Essay about Introduction Finance

4) Using the stock price and return data in Exhibits 5 and 6, estimate the CAPM beta

1. True or False: According to the CAPM, a stock's expected return is positively related to its beta.

the risk-free rate is 5% and the expected return on the market portfolio is 13%. A stock has a beta of 1.5, what is its expected return?

4. The various weighted combinations of stocks that create this standard deviations constitute the set of efficient portfolios.

if the investor adds more and more randomly-selected stocks to the portfolio, the risk will be lower, because as you can see from the graph, with the number of stock added into the market, the portfolio standard deviation is reducing gradually and because portfolio standard deviation is a tool to measure risk, so the risk is reducing at the same time.

So, the cost of capital of any investment opportunity equals the expected return of available investments with the same beta. This estimate is

For example : The UK govt bonds is providing a return of 3% and the average market rate of return is 8.7% .The investor is expecting to invest in ABC ltd , listed in LSE .The beta calculated is 0.9 . Therfore on calculating , Rf = 3 , Rm = 8.7 , β = 0.9 . The return on investment comes out to be as 8.13 which is less than the rate of average market return . Therefore , it would not be beneficial to invest in shares of ABC Ltd .

Wikipedia's accurate definition of finance is "The activity of finance is the application of a set of techniques that individuals and organizations (entities) use to manage their financial affairs, particularly the differences between income and expenditure and the risks of their investments" http://en.wikipedia.org/wiki/Finance. I discuss the importance of keeping track and updating financial reports as well as simple bank statements. These are just some of the essentials that I believe we all as a people should acknowledge.

(15 points) Suppose all investors are risk-averse and hold diversified portfolios. You are evaluating a new drug company that is going to have two divisions: an R&D unit and a Sales unit. Your CEO and you are arguing about whether the two units should have the same cost

Using time series regression on the monthly returns we have estimated the beta coefficient for each stock. Using the market model of CAPM i.e., regressing each stock’s monthly returns against the market index (Nifty100) we have estimated individual stock beta’s.

Financial Management is a critical aspect of any business in order to achieve a sustainable and efficient cash flow. It is essential in maintaining the link between a business’s future financial goals (profit maximization) and the resources that it has in order to achieve its objectives. Businesses demand certain common goals that increase a bussiness's all around achievement, Some of which involve; growth amongst assests, An increase in efficiency in all areas of the business whether it be management or not. And the ability to meet short term and long term debts. Finacial management undertakes the responsibility to implement and acheive these goals for the business using a range of strategies shaped to meet the needs of the business and

Using the same market risk premium and risk free rate (5.5% & 4.62% respectively) given in the case, the averaged beta of 1.40, the pretax cost of debt of 7.65%, and the weighted average of debt & equity, the products & systems

The Beta is the second consideration of the CAPM that ignites some debate. Forward looking Betas are unobservable so the debate is what kind of method to use in getting these Betas. There are a few compromises in obtaining the Beta. One of these is increasing the number of time periods you’re looking into for the historical date in which you run the risk of including stale data. Another problem is shortening the time periods increases your chances of factoring in unwanted random noise. The

A __portfolio__ is a collection of financial assets or investments such as stocks, bonds, and cash. Portfolios can be held by either an investor, hedge funds, or a type of financial institution. __Risk tolerance__ is simply the amount of risk you are able to handle as an investor. The associated risk tolerance with a portfolio usually determines its design. When designing a portfolio, investors will always want to maximize return and minimize risk. However, as you may have heard, the higher the risk tolerance the the higher the return. Investors should always go with a risk tolerance that they are comfortable with both mentally and financially.

According to early academic researches, CAPM seems to have some problems when examining assumptions and empirical testing. Researchers attempt to develop a new model by improving the weak points and make it more realistic which enable investors understand more about financial market situation. Bodie et al. (2014) state that multifactor model could provide better explanation of security returns. Merton (1973) develop ‘Intertemporal model’ to imply that by using beta as a risk measure alone might not yields efficient results in the real world. Therefore, he suggests that other factors could be involved in the calculation. It is clear that he suggests investors to consider not only market risk but also extra market source of risk. Moreover, he mentions that CAPM has a limitations on the economic way of thinking because there are two important factors which are income and many consumption of goods are not be considered. These two factors are changing over time and relative to price.