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Arithmetic Mean
this is the simple mean add and then divide by the number of numbersrealized return TERM 2
Geometric Mean
DEFINITION 2 this represents the tendency of the numbers so if it is percents or whatever find the numbers in relation to another (one) then subtract out the number (1)so 1.2+.85+1.1+.65= .95 or loss of 5% TERM 3
Variance
DEFINITION 3 expected square deviation from the mean=E((R-E*(R))^2) TERM 4
Standard
Deviation
DEFINITION 4 square root of variance TERM 5
Realized Return
DEFINITION 5 Dividend Yield + Capital Gain RateD(t+1) + P(t+1) P(t)
Firm Specific
idiosyncratic, unique, or diversifiable risk. This is when the stock will fluctuate according to independent risks. TERM 7
Systematic Risk
DEFINITION 7 market risk, undiversifiablemarket-wide news to has a common risk. earthquakes affect all houses in the area TERM 8
Portfolio and Probability (Returns)
DEFINITION 8 multiply the expected return by the probability and then sum all TERM 9
Portfolio and Probability (Variance)
DEFINITION 9 expected return - average expected returnthen squarethen multiply by probabilitythen sum all TERM 10
Portfolio and Probability (Standard Dev)
DEFINITION 10 take the square root of the variance
What determines a stocks risk premium?
its systematic risk. not depending on its diversifiable risk TERM 17
Total Risk
DEFINITION 17 systematic risk + diversifiable risk TERM 18
Portfolio containing only systematic risk
DEFINITION 18 efficient portfolio, not possible to diversify any further.market portfolio TERM 19
Cost of Capital (basic)
DEFINITION 19 risk free interest rate plus a risk premium corresponding to its sensitivity to the market TERM 20
Market Risk Premium (basic)
DEFINITION 20 market portfolio's return and the risk free rateER(m)-R(f)
Estimating Cost of Capital using
return(i) = risk free interest rate + * Market risk premium=R(f)+*(ER(m)-R(f))Also called CAPM TERM 22
CAPM
DEFINITION 22 using beta to calculate cost of capitalreturn(i) = risk free interest rate + * Market risk premium=R(f)+*(ER(m)-R(f))cost of capital TERM 23
Portfolio Weight
DEFINITION 23 value of investment total value of portfolio TERM 24
Expected Portfolio Return
DEFINITION 24 (%of portfolio * expected return)+(other % and returns.........) TERM 25
Covariance
DEFINITION 25 the expected product of the deviations of two returns from their meancov is equal to the correlation * standard deviation(1)*standard deviation(2)sum of all the returns deviation from the mean then divided by the number of returns minus 1covar
efficient frontier
the area on the upside of the parabolic curve TERM 32
Sharpe Ratio
DEFINITION 32 portfolio excess return portfolio volatilityExpected return of portfolio - risk free asset standard deviation of portfoliotangent to the portfolio is the highest sharpe ratio TERM 33
Capital Market Line
DEFINITION 33 this is a line that starts at the risk free and passes through the tangent point of the portfolio. (market portfolio point or efficient portfolio)should choose a portfolio on this line! TERM 34
(equation)
DEFINITION 34 SD(1)*Correlation SD(m)Covariance Variance TERM 35
asset or unlevered coast of
capital
DEFINITION 35 fraction of firm funded by equityequity cost of capital +fraction of firm funded by debt debt cost of capital. you can use the return or beta(U) = E * (E) + D * (D) E+D D+Er(U) = E * r(E) + D * r(D) E+D D+E
WACC
r(WACC) = E * r(E) + D * r(D)*(1-t(c)) E+D D+E TERM 37
WACC with a target leverage
DEFINITION 37 r(WACC) = r(U) - D * r(D)*(t(c)) D+E TERM 38
Cost of Capital of Levered Equity
DEFINITION 38 r(e) = r(u) + (D)*(Ru-Rd) E TERM 39
pretax wacc and
deduction
DEFINITION 39 r(WACC) = E * r(E) + D * r(D)*(1-t(c)) E+D D+Er(WACC) = E
- r(E) + D - D * r(D)*(t(c)) E+D D+E D+E
