Corporate Finance at Universität Münster

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Risk Permium

How much of the EV of a lottery are you willing to give up in order to avoid the risk of the lottery, RP = EV - CE

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Certanty Equivalent

Certain outcome that makes you indifferent between lottery & certain outcome

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Risk aversity

Concave utility function
Positive Risk Premium for all lotterys

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Probability Interval for P = 5% und 1%

1.96 für 5%
2.58 für 1%

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Fundamental Assumption for a u-o-Inverstor

-> Not saturated, prefers higher returns
-> Risk averse, always prefers lower variance

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When are EUT and u-o-Principle compatible?

When either
-> we only consider normal distribution
and/or
-> utility function is quadratic

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What are Short Sales?

Reversed sequent of buying and selling, Investor borrows Securities, sells them and buys them back later to return them

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Tobin Separation Theorem

The structure of the risky part of a portfolio dies not depend on the risk aversity of an investor. The risk aversion only determines how much of his wealth the investor puts into risky securities

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Flow to equity approach

Accounts explicitly for tax advantages when computing the “free cash flow”

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Assumptions of MM world

No information cost
No other friction/transactional costs
Rational Agents
Law of one price: all equivalent CF have to have the same price in equilibrium

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Abitrage

Risk free profits realised by price differences

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Axiomatic Foundation of EUT

1. Complete Ordering

-> Completeness

-> Transitivety

2. Continuity
3.Independence

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Corporate Finance at Universität Münster

Flashcards and summaries for Corporate Finance at the Universität Münster

Study with flashcards and summaries for the course Corporate Finance at the Universität Münster

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