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Ch. 2

by: Caitlyn Myers
Caitlyn Myers
GPA 3.35
Intermediate Financial Management
Victoria Javine

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About this Document

Intermediate Financial Management
Victoria Javine
One Day of Notes
25 ?




Popular in Intermediate Financial Management

Popular in Finance

This 1 page One Day of Notes was uploaded by Caitlyn Myers on Friday January 16, 2015. The One Day of Notes belongs to FI 410 at University of Alabama - Tuscaloosa taught by Victoria Javine in Spring2015. Since its upload, it has received 207 views. For similar materials see Intermediate Financial Management in Finance at University of Alabama - Tuscaloosa.

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Date Created: 01/16/15
Fl 414 CH 2 Historical returns 0 Dollar terms receivedinvested 0 Percentage terms return investment Usually prefer these Greater the chance your actual return is less than expected returnrisk Probablity distributionwidermore risk Probability distributionskinnieress risk 0 RF asset has probability distribution of at vertical line Reposetions are counter cyclical l good to create diversi cation counter cyclical Tbill is your risk free asset as far as default rrisk but it still has in ation risk Just because it has a high expected Rate of Return doesn39t mean it39s best because you need to know what the risk is that39s associated with that Variance for REPO Total Riskdiversi abe risk and undiversi able risk 0 Diversi able risk can be gotten rid of by diversi cation of an investment 0 Undiversi able risk can39t be gotten rid of mkt risk Coef cient of variationhow much units of risk per every one unitpercentage of return The lower the correlation between securities the more risk reduction by diversi cation 0 Correlation can range from 1 to 1 1perfect negative correlation l perfectly positive correlation Partial positive correlation gets rid of most risk with a little still left Corelation0 is independent The relevant risk is market risk and that is the risk you have to be compensated for Beta is market risk stand alone includes market risk but can39t nd beta from stand alone risk Security Market Line slopeRisk premium on the market Compare expected Rate of Return to Required Rate of Return to determine under over or fairly priced security 0 Buy if undervalued Beta of a portfolio is the weighted average Required ROR for the portfolioweighted average of required ROR 0 Using SML RperRPmbp The in ation risk premium will be included Added level of riskaversion which means steeper slope on the security market line SMLCAPM shows how investors should act but this doesn39t always happen Base values on historical values but we know that thinkgs that happen in the past don39t always happen again Also Beta is not always the same because of different time values


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