FINE 441 Lecture Notes - Lecture 10: Risk-Free Interest Rate, Risk Premium, Standard Deviation

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15 Dec 2015

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Chapter 21 : 8,9,11 to 15,17 to 20,22 to 25,27,33 to 43: performance evaluation. Generally, the geometric average is preferable for calculation of historical returns while the arithmetic average is more appropriate for forecasting future returns. The concept of abnormal performance is critical to the process performance evaluation. As indicated above, it is more common to benchmark or market adjusted returns reported in industry. The measure of abnormal return using this risk-adjusted technique assumes the managed and the benchmark or market portfolio have the same level of risk. The market model or indexed model approaches are theoretically superior since they explicitly adjust for different levels of systematic risk. Factors that lead to superior performance include selection of undervalued stock and the ability to time general movements in the market. The sharpe measure is also widely accepted in industry. The slope measure is based on the portfolio risk premium and the total risk of the portfolio as measured by standard deviation.

Related Questions

1) The principal amount of a bond that is repaid at the end of the loan term is called _________.

2) _________ plots the yields on bonds relative to maturity.

3) A _________ is an unsecured bond, for which no specific pledge of property is made

4) An unexpected decrease in market interest rates will cause a coupon bond's yield to maturity to ___________.

5) The yield to maturity on a premium bond ____________ the bond's coupon rate.

6) Assume a constant dividend growth. The _________ of a stock equals its capital gains yield.

7) If a firm pays a constant annual dividend, then the capital gains yield is equal to ____.

8) According to the dividend growth model, the required rate of return is equal to the capital gains yield if the dividend growth rate is ______.

9) Assume a constant dividend growth. A decrease in the capital gains yield will ______ the current value of a stock.

10) _______________ can be used to value the stock of firms that pay no dividends.

11) The reward for bearing risk is called the ___________.

12) The higher the risk, the _____ the return.

13) The geometric average return is _____ than the arithmetic average return for a given set of returns.

14) A group of assets held together by an investor is referred to as a __________.

15) Unsystematic risk can also be referred to as asset-specific risk, ________ risk, idiosyncratic risk, or unique risk.

16) ________ refers to the practice of investing in a variety of diverse assets as a means of reducing risk.

17) An unexpected increase in the variable costs for a firm is an example of _____________ risk.

18) An unexpected decrease in corporate tax rates is an example of __________ risk.

19) If a risky security has more risk than the overall market, its beta coefficient is _______ 1.

20) All else constant, an increase in the market value of preferred stock will affect a firm's weighted average cost of capital by changing the ______ of preferred stock.

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[1] The explicit costs, such as the legal expenses, associated with corporate default are classified as _____ costs.
[A] beta conversion
[B] direct bankruptcy
[C] indirect bankruptcy

[2] An indirect cost of bankruptcy is the loss of key employees.
[A] True
[B] False

[3] A legal attempt to financially restructure a failing firm so that it can continue operating as a going concern is called a reorganization.
[A] True
[B] False

[4] The optimal capital structure has been achieved when the:
[A] weight of equity is equal to the weight of debt.
[B] debt-to-equity ratio selected results in the lowest possible weighted average cost of capital.
[C] cost of equity is maximized.

[5] The optimal capital structure will tend to include more debt for firms with:
[A] less taxable income.
[B] lower probability of financial distress.
[C] substantial tax shields from other sources.

[6] The optimal capital structure of a firm:
[A] will remain constant over time unless the firm makes an acquisition.
[B] will be the same for all firms in the same industry.
[C] will vary over time as taxes and market conditions change.

[7] In a world with corporate taxes, MM theory implies that that all firms should choose an all-debt capital structure.
[A] True
[B] False

[8] A firm is technically insolvent when:
[A] the value of its stock declines by more than 50 percent in any given 12-month period.
[B] the value of the firm's assets is less than the value of the firm's liabilities.
[C] it is unable to meet its financial obligations.

[9] Which one of the following statements is correct concerning a Chapter 7 bankruptcy?
[A] A firm reorganizes its operations in an effort to return to being a viable concern.
[B] A trustee will assume control of the firm's assets until those assets can be liquidated.

[10] If the net present value of a project is positive (non-zero), then the project's internal rate of return will exceed its required rate of return.
[A] True
[B] False

[11] Which one of these methods uses accounting values rather than financial values?
[A] AAR
[B] IRR
[C] NPV

[12] An investment should be accepted if the NPV is positive and rejected if it is negative.
[A] True
[B] False

[13] The length of time required for an investment to generate cash flows sufficient to recover the initial cost of the investment is called the:
[A] net present value.
[B] payback period.
[C] internal rate of return.

[14] An investment is acceptable if its average accounting return (AAR):
[A] exceeds the target AAR.
[B] is less than the target AAR.

[15] The discount rate that makes the net present value of an investment exactly equal to zero is called the internal rate of return.
[A] True
[B] False

[16] The most valuable investment given up if an alternative investment is chosen is referred to as a(n):
[A] sunk cost.
[B] opportunity cost.
[C] erosion cost.

[17] The cost of test marketing a product prior to deciding whether or not to produce the product is a sunk cost.
[A] True
[B] False

[18] An asset will be depreciated faster using MACRS rather than the straight-line method.
[A] True
[B] False

[19] The financial break-even point determines which one of these values?
[A] Fixed costs
[B] Variable cost per unit
[C] Sales quantity

[20] The return earned in an average year over a multi-year period is called the _____ average return.
[A] arithmetic
[B] standard
[C] geometric

[21] The capital gains yield plus the dividend yield on a security is called the:
[A] geometric return.
[B] total return.
[C] variance of returns.

[22] Which one of the following is an example of a nondiversifiable risk?
[A] A poorly managed firm suddenly goes out of business due to lack of sales
[B] A key employee of a firm suddenly resigns and accepts employment with a key competitor
[C] A well respected chairman of the Federal Reserve suddenly resigns

[23] Beta values are highly dependent on the covariance of a security with the market.
[A] True
[B] False

[24] Insider trading does not offer any advantages if the financial markets are:
[A] inefficient.
[B] semiweak form efficient.
[C] strong form efficient.

[25] MM Propositions ignore bankruptcy costs.
[A] True
[B] False

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FINE 441 Lecture Notes - Lecture 10: Risk-Free Interest Rate, Risk Premium, Standard Deviation

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