11 CAPM Flashcards
1
Q
Systematic risk
A
A fully diversified portfolio eliminates unsystematic, or firm-specific risk
=> Std is now useless for measuring risk/volatility of a stock
2
Q
Relevant risk
A
Compare a stock’s return to the returns of the market
3
Q
CAPM
A
Re = rf + βi(Rm – rf)
4
Q
Intrinsic value - Stock price estimate is based on:
A
- FCFs
- Growth in FCFs
- Cost of equity - how volatile? how risky?
5
Q
Dividend Discount Model
A
P0 = CF1 / (Re – g)
6
Q
Beta
A
Measure of systematic risk
7
Q
What drives beta?
A
Calc by regressing stock returns vs market returns
=> What drives returns? CFs
=> What drives CFs? Business risk - volatility of business
What else? Financial Risk - debt:
↑debt, ↑risk, ↑volatility
8
Q
Reliability of beta
A
- Has the firm taken on or paid off debt during the measurement period?
- Has the firm acquired or divested assets of a different business risk?
9
Q
Enterprise Value
A
Market value + debt - cash
