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FINA4200 T2 Conceptual
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What are the two measures of equity investment risk?
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Standard deviation and CAPM B
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jehippe
Terms in this set (14)
What are the two measures of equity investment risk?
Standard deviation and CAPM B
Which measure of risk looks at standalone risk?
Standard deviation
Which measure of risk looks at the non-diversifiable risk?
CAPM Beta
Can the risk free rate be determined by financial managers?
No, the risk free rate serves as the Y intercept for the SML.
Can beta be determined by financial managers?
Yes, beta can be determined by financial managers, this is the X axis for the SML.
Can the slope of the SML (Rm-Rf) be controlled by financial managers?
No, this cannot be determined by financial managers.
Would a stock be undervalued or overvalued if the growth rate was quoted below what it actually should be?
The stock would be undervalued
Would a stock be overvalued or undervalued if the Dt calculated by summing the last four quoted D's was quoted beneath what was accurate?
The stock would be undervalued
What would an investor do if their valuation is beneath the quoted price of a stock?
They would likely pursue other investments or short the stock (as long as they are confident in their model)
What factors make stock prices volatile?
1. Dividends are subject to change (or D1)
2. Rs = Rrf + Bi *(MRP) could change
--> Inflation expectations
--> risk aversion
--> individual company risk
3. g (the growth rate) could change (an increase would bring up the stock price and a decrease would bring down the stock price)