Equity #28: Return Concepts Flashcards Preview

2018 Level 2 > Equity #28: Return Concepts > Flashcards

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

14

FORMULA: WACC

WACC = [(MVdebt/MVdebt+equity)(returndebt)(1-tax)] +(MVequity/MVdebt+equity0