Paper
Theory of Finance Exam
Review
Taught by: Tana Chasakara tchasaka@uoguelph.ca http://guelph.soscampus.com/
Feedback from Last session
• I move to fast through the material
• I will slow down this time and go over 2 hours if necessary
• I should correspond with Prof Bower more • Met with Professor Bower and created my slides based on the information she provided
• Some one on one time would be really helpful
• I will be in the library tomorrow from
12.30-3.30 if you need help with specific issues
• The package
• This time I personally created the package Format of Exam and Review Session
• Multiple choice and longer problems
• The exam will be comprehensive but long problems will come from information covered after the midterm.
• The material after the midterm will be covered in detail with long problems
• Multiple choice questions based on the earlier part of the course are included in the review package
Questions?
• Let’s get started!
Chapter 12: Risk, Return and
Capital Budgeting
Chapter 12
• Beta is a measure of market risk
– Beta = covariance(A, market) market standard deviation
– Beta = correlation(A, market) x stock standard deviation standard deviation of market
– Portfolio Beta = weighted average of the betas of all the stocks in the portfolio
* The Beta of the market portfolio is always 1
Capital Asset Pricing Model
• Return = Rf + β( Rm – Rf)
– Rf is the risk free rate which is the rate of return on treasury bills
– Rm - Rf is the market risk premium
• If you plot the security rate of return against its Beta you get a security market line • According to the CAPM, all stocks should fall on the SML
Project vs. Company Risk
• The discount rate should reflect the risk associated with the project:
– If the risk is the same, use the company cost of capital – If the risk is greater, use a rate greater than the company cost of capital
– If
Review
Taught by: Tana Chasakara tchasaka@uoguelph.ca http://guelph.soscampus.com/
Feedback from Last session
• I move to fast through the material
• I will slow down this time and go over 2 hours if necessary
• I should correspond with Prof Bower more • Met with Professor Bower and created my slides based on the information she provided
• Some one on one time would be really helpful
• I will be in the library tomorrow from
12.30-3.30 if you need help with specific issues
• The package
• This time I personally created the package Format of Exam and Review Session
• Multiple choice and longer problems
• The exam will be comprehensive but long problems will come from information covered after the midterm.
• The material after the midterm will be covered in detail with long problems
• Multiple choice questions based on the earlier part of the course are included in the review package
Questions?
• Let’s get started!
Chapter 12: Risk, Return and
Capital Budgeting
Chapter 12
• Beta is a measure of market risk
– Beta = covariance(A, market) market standard deviation
– Beta = correlation(A, market) x stock standard deviation standard deviation of market
– Portfolio Beta = weighted average of the betas of all the stocks in the portfolio
* The Beta of the market portfolio is always 1
Capital Asset Pricing Model
• Return = Rf + β( Rm – Rf)
– Rf is the risk free rate which is the rate of return on treasury bills
– Rm - Rf is the market risk premium
• If you plot the security rate of return against its Beta you get a security market line • According to the CAPM, all stocks should fall on the SML
Project vs. Company Risk
• The discount rate should reflect the risk associated with the project:
– If the risk is the same, use the company cost of capital – If the risk is greater, use a rate greater than the company cost of capital
– If