Flashcards in Equity #28: Return Concepts Deck (14):

1

## FORMULA: Holding period return

### r = [(P1 +CF1)/P0]-1

2

## What is the assets' required return?

### min. expected return an investor requires

3

## Asset is overvalued or undervalued when Expected return > Required return?

### undervalued

4

## Required return > Expected return, asset value is over or under valued?

### overvalued

5

## discount rate is used to find the future or present value of the investment?

### present

6

## What is the IRR for?

### Internal rate of return (IRR) is rate that = discounted cash flows to the current price

7

## What is the equity risk premium?

### return over the rfr that investors require for holding the securities

8

## FORMULA: CAPM Required return for stock

### = rfr + (Beta)(ERP) where ERP is equity risk premium

9

## What are 3 types of fwd looking estimates for ERP (equity risk premium)?

### Gordon growth, Macroeconomics models. survey estimates

10

## FORMULA: Multifactor model required return

### rr = RF + (risk prem)1 +(risk prem)2

11

## Difference btwn Pastor-Stambaugh model and Fama-French model

### Pastor-Stambaugh adds liquidity factor

12

## FORMULA: adjusted beta

### [(2/3)(regression beta)]+[(1/3)(1)]

13

## When dealing with emerging market and adding premium, what is diff btwn country spread model and country risk rating model?

### country spread model uses corresponding developed markets and adds EM premium (bond yields). country risk rating estimates ERP for developed and replaced inputs for EM

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