Finans Flashcards
(15 cards)
What is the purpose of the Capital Asset Pricing Model (CAPM)?
CAPM explains how risk and expected return are related. It shows that investors need to be compensated for the time value of money and for taking on additional risk.
Why might a company delay an IPO during periods of market volatility?
Market volatility might lead to lower valuations and higher uncertainty, making it less favorable to issue shares at the desired price
What does Beta represent in finance?
Beta measures an asset’s sensitivity to market movements. A Beta of 1 means the asset moves with the market, above 1 means it’s more volatile, and below 1 means it’s less volatile.
Flashcard 3
Q: What is systematic risk, and how is it different from unsystematic risk?
Systematic risk is market-wide risk that cannot be diversified away (e.g., economic recessions). Unsystematic risk is specific to a company or industry and can be reduced through diversification.
Flashcard 4
Q: Why is diversification important in a portfolio?
Diversification reduces unsystematic risk by spreading investments across various assets. This improves the risk-return tradeoff of the portfolio.
What does the Efficient Market Hypothesis (EMH) suggest about stock prices?
EMH suggests that stock prices always reflect all available information, making it impossible to consistently outperform the market without taking on additional risk.
What is the difference between the Capital Market Line (CML) and the Security Market Line (SML)?
The CML represents the risk-return tradeoff for portfolios combining risk-free assets and the market portfolio. The SML represents the risk-return tradeoff for individual assets based on their Beta.
What is the significance of the risk-free rate in investment analysis?
The risk-free rate is the return on an investment with no risk of financial loss, serving as the baseline for evaluating other investments.
Why might a project with a positive Net Present Value (NPV) be rejected?
A project might be rejected if it conflicts with a firm’s strategic goals, exceeds available resources, or carries unquantifiable risks not reflected in the NPV calculation
What is meant by the “opportunity cost of capital”?
It is the return an investor forgoes by investing in one project instead of the next best alternative with a similar risk profile.
What does it mean for a portfolio to be “mean-variance efficient”?
A portfolio is mean-variance efficient if it offers the highest expected return for a given level of risk or the lowest risk for a given level of expected return.
What is the purpose of calculating the Weighted Average Cost of Capital (WACC)?
WACC represents the average return required by all capital providers (debt and equity). It’s used to evaluate the feasibility of investments or projects.
What is the role of a risk premium in investment?
The risk premium is the additional return investors demand for taking on risk above the risk-free rate.
Why are tax shields important in project evaluation?
Tax shields lower the effective cost of debt by reducing taxable income, making projects more attractive financially.
What does “market efficiency” imply for investors?
If markets are efficient, it implies that no strategy can consistently achieve returns above the market average without taking on more risk.
