2.9 KiB
Executable file
2.9 KiB
Executable file
Section 8 | Lesson 45 - Risk & Return, Business Statistics, Security Law
- Links
- Notes
Notes
debt
-
senior debt: debt secured via access to assets upon default
- they have the first claim on company if you go belly up
- subordinate debt: less rights
risk and return
expected return
equity return
- profit or loss generated on an investment in equity (owneship interest in a company) over a specific period
- expressed as a percentage of the original investment amount
components of equity return
- capital gains: increase in stock price
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dividends: payments made to shareholders
- cash
- additional shares
formula for equity return
\[ \text{Equity Return} = \frac{(\text{Ending Price} - \text{Initial Price}) + \text{Dividends}}{\text{Initial Price}} \times 100 \]
formula for public equity return
\[ \text{Equity Return} = \text{Risk Free Rate} + \text{Volatility} x \text{Outperformance} \]
- returns from publicly traded stocks
Risk Free Rate includes inflation
- This is the return on an investment with zero risk, typically represented by government bonds like U.S. Treasury bills.
- It accounts for inflation and is considered the baseline rate of return.
- Example: If the current inflation rate is 2% and Treasury bonds yield 3%, then the Risk-Free Rate is 3%.
Volatility: The volatility of the company versus the market
- measures how much the stock price fluctuates relative to the overall market.
- It's often represented by beta (β) in the Capital Asset Pricing Model (CAPM), where β > 1 means the stock is more volatile than the market.
- For example, a volatility of 1.2 indicates the stock is 20% more volatile than the market.
Outperformance: how much we expect stocks to outperform government bonds
- This is the expected premium that equity holders expect stocks to generate over government bonds.
- It reflects the idea that since stocks are riskier than government bonds, investors expect higher returns.
- This value could be determined from historical stock market returns minus bond returns. For example, if stocks historically outperform bonds by 4%, the Outperformance might be set to 4%.
cost of capital if we use equity and debt
WACC: Weighted Average Cost Of Capital
securities law and ventures financing
- serious jail sentences
- ignorance is no excuse
basic laws
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potential investors must receive all relevant information before investing
- all risks
- this is called an S1
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if you have been defrauded you should receive compensation
- class action lawsuits
- insider information for publicly traded stocks is illegal and results in prison (no excuses)