Premium Essay

Corporate Finance Chapter 9

In:

Submitted By darcyliu1997
Words 6357
Pages 26
CHAPTER 9 – CHARACTERIZING RISK AND RETURN

Questions

LG1 1. Why is the percentage return a more useful measure than the dollar return?

The dollar return is most important relative to the amount invested. Thus, a $100 return is more impressive from a $1,000 investment than a $5,000 investment. The percentage return incorporates both the dollar return and the amount invested. Therefore, it is easier to compare percentage return across different investments.

LG2 2. Characterize the historical return, risk, and risk-return relationship of the stock, bond and cash markets.

Examining Table 9.2, it is clear that the stock market has earned about double the return since 1950 than bonds. Bonds have earned about 50% higher return than the cash markets. The risk in the stock market is also higher than the bond and cash markets according to the standard deviation measurement (Table 9.4). Another illustration of the high risk is that the stock market frequently losses money and sometimes does not earn more than the bond and cash markets over short periods of time (Table 9.2). The risk-return relationship tells us that we should expect higher returns for the riskier market. We do see higher realized returns over the long term to the higher risk asset classes.

LG3 3. How do we define risk in this chapter and how do we measure it?

Risk is defined as the volatility of an asset’s returns over time. Specifically, the standard deviation of returns is used to measure risk. This computation measures the deviation from the average return. The idea is to use standard deviation, a measure of volatility of past returns to proxy for how variable returns are expected to be in the future.

LG3 4. What are the two components of total risk? Which component is part of the risk-return relationship? Why?

Total risk includes firm specific risk and market risk.

Similar Documents

Premium Essay

Afdg

...Module Title |Fundamentals of Securities and Futures Regulation | | |Module Code |BAF2407 | |Module Year |2010-2011 | |Module Value |3 | |Module Hours |Lecture | |30 | | | |Tutorial |15 | | | |TOTAL | |45 | | | | | | | | |Pre-requisites |Nil | |Co-requisites |Nil | |Module Aims |To provide students with an understanding of the rules and regulations in regulated | | |activities in Hong Kong. | |Exemption Criteria ...

Words: 717 - Pages: 3

Premium Essay

Fin 534 Student Guide

...COURSE DESCRIPTION Introduces the concepts of finance. Reviews the basic tools and their use for making financial decisions. Explains how to measure and compare risks across investment opportunities. Analyzes how the firm chooses the set of securities it will issue to raise capital from investors as well as how the firm’s capital structure is formed. Examines how the choice of capital structure affects the value of the firm. Presents valuation and integrate risk, return and the firm’s choice of capital structure. INSTRUCTIONAL MATERIALS Required Resources Brigham, E. F., & Ehrhardt, M. C. (2014). Financial management (14th ed.). Mason, OH: South-Western Cengage Learning. Supplemental Resources MBA Primer Note: The MBA Primer is designed to help students with little or no educational background in business to prepare for the rigors of an MBA program. The MBA Primer is also a useful tool for students who have the business background but might need a refresher. It is a way to help you prepare for the types of activities and concepts that will be covered in the MBA program, so you can feel more comfortable and confident as you progress into higher level courses. Students are emailed an access code for this product when they purchase MBA Primer from the Strayer Bookstore, accessible through iCampus. CNN Money. (2013). General format. Retrieved from http://money.cnn.com/ Criniti, A. (2013). The necessity of finance. Philadelphia, PA: Criniti Publishing Company. ...

