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10 Cards in this Set
- Front
- Back
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CAPM argues that ? |
investors can reduce the risk inherent with individual investments by holding a diversity of investments within a portfolio. |
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Specific risk, or unsystematic risk, is specific to the individual investment and ....? |
It can be removed through diversification. |
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Market risk is associated with the economic environment in which all entities operate. what are two types? |
Business risk is associated with the particular activities undertaken by the entity. Financial risk results from the debt in the financing structure of the entity. |
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Beta (β) is ? |
A measure of responsiveness of the returns for a particular investment when compared to the average market return. |
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The Sharpe single index CAPM can be used to establish ? |
whether individual financial instruments are under or overpriced. |
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The formula for calculating the expected return from an investment is: |
Er = Rf + β(Rm - Rf) |
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CAPM can be used in the appraisal of a capital investment provided |
That the risk borne in each appraisal period is constant |
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here are limitations in using CAPM to obtain the cost of capital (discount rate) to appraise an investment project. |
CAPM is a single-period model. CAPM assumes only systematic risk. CAPM assumes that the risk can be encapsulated in a single figure (beta). Close comparison with a proxy entity is difficult. |
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Arbitrage pricing theory (APT) attempts to explain the risk-return relationship using several independent factors rather than a single index. what are the factor used in the theory? |
Inflation or deflation Long-run growth in profitability in the economy Industrial production Term structure of interest rates Default premium on bonds Price of oil |
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Modigliani and Miller (MM) theory in that? |
Based on the arbitrage process, two similar assets cannot sell at different prices. |
