OPTIONS 1
What’s the famous formula of 1973 that created financial options
Black Scholes
What's Robert Merton known for
Modifying Black Scholes Formula / Winning the Nobel Prize
What's Sharpe Ratio
R(s)-R(m) / Sigma
What's the rule of 72?
The number of years to double the investment
What’s D in EBITDA?
Depreciation
What is the fifth variable in B-S Formula? S, X, t, sigma, ____
Risk-free Rate
A Nobel Prize was awarded in 1997 for adding which variable to B-S formula?
Dividends
Sigma: ___ is like CML: SML
Beta
In Corporate Finance, what’s the predecessor of Option Pricing Models?
RISK & RETURN
What’s Market Risk Premium?
Rs-Rm
Which of the five variables have the most impact on Option Value, which Greek letter captures it?
Stock Prices. Delta.
Why are Real Options called so?
REAL MARKETS (not Financial Markets)
What's Terminal Value in NPV
The estimated value at the end of the forecast period. Cash Flow divided by (WACC - g)
Efficient Stock Portfolio is the point at which the Efficient Frontier Meets the _________?
Capital Market Line
What’s the Beta of the Market?
1
What's Volatility Smile
The higher option prices for deep in-the-money and out-of-the-money options
Who coined the term “Real Options” in 1976?
Professor Stewart Myers (MIT)
What is CAPM formula?
Security Market Line; r(p) = rf + MRP * Beta(p)
What was Sharpe's seminal contribution to finance in 1963?
Simplified the Markowitz model to CAPM
How’s Alpha increased? By creating a portfolio of assets with low _________.
Correlation
What does Theta capture?
Theta captures the time decay of an option
Real Option Value is Net Present Value plus what?
FLEXIBILITY VALUE
According to Tobin (1958), what is the key difference across portfolios is the % of _______ assets.
RISK-FREE
Modgliani won a Nobel Prize in 1985 for showing which three variables are NOT important in Valuation? Debt, Tax, ______.
DIVIDENDS
What are the three drivers of WACC?
D/E, cost of equity, cost of debt