Words: 1233 - Pages: 5

Premium Essay

Dozier

...Lecture Notes for 15.436 International Financial Markets Chapter 6 Why hedge exposure to exchange rates Fall 1999 Raman Uppal 6-2 International Finance: Chapter 6 – Why hedge Fall 1999 Road Map 1 Part A Part B 6 7 8 9 Part C Part D Part E Preliminaries: Conventions, notation, and basic concepts Currency markets and the behavior of the exchange rate Markets for exchange-rate derivatives and the hedging decision Why hedge exposure to exchange rates Measuring and managing exposure to exchange rates The market for currency futures The market for currency options Markets for fixed income securities and the financing decision Markets for equities and the portfolio investment decision Foreign direct investment Fall 1999 International Finance: Chapter 6 – Why hedge 6-3 Contents 6.1 Main issues . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2 Motivating problems . . . . . . . . . . . . . . . . . . . . . . 6.3 Implications of empirical evidence on exchange rate behavior . 6.4 When is value of a firm independent of its hedging policy 6.5.1 6.5.2 6.5.3 6.5.4 6.5.5 4 5 6 7 9 10 15 17 22 23 . . 6.5 How can hedging increase the value of a firm . . . . . . . . . Corporate hedging reduces costs of financial distress . . . . . . . . “Home-made” hedging is not an efficient substitute for corporate hedging . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Hedging reduces agency costs . . . . . . . . . . . . . . . . . . . Hedging...

Words: 3488 - Pages: 14

Premium Essay

Miss

...American University of Science &Technology Faculty of Business and Economics Department of Finance Course Syllabus (FIN 460) - International Finance – M.W. Fall 2014-2015 Course Description The subject matter of international finance is concerned with the monetary and macro-economic relations between countries. International finance is a constantly evolving subject that deals very much with real world issues such as balance of payments problems and policy, the causes of exchange-rate movements and the implications of macro-economic linkages between countries. Credit : 3 hours Prerequisites By course :Fin 350- Financial Markets & Institutions Eco 202- Macroeconomics Textbook : Fundamentals of Multinational Finance, 4th edition, 2012. Moffet/Stonehill/Eitman, Pearson, Prentice Hall. Supportive text : International Financial Management, Bekaert,Hodrick International Money and Finance: 7th edition by Michael Melvin Instructor : George El Kazzi, MMB Office Hours : M.W.F. from 6-7 pm E-mail : gkazzy@aust.edu.lb kazzifinance@yahoo.com Business Division e-mail: business.div@aust.edu.lb ________________________________________________________________________ Course Objectives To study the role that international trade and investment, currency movements...

Words: 892 - Pages: 4

Premium Essay

Capital Budgeting

...OUTLINE OF MBA 520 Fall Semester 2008 Business Finance Instructor: Grant McQueen Teaching Assistants: Mark Cherrington & Office: 636 TNRB Christian Hsieh Phone: 422-3017 Office: 324 TNRB Office Hours: MW 2:00 - 3:00 p.m. Phone: 422-6835 e-mail: Office hours: forthcoming Home page: Course Description and Objectives This course introduces basic financial concepts all business managers should understand regardless of functional specialization. Topics include financial analysis and planning, time value of money, valuation, capital budgeting, risk/return trade-offs, cost of capital, and capital structure. The pedagogical approach used is a mixture of lectures and case examples. Cases are often used as a vehicle for discussing the complexities of real-world financial problems. To benefit most from this method of teaching, you will want to come prepared to discuss the cases in detail. By the end of the semester, students should be able to: (1) describe essential characteristics of the finance profession and institutions, (2) be conversant in basic financial jargon, (3) value paper assets (stocks and bonds) and tangible assets (capital budgeting) using the tools of time value of money, including NPV and IRR, (4) explain the various sources of financing, their associated costs, and their advantages and disadvantages, (5) calculate and use financial statements and ratios to analyze a business and create and use pro forma statements for planning...

Words: 2362 - Pages: 10

Premium Essay

Asked Frequently Questions

...tly A sk ed Fr equen in s Question orporate C FinanCe io, a llocch ur izio D uiry, M a lv i Pa sc a l Q tonio Sa Le Fur , A n Ya nn From the team behind Pierre Vernimmen’s % = Corporate FinanCe + 3 Frequently Asked Questions in Corporate Finance Frequently Asked Questions in Corporate Finance Pierre Vernimmen, Pascal Quiry, Antonio Salvi, Maurizio Dallocchio and Yann LeFur A John Wiley & Sons, Ltd., Publication This edition first published in 2011 Copyright  2011 Pierre Vernimmen Registered office John Wiley & Sons Ltd, The Atrium, Southern Gate, Chichester, West Sussex, PO19 8SQ, United Kingdom For details of our global editorial offices, for customer services and for information about how to apply for permission to reuse the copyright material in this book please see our website at www.wiley.com The rights of Pierre Vernimmen, Pascal Quiry, Antonio Salvi, Maurizio Dallocchio and Yann LeFur to be identified as the authors of this work have been asserted in accordance with the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, except as permitted by the UK Copyright, Designs and Patents Act 1988, without the prior permission of the publisher. Wiley publishes in a variety of print and electronic formats and by print-on-demand. Some material included with...

