Division of Risk and Return

4 important questions on Division of Risk and Return

By what 3 factors is the beta influenced?

1. Cyclicality of sales - extent to which sales are related to economic conjuncture ^ > high ß
2. Operating leverage - Level of fixed costs in production ^ > high ß
3. Financial leverage - Degree of debt in an organisation, higher external financing means high ß

What are the characteristics of an efficient market?

1. Prices of securities correspond completely to information available
2. Prices are immediately adjusted to new information, meaning that investors should only expect a normal return
3. Companies can only sell securities against their current value.

What are the 3 assumptions for efficient markets?

1. Rationality - all investors are rational and base their judgements on the same measurements
2. Countervailing investments - when there are ambiguities about future projects, rational buying/selling is not possible. Positivistic views then outweigh the pessimistic ones, leading back to situation 1
3. Arbitration - the possibility to purchase an asset somewhere and immediately sell it at a higher price, not applicable in an efficient market
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What are the 3 types of markets based on the 3 types of information?

1. Weak form:
- price is based on historical value of the share
- Information available is based on historical data only
2. Semi-strong form:
- All publicly-available information is reflected in prices and the historical prices too
3. Strong form:
- All information is included in the price: historical, publicly available and inside information

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