Quiz 2

When graphing the opportunity line of two risky assets, you know that its more
curved as it approaches -1
Correlation p is considered the diversification variable. What would offer the most
diversification?
Sharpe ratio measures slope of the opportunity set by combining 1 risky asset and 1
risk free asset to determine the best risk adjusted return
# of holdings increases variance & SD decreases function of average covariance
asset less than individual decreases firm specific risk
arithmetic average understates the potential future value-> problematic
Variance and annual returns
Larger variance = more returns diff from average return
Larger variance = larger standard deviation
Larger variance increases required return

Quiz2
TVM: money available at present is worth more than money in future, money
recurred or paid at different times cant be compared unless one is discounted, time
passes money looses power
EOY: if deposits begin immediately its an annuity due
BE able to : make timeline, describe equation

Exam 3
Multiple choice based on Table stating SD for Asset 1 &the market except 2nd asset.
Whats the SD?
WHats the covariance?
Return? * equation *rw +r2(1-w)
WHats the SD of the full portfolio?
Compare portfolio to market and choose the best asset.
Zero Beta stock doesn’t have systematic risk and correlation to the stock market.
SD of portfolio beomes square root of average covariance the number of holdings
increases
-Risk premium= Beta * Rpm
-Fed increases interest rates SML remains constant but Y intercept increases.
-Expected return for 1 stock given SD correlation and probability
-Sd of market asset given expected return and correlation w/ prob %
Beta of an asset
Allocation and CAL
-dividing money b/w multiple assets
-all possible combination of risky asset and risk free asset

short answer
Diversifiable –risks rthat relate to a single stock or small subsector example
deathCEO
Nondiversifiable- whole market ex recession
Label opp sets and graph
Rf + B(rpm-rf) -> over/underpriced

Know difference in defintition between arithmetic and geometric mean and

calculate both
Arithmetic-statistacal
Geometric-TVM compounding

Label graph with

1. opportunity set
2. optimal CAL
3. ORP/MVP
4. All x/y labels

Complete table missing info

WA WB ER SD
A
B
C
d

Dots all over – Low R2 = high unsystemic risk

Close together points- high R2 high systemic

Close together points- high R2 high systemic

Graph and label SML &calculate alpha

A= return on investment (ri)-[rf+B(rm-rf)]
If alpha is positive invest.

Exam 1

Qt theory if velocity increases price increases to keep balanced; when

quantity increases fed decreases monetary base

Nominal rate- inflation= real rate

Know the reasons why the fed doesn’t stimulate the economy

Sellers reservation price

Business conditions deteriorate: supply curve shifts left and price increases while
yield increases
Add back deffered tax t Cash flow from operations

Capital Spending , Change in fixed assets & Change in a accumulated depreciation

CFA – cash that the firm is free to distribute to creditors and sellers

Scocially optimal quanity hard multiple choice problem

Label Supply and demand curve & know changes

Short essay interest is financing decision not in operations

Fisher model graph and show improvement

Explain “patience”

Fed- discount window – primaray and secondary credit – and its relation to the fed
funds market

Short answer:Tools that simulate growth in economy for Fed

Treasury yield curve and shape

Given balance sheets and income statement:

Calculate FCF – CFA
Net cash flow to share holders

Exam 2
EAR increases as compound frequency increases
EPR<APR<EAR
APR – annual only
Describe equation

Pmt for amoritized loan consists of principal & interest .. will slowly apply more pmt
to principal

IRR
PV= FV/(1+i)n
Time and present value are inversely related all things constant
Know FV equation of cash flows at different times
Fill in Cashs flows on a timeline
EAR(1+APR/n)n-1

Lottery problem 1/ 2 options *EPR (1+EAR)1/2 -1

Find monthly payment for a loan and complete amortization table

Mortgage problem
1. hoe long to payy off
2. balance due in a number of years?
3. How much house worth?
4. How much equity **equity=value-mortage or #3-#2

Ugly alignment problem

1. with college costs
2. retirement costs
3. saving amount
4. leave inheritance