Words: 120046 - Pages: 481

Premium Essay

Corporate Finance for Demistified

...CORPORATE FINANCE DEMYSTIFIED TROY A. ADAIR, Jr. McGraw-Hill New York Chicago San Francisco Lisbon London Madrid Mexico City Milan New Delhi San Juan Seoul Singapore Sydney Toronto Copyright © 2006 by The McGraw-Hill Companies. All rights reserved. Manufactured in the United States of America. Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written permission of the publisher. 0-07-148678-X The material in this eBook also appears in the print version of this title: 0-07-145910-3. All trademarks are trademarks of their respective owners. Rather than put a trademark symbol after every occurrence of a trademarked name, we use names in an editorial fashion only, and to the benefit of the trademark owner, with no intention of infringement of the trademark. Where such designations appear in this book, they have been printed with initial caps. McGraw-Hill eBooks are available at special quantity discounts to use as premiums and sales promotions, or for use in corporate training programs. For more information, please contact George Hoare, Special Sales, at george_hoare@mcgraw-hill.com or (212) 904-4069. TERMS OF USE This is a copyrighted work and The McGraw-Hill Companies, Inc. (“McGraw-Hill”) and its licensors reserve all rights in and to the work. Use of this work is subject to these terms. Except as permitted...

Words: 60340 - Pages: 242

Premium Essay

Mw Petroleum

...FI 8320, Spring 2005 Cases and Readings in Corporate Finance [pic] [pic] [pic] [pic] Instructor Professor David C. Nachman Office: RCB 1239 Phone: 651-1696 email: dnachman@gsu.edu Office Hours: W 10:00 am – 2:00 pm, or by appointment Prerequisites FI 8000 CSP: 1, 2, 6 Course Description This course focuses on financial policy-making through case analyses, contemporary readings from the professional literature, and problem solving. The emphasis in the course is on investment and financing decisions and their impact on firm value and on capital market imperfections and their impact on the raising of corporate capital. The course also provides an opportunity for the study of additional topics of special current significance such as capital structure and dividend policy, corporate restructuring and the market for corporate control, real options, risk management, international capital budgeting and financing, financial planning and working capital management, project financing, reorganizations and advanced equity valuation. Course Material Required text material • (BMA) R. A. Brealey, S. C. Myers and F. Allen, Principles of Corporate Finance, 8th ed., McGraw- Hill/Irwin, Inc., 2006. •(RP) Reading Packet •(CP) Case Packet The required text (BMA) and the materials that make up the Case Packet (CP) are available at the GSU Book Store. The Reading Packet (RP) is available at ERes. Contents of (CP) and (RP) (with ERes access instructions) follow...

Words: 2562 - Pages: 11

Premium Essay

Real Option

...FI 4320, Spring 2005 Cases and Readings in Corporate Finance [pic] [pic] [pic] [pic] Instructor Professor David C. Nachman Office: RCB 1239 Phone: 651-1696 email: dnachman@gsu.edu Office Hours: W 10:00 am – 2:00 pm, or by appointment Prerequisites FI 4000 CSP: 1, 2, 4, 6 Course Description This course focuses on financial policy-making through case analyses, contemporary readings from the professional literature, and problem solving. The emphasis in the course is on investment and financing decisions and their impact on firm value and on capital market imperfections and their impact on the raising of corporate capital. The course also provides an opportunity for the study of additional topics of special current significance such as capital structure and dividend policy, corporate restructuring and the market for corporate control, real options, risk management, international capital budgeting and financing, financial planning and working capital management, project financing, reorganizations and advanced equity valuation. Course Material Required text material • (BMA) R. A. Brealey, S. C. Myers and F. Allen, Principles of Corporate Finance, 8th ed., McGraw- Hill/Irwin, Inc., 2006. •(RP) Reading Packet •(CP) Case Packet The required text (BMA) and the materials that make up the Case Packet (CP) are available at the GSU Book Store. The Reading Packet (RP) is available at ERes. Contents of (CP) and (RP) (with ERes access instructions)...

