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shorting a risk free investment
means taking long
--> borrorwing money for investment in risky
-pay back interests
when is debt risk free
when the cash flow is higher than the guaranteed payment
e µ−σ−principle “compatible” with expected utility theory
in general they are not compatible even though they lead to the same decision making
but when only consider normal distributions they are compatible
negative sharp ratio meaning?
sharp ratio general meaning
higher return with riskfree asset
return of an investment per risk unit
security which has a lower return than the risk free asset possible in capm equilibrium
yes negativ correlated to the market portfolio
lower risk than the risk free asset
possible because it lowers the portfolio risk
Cost of capital for equity= for the investor?
Cost of capital for debt= " "
RE : Return received by Equity providers
RD : Return received by Debt providers
why do we start by looking at individual decision making?
individual investors influence financial markets and markets influence corporoate finance decisions
µ
σ meaning
return
risk (standard deviation)
reasons for better performance by experts
-imitation effect a lot of people imitate and the price raises,
-pros have superior abilities
-higher risk adjustment
. xj > 1 meaning?
short-sale effect --> you get the proceeds from the sale which you can invest in another security
so it is possible that you invest more than 100% of the initial busget
Debt vs. Equity
Debt:
-fixed claim
- certain repayment execpt for default risk
- does not depend on how well company is doing
Equity
residual claim on a share of the companys assets
higher return for higher risks
General idea of the DCF method
Calculate the present
value of all the cash flows CFt that the company owners will
obtain in the future periods. This present value is today‘s fair price of the company
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