Arithmetic return:”2nd” “Data” set “stat” to “LIN” x / y ->return Sx=standard deviation Sx²=Variance Def:

The return earned in an average year over a multi-year period. (too high for long run)
Geometric return: “2nd “mem” 1+positive %(1+13%or0.13 1-negative%(1-13%) RCL0xRCL1xRCl2->y^x-
>1/X->subtract 1 Def:average compound return earned per year over a multi-year period. (too low for
short run)(if returns identical then arith and geo avgs would be the same)(geo avg<airth avg)
Dividend=dividend x # of shares (geo best way to analyze an investment performance)
Dividend yield=(income)/beg price or price bought
Cap gain/loss= price sold-price bought x # of shares
Cap yield=price sold-price bought/price bought. Face value Coupon
Total Dollar return=income+ capital gain(loss) if FV & CPN ($940 − $970) + $1,000 × 7% = $40
Total% return=Dividend yield+Capital yield Risk premium=avg return - T-bills(considered risk free)
Efficient: instantly adjust to new info & zero-NPV investments diff btwn Market
value of an investment and its cost is zero
Strong market: prices reflect all info public and private cannot earn extra
money
Semi market: prices reflect only public can make extra money by trading
private info (most controversial)
Weak market: prices reflect all past info Overreaction:overhyping a stock. Delayed:under hyping
stock.Efficient: instantly adjust to new info
If investors stop researching stocks, then the market
will not be efficient
Ch13
E(R): Return on a risky asset expected in the future.
Portfolio: Group of assets such as stocks and bonds held by an investor.
Total invested
Portfolio weight: Percentage of a portfolio’s total value in a particular asset.
invested∈stock wtvr
∑
E ( Rp )= W × E[ R]->portfolios
CapitalAssetPricingModel->E(R)=Risk free + (E(Risk market - Risk free) fyi Rm-Rf= Market risk premium
Risk premium=Expected return – Risk-free rate.
R(p): excess return required from an investment in a risky asset over a risk-free investment.
Feasible/opportunity set: the curve that comprises all of the possible portfolio combinations.
Efficient set: the portion of the feasible set that only includes the efficient portfolio (where the
maximum return is achieved for a given level of risk, or where the minimum risk is accepted for a
given level of return).
Minimum Variance Portfolio: the possible portfolio with the least amount of risk. Which of the
following stocks has the greatest expected return: prob x return
: a measure of the volatility or systematic risk compared to the market
STD/: measuring the degree to which the fund fluctuates in relation to its mean return.
If return is constant then =0 no fluctuation & lower  better cuz maximizing return for total risk
=total risk and total risk= Systematic or non-diversifiable risk + Unsystematic or diversifiable risk
Systematic/market risk: affects large # of assets market-wide effect (GDP, Inflation, Interest rates).
Risk that cannot be mitigated by diversification
Unsystematic/asset specific/unique risk: affects individual company/industry (aircanada&airline).
Risk that can be reduced by diversification
Var(R)/ x²: used to measure the portion of risk that the (usually unsystematic) or systematic has
from the total risk. x=x² + x²
The stock with the smaller variance has more systematic risk meaning its more riskier
Total Return = expected return + unexpected return
Unexpected return = systematic return + unsystematic. Announcement = expected part + surprise
Total return = expected return + systematic return + unsystematic return
Overtime, avg unexpected risk will be zero
Realized returns  Expected returns
=1= market also risk-free asset has  of 0
>1 more systematic risk btw the higher the  the greater the risk premium
<1 less systematic risk
systematic risk principle: Principle stating that the expected return on a risky asset depends only on that
asset’s systematic risk.b
In equilibrium, all assets and portfolios must have the same reward-to-risk ratio and they all must equal the reward-to-risk ratio for the
E ( Ra )−Rf E ( Rm ) −Rf
market. = -> Rf or E(Ra) won't be gives so just cross multiply to solve
a m1
The security market line (SML) is the representation of market equilibrium. Between Expected return and 
The slope of the SML is the reward-to-risk ratio: (E(Rm) – Rf)/m or 1
since the  for the market is ALWAYS =1, Slope = E(Rm) – Rf = market risk premium therefore reward to risk ratio is the ratio of its risk
premium to its beta
The capital asset pricing model(CAPM) defines the relationship between risk and return
E(RA) = Rf + A(E(RM) – Rf)
If we know an asset’s systematic risk, we can use the CAPM to determine its expected return. This is true for financial assets or physical
assets.
Pure time value of money - measured by the risk-free rate.
Reward for bearing systematic risk - measured by the market risk premium.
Amount of systematic risk - measured by beta.
Ch8
D0 “just paid” D1 “next year” P0 (stock price/value today?) Pt (stock int years)
Constant dividend (Zero growth): dividend that has zero growth and is constant through time to get Pv of a stock
D D D D D D
P 0= 1
+ 2
+ 3
+ 4
+ 5 or P 0= if dividends are not 0 for first few years “after t years dividends will
( 1+r ) ( 1+r ) (1+ r ) ( 1+ r ) (1+ r ) r
grow at constant rate per and required return is wtvr what is the value of the stock today? You calculate t years value then do the D+D+D
thing above add them together = answer
D 0 ( 1+ g ) D 0 ( 1+ g ) D1
Constant dividend growth: dividend will grow at a constant rate indefinitely P0= to calc r = + g= + g (use
r−g P0 P0
Dt ( 1+ g ) Dt+ 1
dividend growth model to find stock price at any point in time Pt = ¿ (use 2nd only if asked for p of next period) using
r −g r −g
D6
this model if we are trying to find stock price in 5 years then we are multiplying to D6 so it will be P 5= on
r−g
(General formula to calculate dividend growth Dt=D0(1+g)^t) D 1=D 0(1+r ) to get dividend of next period To find dividend in 2 periods
2 D1
D 2=D 0 ( 1+ g ) If g<r the Pv can be computed P 0= if its g>r then you will get the stock price is infinitely large if g=r then P0=D0
r −g
dividend growth model: A model that determines the current price of a stock as its dividend next period, divided by the discount rate, less
the dividend growth rate.
“you predict in t years _ will pay dividend for the first time & you expect it to grow x% indefinitely and r and g are given use and ask for P0
D1 Dt ( 1+ g )
use -> If given D1 and asks for P0 use P 0= if asked what is value in t years use Pt =
r −g r −g
Supernormal Growth: method that accounts for a period of high, above-average growth
followed by a stable growth rate. Find stock price if furure dividends grow at x% then at Y% First
D1(1+r) then

Noneconstant
Common: stock that has no special preference in either in dividends or in bankruptcy
Right to vote for board of directors & mergers
Right to share proportionally in dividends paid
Right to share proportionally assets after liabilities have been paid for or liquidation
Preemptive right: first shot at new stock
Dividends not a liability till it is declared by the board, Cant go bankrupt for not declaring
dividends, Not tax deductable Dividends received by individual shareholders are partially
sheltered by the dividend tax credit., Dividends received by corporate shareholders are not
taxed. This prevents double taxation of dividends.

Preferred
Most preferreds have a stated dividend that must
be paid before common dividends can be paid.
Dividends are not a liability of the firm and preferred dividends can be deferred indefinitely,
preferred dividends are cumulative - any
missed preferred dividends have to be paid before
common dividends can be paid, cant vote
Classes of stock
Unequal voting rights
Control of firm
Coattail provision

Growth opportunities If a company decides to distribute all of its earnings

to the investors, then we have P=EPS/r = D/r
the current stock price reflects this growth opportunity in addition to the
current EPS. P=EPS/r +NPVGO