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Level 92

Risk & Return


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net present value (NPV)
Capital investment decision model in which the PV of a project's cash inflows is compared to the PV of the projects outflows; the diff between these values determines whether or not the project is an acceptable invstmt.
(IRR) Internal Rate Of Return or NPV=0
discount rate when the present value of the cash inflows equals the original investment.
diversified risk
affects only individuals or small groups and not the entire economy
Systematic Risk
Cannot be diversified and is relevant. Measured by beta. Beta determines the level of expected return on a security or portfolio (SML)
Unsystematic Risk
The risk that effects at most a small number of assets; it is also called unique or asset-specific risk. For example, oil strike by a single company.
(WACC) Weighted Average Cost of Capital
Is calculated taking into account the relative weights of each component of the capital structure. The rate that a company is expected to pay on average to all its security holders to finance its ass…
Beta coefficient
The amount of systematic risk present in a particular risky asset relative to that in an average risky asset.
Independent projects
projects whose cash flows are unrelated to (or independent of) one another; the acceptance of one does not eliminate the others from further consideration
mutually exclusive projects
Projects that, if undertaken, would serve the same purpose. Thus, accepting one will necessarily mean rejecting the others.