Principles of Finance I

Principles of Finance I

Name

Institution

Tutor

Course

Date

Stand-Alone Risk

This is a risk that accepts a single asset that the company is interested in and is not inclusive of the other assets owned by the company. This risk does not take into account the consequences that the single asset will bring to the corporate risk.

It is usually measured by

It is measured by the variability of the single project alone.

Probability distribution and its relation to risk Expected rate of return

Probability distribution is the total number of several returns that contain both the possible returns and the possibility of the return from the share.

Expected return is the medium or average of all the dollar returns that are likely to occur.

Continuous probability distribution

This is a distribution where any variable can yield on any value at a range that is consistent and continuous.

Standard Deviation

Standard deviation is a measure of the distribution of data that has been arranged from its mean. It is calculated by finding out the variation. When the point of the data in question are far from its mean, then there are higher chances of deviation in the set of data.

Variance

Variance is the range of numbers in a data set. The variance measures the distance between each number and the mean in the data set.

Risk Averse

This is a depiction of an investor who will take into consideration an investment with a lower risk when he or she faced with an opportunity to invest in two risks with the same expected return.

Real Rate of Return

It is a percentage of the yearly return whose prices are usually accustomed because of inflation or any other factors affecting the investment. The nominal rate of return is not adjusted to account for inflation and so the real rate of return is simply nominal rate of return with inflation adjustments ensuring that the purchase power is constant.

Risk Premium

This is a return that has been experienced in excess after an investment has been successful and it is supposed to be a reward for the investors who participated in the further risk.

Market Portfolio

These are investments whose assets have been subjected to proportion in the financial market with its total. The expected return of the market portfolio and the entire market is usually similar.

Correlation as a concept

A correlation coefficient is a measure of the degree where a slight change in a variable would automatically show a change of a different variable. In variables that tend to relate positively, the value is bound to increase or decrease in cycle. In variables that relate negatively, the value will either increase as the other decreases.

Material Risk

This is a risk that is posed on an investor who is likely to undergo a financial loss because of factors that affect the usual routine of the financial market. An example is when an investor buys stocks from a company that showed profitable books only to find out that the numbers were cooked causing a substantial drop in the stock price, thus heading to lose.

Capital Asset Pricing Model – CAPM’

The capital asset pricing model is a model that illustrates the connection and relation present between systematic risks an expected risk for assets. It is used especially in finance for regulating the prices of securities which are very risky, calculating the expected returns when given the predicted risk of those assets and finding out the total amount of capital used.

Diversifiable risk

This is a risk that is likely to be experienced by a specific security or sector for the purposes of impacting a portfolio that is limited and diverse.

Relevant risk Beta coefficient

This is a measure of the measure of the instability of a stock with relative to the way the market deviates.

Security Market Line – SML’

The security market line is that line which is drawn on a graph that is used for the illustration of the levels of an organized, or market that risk several securities in the market aligned against the expected return of the whole market at some point in time.

SML equation Slope of SML and its relationship to risk aversion Equilibrium

Expected return

Risk free rate

Risk-Beta

Efficient Markets Hypothesis (EMH)

The efficient market hypothesis is an investment philosophy that poses the condition which says that it is difficult or very hard to defeat the market because the stock market is very efficient in that it has prices always incorporated with the important used information.

Herding

This is the affinity of people to emulate or copy the activities of a larger crowd. Ideally, not all people are likely to indulge in the same act.

Reference

Fundamentals of Corporate Finance, Third Edition by Richard A. Brealey, Stewart C. Myers, and Alan J. Marcus

Corporate finance by Ivo Welch 2009

Corporate finance, Theory and Practice by Pascal Quiry, Maurizio Dallocchio, Yann Le Fur, Antonio Salvi