Summary
Financial Management Summary
- Course
- Institution
- Book
Financial Management Summary Passed exam: 9.0
[Show more]
Connected book
Book Title:
Author(s):
- Edition:
- ISBN:
- Edition:
More summaries for
-
Test Bank in Conjunction with Financial Markets and Corporate Strategy,Hillier,Seond European edition
-
Be Exam Ready with the Updated [Financial Markets and Corporate Strategy,Hillier,Seond European edition] 2023-2024 Test Bank
-
Intermediate Corporate Finance Summary
5 reviews
By: harolddequincey • 3 year ago
By: bramheijstek • 5 year ago
By: semvandenberg • 5 year ago
By: NickBreukelman90 • 6 year ago
By: ilco_van_waardenburg • 6 year ago
Seller
Follow
Thommullekom
Reviews received
Content preview
Financial ManagementTopic 1
Roadmap of the course
Portfolio theory & CAPM
Expected return =
Variance =
Investors problem within a portfolio: How to allocate my wealth? = optimization problem.
Computing portfolio expected returns: - - >
Correlation coefficient (p) = cov/(vol1*vol2)
A portfolio variance is more difficult.
The last part is the correlation-coëfficient.
Tangency portfolio!
Tangency portfolio -> Where the sharp (reward-to-volatility ratio is maximized
Sharp ratio = (E(rm) – rf) / Rm
Much assets -> difficulties with calculating. This is solved by using matrices in the calculation.
Vector of portfolio weights: W
Variance-covariance matrix: Ω
Portfolio variance: w’ Ωw
Investing in multiple asset could cause diversification benefits.
Diversification means that you diversify the idiosyncratic / firm-specific risk which leads to only
remaining the systematic risk.
Quiz final
Market risk premium: 8% -> find covariance and variance.
1
,Market Risk
Also called non-diversifiable risk, systematic risk
Attributable to market wide risk sources
Example: macroeconomic factors
Firm specific risk
Also called as diversifiable risk, unique risk, non-systematic ris
Risk is firm specific and the sources of risk are independent.
Example: success in R&D projects.
Potential diversification benefits arise when the assets are not perfectly correlated.
The portfolio risk does fall with diversification, but the power of diversification is limited by common
sources of risk. (in extreme cases: when the correlation is -1, we can construct a zero variance
portfolio -> Perfect Hedge!)
Minimum variance portfolio: the minimum variance portfolio is the portfolio composed of the risky
assets that has the smallest standard deviation, the portfolio with least risk.
(formula is derivec after applying the first order condition)
Separation theorem (portfolio theory) states that, under certain conditions, any investor's optimal
portfolio can be constructed by holding each of certain mutual funds in appropriate ratios, where the
number of mutual funds is smaller than the number of individual assets in the portfolio.
- All investors identify M because they want to be on the Capital Market line
- You choose to invest into the tangency portfolio.
Capital Asset Pricing Model (CAPM): a prediction about the relationship
between risk and expected return of an asset. The two functions:
A benchmark for rate of return
A guess of an expected return of an asset (in particular non-traded
assets).
What does CAPM say?
All investors will choose a market portfolio (M) with some
proportion (combining with some risk free asset
Capital Market line -> Investors’ optimal asset allocation line
Risk premium of the market portfolio M is proportional to its risk
and average risk aversion level of the investors
The risk premium on individual assets is proportional to risk
premium on market portfolio
2
,How do we measure β :
Is it possible to have a negative β?
Wiki: Negative betas are possible for investments that tend to go
down when the market goes up, and vice versa. There are few
fundamental investments with consistent and significant negative betas, but some derivatives like put
options can have large negative betas.
Example: gold market
A negative beta simply means that the stock is inversely correlated with the market.
A negative beta might occur even when both the benchmark index and the stock
under consideration have positive returns. It is possible that lower positive returns of
the index coincide with higher positive returns of the stock, or vice versa. The slope of
the regression line in such a case will be negative.
Roll’s critique: market portfolio is unobservable -> use a proxy like a stock index, but this
doesn’t include all assets.
Critics of CAPM
Is CAPM testable?
How to be sure about true expectations (e.g. E(r))
Roll’s critique -> market portfolio is unobservable
Why does CAPM fail from empirical tests?
Failure of data
Validity of the market proxy
Statistical methodology
CAPM is accepted as “the best available model”
Logic of decomposition of systematic and firm specific risk
The efficiency of market portfolio is not far from being valid.
3
, Topic 2: Valuing real assets
Chapter 9: Discounting and Valuation
The key idea in this chapter: Time has value!
Time value of money: how do we compare $$ today to $$ tomorrow!
Calculate
- Return: (P1-P0)/P0
- P1 = P0(1+r1)
- P0 = Pt / (1+r)^t
Compute the per period yield of a zero-coupon bond with a face
value of €100 at date 20 and a current price of €45.
- Nominal and real rates
- Inflation adjusted cash flows
You have to discount consistently -> Discounting nominal cash flows at nominal discount rates or
inflation-adjusted cash flows at the appropriately computed real interest rates generates the same
present value.
Perpetuity: PV = C/r
Growing perpetuity: PV = C / (r-g)
Annuity:
Growing annuities:
4
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller Thommullekom. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $5.37. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
52510 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy study notes for 14 years now