Words: 2563 - Pages: 11

Premium Essay

Corporate Finance

...Continuing and Professional Studies Fundamentals of Corporate Finance New York University School of Continuing & Professional Studies Course #X51.9140 Spring 2011 James Berman 212.388.9873 jberman@jbglobal.com Description: In this introduction to corporate finance, emphasis is on utilizing long-term debt, preferred stock, common stock, and convertibles in the financial structure of a corporation. Learn to analyze methods of financing using internal and external funds. Topics include: financial management; corporate growth; business failures; return on investment; risk leverage; the time value of money; dividend policy; debt policy; and leasing. Instructor Biography: James Berman, the president and founder of JBGlobal.com LLC, a Registered Investment Advisory Firm, specializes in asset management for high-net-worth individuals and trusts. With over thirteen years of experience managing client portfolios, Mr. Berman is a professional analyst of financial vehicles, including equity and bond mutual funds, and is an expert in global investment, asset allocation and modern portfolio theory. As the president of JBGlobal LLC, the general partner of the JBGlobal Fund LP, Mr. Berman manages a global equities fund that invests in the United States, Europe and Asia. Mr. Berman is a faculty member in the Finance Department of the NYU School of Continuing and Professional Studies where he teaches corporate finance. He serves as sub-advisor to Eitan Ventures LLC, a venture...

Words: 1595 - Pages: 7

Premium Essay

Uwi Fm2 Course Outline

...initiated in the predecessor course and is for the consumption of Management / Finance students at the undergraduate level. This course is concerned with the major skills needed for a senior financial officer with respect to short-term financial operations (working capital management and financing) and long-term financial operations (capital structure, financing options) and introduces some international finance issues. Students will learn how to apply their learning in real-world examples. LEARNING OUTCOMES Since the course picks up the thread from its pre-requisite course MGMT 2023, the students already know that the finance function in an organization comprises of taking decisions regarding long term investments, financing (long term and short term) and distribution of profits. We touched upon some of these in the course before. Here, we specifically focus on the mechanism of raising capital, Capital Structure and Dividend policies and Short term Financial Decisions. We move towards consummation by taking up some issues in International Finance, Risk Management, Mergers and Leasing as well. The learning outcomes remain broadly similar in spirit to the Financial Management I (MGMT 2023) course as the focus remains on first the computation and then on the application of concepts and techniques. CONTENT |Week |Lecture Topic |Chapter...

Words: 557 - Pages: 3

Premium Essay

Da Nang Spring

...leader /lecturer: Dam Nguyen Anh Khoa E-mail: khoadam07@gmail.com Phone: 0905 03.05.60 1) Main objectives and goals of the course a. Understanding Business Ethics, Corporate Social Responsibility and their relationship; and examine their importance; b. Investigating different perspectives of business ethics theories; c. Understanding the roles of corporate culture and corporate leadership in business ethics; d. Understanding the concepts of ethics in the working place; e. Applying an ethical framework to business fields: Marketing, Corporate Governance, Accounting, and Finance; f. Describing business environment responsibilities. 2) Course Textbook(s)/ Resources: a) Main books: Laura Hartman and Joseph DesJardins, Business Ethics: Decision-Making for Personal Integrity and Social Responsibility, McGraw-Hill/Irwin, 2nd edition, 2010. Or Laura Hartman and Joseph DesJardins, Business Ethics: Decision-Making for Personal Integrity and Social Responsibility, McGraw-Hill/Irwin, 3rd edition, 2013 b) Reference books or resources: * Harvard Business Review * John D. Ashcroft, Jane E. Ashcroft, 2010, Law for Business, 17th edition, Cengage Publication, ISBN 13 9780538749923 04.02e-BM/DH/HDCV/FU 1/2 1/9 3) Implementation plan in details | | | | | | | | | | | | | | | | | COURSE SCHEDULE | | | | | | | | | Week | | Date | | | Back to Syllabus | |...

