• Mississippi State University

• FIN 334  FIN334_EXAM1_CHEATSHEET

CS=direct ownership in corporation Institutional Investor EX=life insurance company,mutal or pensionfund
most IPOs are underwritten by investment banking firm CS invest=could have unlimited returns, provide income from
dividends, may expose owner to risk of falling prices
only risk changes as the correlation coefficient between 2 securities
change
portfolio risk is NOT equal to weighted average of risks of individual
securities
investor would choose the portfolio at the point of tangency between
the investor's highest indifference curve and the efficient frontier
Beta measures systematic risk NOT total risk- higher beta=more risk -
systematic risk is what counts in determining expected returns (b>1
are riskier than overall market
If the stock is uncorrelated with the market then it has a zero beta (zero
beta expected return=RF rate
UTILITY FUNCTION= WORTH OR HAPPINESS**
If a stock is volatile but its movements are negatively correlated with the
market's movements, then the stock has a negative beta. If beta is negative,
then the right hand side of this equation is less than Rf, so the stock's expected
return is less than the risk-free rate.
Fixed income securities= investments that make fixed cash payments at
regular intervals -bonds, convertible securites, preferred stock
Mutual funds= companies that pool money from many investors and
invest funds in a diversified portfolio of securities
Exchange traded ufnds= investment funds, index funds, that are
exchanged listed and therefore, exchange traded
Derivative securities= securities that are neither debt nor equity but
are structured ot exhibit that charateristics of the underlying assets
from which they derive their value
Venture capitalists=provide financing at early (pre IPO) stages of firms
life
Dimensions of return= cash/near cash(stocks,bonds) and cap gain or
loss