Investment Performance Measures

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