Words: 2283 - Pages: 10

Premium Essay

Ksyllab

...know and we will arrange a mutually satisfactory time. For some students, telephone “meetings” are easier. To this end, you may call me at reasonable hours (i.e., before 10:00 p.m.). NOTE: It is the student’s responsibility to read, understand and abide by all of the course information and policies listed below. Failure to do so could result in you failing this course or being withdrawn from this course by your instructor, School of Business Dean’s Office or by the Graduate Studies Department. The course syllabus provides a general plan for the course; deviations may be necessary. COURSE PREREQUISITE: All MBA Foundations classes must be completed or waived before enrollment in FIN 611. REQUIRED MATERIALS: 1. Textbook – Corporate Finance: The Core, by J. Berk and P. DeMarzo, published by Prentice Hall, ISBN (10‐digit) 0132153688. Available in loose leaf (3‐ring) format in the U Tampa bookstore. Textbook are also available as an e‐book from coursesmart: 1 Revised 08/21/2012 2. Cases and readings: available from www.study.net – available by 8/27/12 3. Additional files and readings will be distributed via Blackboard 4. Calculator - A financial calculator is required for this class. A Hewlett Packard 10B or a Texas Instruments BAII+ is ideal. Other brands/models may also suffice. Bring your calculator to class every day. Be sure you know how to use it. 5. Laptop computer – Many students find it useful to use their laptop computer during class. This is not...

Words: 2490 - Pages: 10

Premium Essay

Abc Defg

...financial problems. To benefit most from this method of teaching, you will want to come prepared to discuss the cases in detail. By the end of the semester, students should be able to: (1) describe essential characteristics of the finance profession and institutions, (2) be conversant in basic financial jargon, (3) value paper assets (stocks and bonds) and tangible assets (capital budgeting) using the tools of time value of money, including NPV and IRR, (4) explain the various sources of financing, their associated costs, and their advantages and disadvantages, (5) calculate and use financial statements and ratios to analyze a business and create and use pro forma statements for planning and decision-making purposes, (6) appreciate the complexities international business, and (7) demonstrate team skills by actively participating in group written cases. Course Materials Text: Background readings and problem sets are from Ross, Westerfield and Jordan (RWJ), Fundamentals of Corporate Finance, 9th Alternate Edition, Richard D. Irwin, Inc., 2010 (ISBN 978-0-07-724612-9). You will sometimes find that the readings are not necessarily highly correlated with the cases. This is because the cases tend to bring together many aspects of finance at once. Be patient, the concepts will gradually all fall into place as you move through the semester. Computers and Calculators: You will need...

Words: 2388 - Pages: 10

Free Essay

Fina3020Ab Course Outline Sem 1 2015

...The Chinese University of Hong Kong CUHK Business School FINA3020 International Finance First Term 2015 – 2016 A. Staff Information Instructor: Office: Phone: Email: Office Hours: Dr. Anson C. K. AU YEUNG Room 1245, Department of Finance, CYT 3943 3780 ansonauyeung@baf.cuhk.edu.hk By Appointment TA: Office: Phone: Email: Office Hours: Miss. Karen LEE Room 1155, Department of Finance, CYT 3943 7840 karenlee@baf.cuhk.edu.hk By Appointment B. Class Schedule Session FINA3020A FINA3020B Day Thursday Monday Time 14:30 – 17:15 14:30 – 17:15 Venue CKB UG04 WMY 406 C. Course Overview Businesses are operating in an increasingly competitive environment. Managing businesses either directly or indirectly exposed to international competition requires an understanding of currency markets, foreign exchange derivatives, exchange risk, exposure and risk management. This course assumes the viewpoint of the financial manager of a multinational corporation (MNC) with investment or financial operations in more than one country. Managers encounter new opportunities as they extend their operations into international markets, as well as new costs and risks. The challenge facing the multinational financial manager is to successfully develop and execute business and financial strategies in more than one national business environment. The aim of this course is to provide you a framework for analyzing financial decisions relating to risk management...

Words: 1635 - Pages: 7