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Overall Performance Measure
Summarizes past investment performance
Weighted Average Cost of Capital
Calculated based on market values for components
Percentage Return Calculation
Method: divide $ return by investment's beginning value
Average Monthly Return
Calculated as the mean of monthly returns
Risk Ranking
Order from least to most risky assets
Total Risk Definition
Portion of risk attributable to firm or industry factors
Risk-Return Relationship Ranking
Ordering stocks based on return and standard deviation
Diversifiable Risk
Part of total risk reducible through diversification
Portfolio Return Calculation
Weighted sum of individual asset returns in a portfolio
Portfolio Weights Calculation
Individual stock weight in a portfolio
Expected Return Calculation
Weighted sum of returns based on probabilities
Market Risk Premium
Reward for taking systematic stock market risk
Company's Required Return Calculation
Based on beta, market return, and risk-free rate
Asset Pricing Theory Basis
Relies on beta as a measure of market risk
Efficient Market Hypothesis
States security prices reflect expected return
Behavioral Finance Study
Focuses on biases in financial decision-making
Expected Return Calculation (Equation 10.6)
Formula: D1/P0 + growth rate
Executive Stock Options
Special rights to buy company shares at a fixed price
Component Cost of Preferred Stock
Calculated as coupon rate divided by price
Cost of Equity Calculation
Based on beta, risk-free rate, and market return
Component Cost of Debt Calculation
Before and after-tax costs based on bond details
Firm's Value-Adding Project Analysis Start
Begins with current capital structure and costs
Firm's Cost of Capital Basis
Determined by weighted average of debt and equity costs
