[FIN 4414] - Midterm Exam Guide - Ultimate 13 pages long Study Guide!

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FIN 4414
MIDTERM EXAM
STUDY GUIDE
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FIN 4414
Lecture 1
CAPM
Intuition behind CAPM
- Cash in the future either risk free or risky
- People are risk averse & want to be compensated for holding a risky
asset
- Risk = how well the economy/market is doing
- Discounted by some combo of risk free rate & risk premium
- Why doesn’t CAPM give a price?
> You need cash flows & to discount them
Discount rate
- Rate to discount future cash flows to get their present value today
Formula
If expected returns are greater than your discount rate = underpriced
= buy it = price goes up = expected return goes down
Beta
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- Measure of how sensitive an asset or business or risk or cash flow is
to changes in the market
- Beta = 0 doesn’t always mean it is risk free (not sensitive at all)
> Betting/ not correlated with market can give a 0 beta
> Examples: treasuries, cash, horse racing
- Low beta = not very sensitive
> This would be things like utilities & food
- Beta of 1 = roughly like the market
- Beta > 1 = very sensitive
> Examples: luxury goods, tech stocks, emerging market stocks
- Beta < 0 (negative) = does well when market does badly, for
example….
> Gold
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