QUESTIONS:
1. A friend comes to you and says that they have a "can't miss" opportunity that offers very high rates of return with no risk. Are you inclined to jump in and invest or are you a little bit skeptical? Why?
2. Explain the difference between average stock returns and risk-free returns.
3. Explain how the Sharpe Ratio is used to manage risk
4. Describe the significance of US equity risk premiums as a method of comparison with other countries.
5. If there is such a thing as a universal bit of investment advice it is this: a wise investor must diversify his/her holdings. How does diversification work and why is it so important?
6. Describe how variance and standard deviation are used to measure the variability of individual stocks
7. Explain how an investor chooses the best portfolio of stock to hold.
8. Discuss how diversification is used to mitigate risk in the portfolio
9. Describe the relationship between risk and expected return (CAPM).
10. The weighted-average cost of capital (WACC) is often used as the discount rate when performing net present value (NPV) calculations. What is the rationale for using WACC for this purpose?
11. Explain how the risk-free rate, market risk premium and stock beta are used to calculate expected returns using the capital asset pricing model (CAPM).
12. Describe the dividend discount model (DDM) approach and how is it different than CAPM.
13. What derivatives are and how are they used to manage risk.
14. Distinguish between forward contracts and future contracts
15. Compare and contrast the various types of swap contracts.
ANSWER EACH QUESTION IN 200 OR MORE WORDS.
USE CITATIONS AND REFERENCES.
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