Investment Performance Measures

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23 Terms

1

Overall Performance Measure

Summarizes past investment performance

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2

Weighted Average Cost of Capital

Calculated based on market values for components

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3

Percentage Return Calculation

Method: divide $ return by investment's beginning value

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4

Average Monthly Return

Calculated as the mean of monthly returns

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5

Risk Ranking

Order from least to most risky assets

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6

Total Risk Definition

Portion of risk attributable to firm or industry factors

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7

Risk-Return Relationship Ranking

Ordering stocks based on return and standard deviation

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8

Diversifiable Risk

Part of total risk reducible through diversification

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9

Portfolio Return Calculation

Weighted sum of individual asset returns in a portfolio

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10

Portfolio Weights Calculation

Individual stock weight in a portfolio

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11

Expected Return Calculation

Weighted sum of returns based on probabilities

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12

Market Risk Premium

Reward for taking systematic stock market risk

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13

Company's Required Return Calculation

Based on beta, market return, and risk-free rate

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14

Asset Pricing Theory Basis

Relies on beta as a measure of market risk

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15

Efficient Market Hypothesis

States security prices reflect expected return

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16

Behavioral Finance Study

Focuses on biases in financial decision-making

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17

Expected Return Calculation (Equation 10.6)

Formula: D1/P0 + growth rate

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18

Executive Stock Options

Special rights to buy company shares at a fixed price

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19

Component Cost of Preferred Stock

Calculated as coupon rate divided by price

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20

Cost of Equity Calculation

Based on beta, risk-free rate, and market return

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21

Component Cost of Debt Calculation

Before and after-tax costs based on bond details

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22

Firm's Value-Adding Project Analysis Start

Begins with current capital structure and costs

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23

Firm's Cost of Capital Basis

Determined by weighted average of debt and equity costs

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