Chapter 12
In the CAPM formula, what does beta (β) represent?
A measure of a security’s sensitivity to market risk.
What does the NPV (Net Present Value) rule state?
A firm should accept an investment/project only if the NPV is positive, and viceversa.
What does the Security Market Line (SML) show?
The relationship between a stock’s expected return and its systematic risk (beta) according to the CAPM.
What is the name for a triangle with 3 equal-length sides?
Equilateral
Which two components make up a firm's WACC?
Cost of equity and cost of debt.
What does diversification help an investor achieve?
It reduces idiosyncratic risk by spreading investments across different assets.
Throughout the chapter, several biases and behaviours that affect a traders' performance were mentioned. Name at least two.
Familiarity bias, overconfidence bias, disposition effect, investor attention, mood and experience, herd behavior.
What is the most populated country on earth?
India (they surpassed China in 2023)
What does it mean when a company or project is described as unlevered?
That it has no debt, it’s financed only with equity.
What is the real name of the person portrayed in "The Wolf of Wall Street"?
Jordan Belfort. (not Leonardo DiCaprio)
No. The efficient frontier represents the highest possible return for any given level of risk.
Who won the 2002 FIFA World Cup?
Brazil
What is another name for bonds rated below BBB (Standard & Poor's) or Baa (Moody's).
Junk bonds, high-yield bonds or speculative bonds.
Which U.S. energy company collapsed in 2001, leading to the creation of the Sarbanes–Oxley Act?
Enron.
What is meant by "herd behavior" in Chapter 13.4?
When investors follow the crowd or copy others’ trades instead of using their own information.
How many German people are there in our tutorial group?
3 ish
Why do we multiply the cost of debt by (1 − tax rate) in the WACC formula?
Because interest payments on debt are tax deductible. It reduces the effective cost of debt.
"MSFT" is the ticker symbol for which company listed in the S&P500?
Microsoft Corporation.
In the graph of the Security Market Line (Figure 13.2), Tiffany's stock lies under the line.
What does that tell us about Tiffany’s stock?
Tiffany offers a lower expected return than predicted by its beta, meaning it is overvalued according to the CAPM.
In which country is the current best restaurant in the world? According to The World's 50 Best Restaurants list.
Peru (obviously)