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Lecture

Lect 1.docx

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Department
Business
Course
EFB210
Professor
All Professors
Semester
Spring

Description
EFB307 Lecture 1INTRODUCTIONA financial decision typically involves riskA Company borrowing money faces the risk that interest rates may changeA company building a new factory faces the risk that product sales may be lower than expectedTo make effective financial decisionManagers need to understand what causes riskhow it should be measuredthe effect of risk on the rate of return required by investorsThese issues are discussed using the framework of portfolio theoryPortfolio theoryShows how investors can maximise the expected return on portfolio of risky assets for a given level of riskRelationship between risk and expected return is described by 2 models for valuing assets under uncertainty o Capital Asset Pricing Model CAPMLinks expected return to a single source of rise o Fama and French threefactor ModelImplies that there are 3 risk factors for which an investor may demand compensationRETURN AND RISKReturn on investment is the financial outcome for the investor o If someone i
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