expected. The primary purpose herein is to focus upon return and risk and how they are measured. Importance :The relationship between risk and return is a fundamental financial relationship that affects expected rates of return on every existing asset investment. The Risk -Return relationship is characterized as being a "positive" or "direct" relationship meaning that if there are expectations of higher levels of risk associated with a particular investment
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Learning Goal: 5 Topic: Capital Asset Pricing Model (CAPM) 54. An example of an external factor that affects a corporation’s risk or beta, and hence required rate of return would be (a) financing mix. (b) toxic spills. (c) asset mix. (d) change in top management. Answer: B Level of Difficulty: 3 Learning Goal: 5 Topic: Beta and Systematic Risk 55. The beta of a portfolio is (a) the sum of the betas of all assets in the portfolio. (b) irrelevant, only the betas of the individual assets are important. (c)
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are given the following two equations: E(Ri ) = Rf + (E(RM ) − Rf )βi E(RM ) − Rf E(Rp ) = Rf + σp σM (1) (2) You also have the following information: E(RM ) = .15, Rf = .06, σM = .15. Answer the following questions, assuming that the capital asset pricing model is correct: (a) Which equation would you use to determine the expected return on an individual security with a standard deviation of returns =.5 and a β = 2? Given the parameters above, what is the expected return for that security? (b)
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Midland Energy Resource Case Analysis 1. Describe Midland, its capital planning model and Janet Mortensen's role in the case. Midland Energy Resource, Inc. has three major divisions: Exploration & Production (E&P), Refining and Market (R&M), and Petrochemicals. E&P division provides the most profit for Midland. R&M is the largest division in Midland by revenue. Petrochemicals is the smallest division in Midland. Midland’s financial strategy in 2007 consisted of four principals:
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* Question 1 0 out of 1 points | | | The common price-earnings valuation method applied the ____ price-earnings ratio to ____ earnings per share in order to value the firm's stock. | | | | | Selected Answer: | b. firm's; industry | Correct Answer: | d. average industry; firm's | | | | | * Question 2 1 out of 1 points | | | If security prices fully reflect all market-related information (such as historical price patterns) but do not fully reflect all other public
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All of the models to be discussed, i.e. Markowitz, Single Index, CAPM, and APT, have one single goal that is accomplished by using them. This goal is to make a portfolio, or individual securities, as efficient and well performing as possible by finding the optimal weights, highest return, and lowest risk. The Harry Markowitz model of 1952, or the mean-variance model, was one of the earliest models created to compare and contrast securities outcomes. This model uses the weights, standard deviation
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FIN 475 Spring 2014 Cases in Financial Management Case 2 Prepared For Dr. Haskins By Kaylynn Burgess, Cody Jochim, and Richard Caldecott February 20, 2014 1. The case gave a table that had the rate or return under certain conditions and from that we found the expected returns, standard deviations, and coefficients of variations for the assets. For the expected returns we took the probability and multiplied that by the rate of return for each type of economy, and then added them all up
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theories and models that yield the cost of equity. After providing a clear description of all three, I will focus on one particular model, the Capital Asset Pricing Model (CAPM), which is a simplistic approach to cost of equity. Then lastly, the CAPM will be applied to a few companies and discussed. Three Models There are several tools available to estimate the rate of return. Three of these tools are capital asset pricing model, the dividend growth model, and arbitrage pricing theory. Although
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The Weighted Average Cost of Capital Cost of Capital – the cost that a firm must pay for the capital it uses to finance new investments and investment projects. Capital comes from: 1) Debt 2) Preferred stock 3) Retained earnings 4) Common stock Alternatively: Cost of Capital to the firm is the equilibrium rate of return demanded by investors in the capital markets for securities in that risk class. So, it is the minimum rate of return required
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