1 is end of period 1
types of cash flows singlemultiple Equal multiple unequal
multiple equal cash flow finite (annuity)Infinite (perpetuity)
Multiple unequal finiteinfinite
as an investor and based on your understanding of risk s&P companies that are considered riskier than the others will have a higher expected rate of return than the others
if you invest $100,000 in 40 stocks, 20 bonds, and a CD. What kind of risk will be exposed to? portfolio risk
generally, investors would prefer to invest in assets that have a low level of risk and high expected return
un systematic risk type of risk associated with how a firm is finances
systematic type of risk relates to fluctuations in exchange rates
standard deviation measure of the variability of a set of outcomes
risk aversion concept based around the idea that investors require higher rates of return as risk increases
expected rate of return on a porfolio Rate of return *size percentage
standard deviation of historic return Variance = sum of squared amounts/n-1Variance^1/2
coefficient of variation standard deviation/expected return
portofilio risk is NOT weighted average. you have to take relationships into consideration
because of the effects of diversification, the risk is likely to be smaller than the average of all stock standard deviations
portofolio risk will decline if more stocks that are negatively correlated with other stocks are added to porfolio
market risk of portfolio can be reduced by hedging, investing in different markets smartly
unsystematic risk component of the total portfolio risk can be reduced by adding negatively correlated stocks to portfolio
Stock A beta is 1, this mens stock moves in same direction and magnitude as market
beta coefficient o stock i (stock i deviation /market standard deviation)*correlation
portfolio beta investment/value of portfolio*beta of each stock
required return risk free rate +Market risk(beta)
portfolio require return points old rate of return-new rate of rreturn
switch higher beta then portoflio beta increase, and require return increase
on charts Risk Free is y interceptMarket Risk Premium: slopestock beta, horizontal coordinaterate of return y coordinate
what kind of stock is most affected by changes in risk aversion? high beta stocks
Fama And French Three Factor Mode A factor model that expands on the capital asset pricing model (CAPM) by adding size and value factors in addition to the market risk factor in CAPM. This model considers the fact that value and small cap stocks outperform markets on a regular basis. By including these two additional factors, the model adjusts for the outperformance tendency, which is thought to make it a better tool for evaluating manager performance.
calculating required return with french three facotr Risk free rate+agc+bgc(required market -risk free)+Cgc(Risk for small stock)_Dgc(risk premium for value stocks)
Capital Asset pricing model realized return on any stock is the sum of the market risk free rate and the market premium multiplied by the sensitivity of the stock to the return
fama french three factor uses market risk, company size and company book to market value to estimate required return on security
the model maintains that the only risk rewarded in the market with additional return is systematic or nondiversifiable risk capital asset pricing model
academics use this more than real managers french three factor model

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