Division of Risk and Return
4 important questions on Division of Risk and Return
By what 3 factors is the beta influenced?
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?
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?
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?
- 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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