Problem
• Understand how capital gains and percentage returns are calculated.
• Explain the difference between average stock returns and risk-free returns.
• Explain how the Sharpe Ratio is used to manage risk.
• Describe the significance of US equity risk premiums as a method of comparison with other countries.
• Describe how variance and standard deviation are used to measure the variability of individual stocks.
• Explain how an investor chooses the best portfolio of stock to hold.
• Discuss how diversification is used to mitigate risk in the portfolio.
• Describe the relationship between risk and expected return (CAPM).
• 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).
• Explain how cyclicality of revenues and operating leverage help determine beta.
• Describe the dividend discount model (DDM) approach and how is it different than CAPM.
• Understand how to calculate the weighted average cost of capital to determine the optimum level of debt and equity to finance an investment.
• What derivatives are and how are they used to manage risk.
• Distinguish between forward contracts and future contracts.
• Compare and contrast the various types of swap contracts.
The response must include a reference list. Using Times New Roman 12 pnt font, double-space, one-inch margins, and APA style of writing and citations.