ACFI201 - 3
Card Set Information
ACFI201 - 3
cash flows risk return
week 3 cards
The principal revenue producing activities of the entity and other activities that are not investing or financing
The acquistion and/or disposal of long term assets and other investments not included in cash equivalents
Cash Flows relating to changes in the size and/or composition of the financial structure of the entity including equity and borrowings.
After Tax Cash Flows
Cash Collections from Customers
Sales + Op acc receivable - close acc reivable - bad debts - provision for DD - discount allowed
Cash paid to suppliers
COGS +closing inventory-opening inventory + opening acc payable - closing acc payable
Cash paid for other operating expenses
=Other operating expenses - non cash expenses - opening prepaid expenses + closed prepaid expenses +opening accrued expenses - closing accrued expenses
Cash paid for interest
= Interest expense + op accrued interest - close accrued interest
Cash paid for Tax
= Tax expense +op tax payable - close tax payable +op deferred tax - close deferred tax
The return earned on investments represents the marginal benefit of investing.
Risk represents the marginal cost of investing
Actual rate paid or earner before deducting the effects of inflation
: Real Returns
The nominal rate adjusted for the effect of inflation
The nominal rate adjusted for the effect of the rate paid or earned being calculated more frequently than once per annum (adjusted to represent effects of compounding)
The return that an investor expects to earn or receive on an asset given its price, growth, potential etc
The return that an investor requires on an asset given its risk
The return that an investor earned on an asset for a holding period
Equity Risk Premium
The difference in equity returns and returns on safe investments.
Implies stocks are riskier than bonds or bills
Trade off always arises between risk and expected return
The total gain or loss experienced on an investment over a given time period
Return on a Single Asset
Formula: Arithmetic Average Return
Difference between Geometric and Arithmetic Mean
Arithmetic mean usually overstates the mean.
The difference between the 2 is greater as volatility increases.
They would be the same if there was no change in the returns
Occurs because of the probability of earning a return less than that expected The greater the chance of a return below expected, the greater the risk
Standard Deviation measures...
the dispersion or variability around the expected value
Coefficient of Variation
Coefficient of Variation
A measure of the relative dispersion of a probability distribution
Measures the risk per unit return.
: Using standard deviation to compare the riskiness of two projects can be misleading when the projects are of unequal sizes.
A relative measure of risk
Investors are either Risk neutral, Risk Seeking or Risk Averse. Historical returns on financial assets are consistent with a population of risk averse investors
If two assets have equal expected returns, the the one with lower risk dominates.
if two assets are equally risky, then the one with higher returns dominates
Can also be non-dominated
Formula: Expected Return for a Portfolio
Importance of Covariance
Risk reduciton is achieved in portfolios because fluctuations in one asset are partially offset by fluctuations in another asset.
Risk of a portfolio depends crucially on whether the returns on the portfolio's components move together or in opposite directions.
Variance on a Two Asset Protfolio
Correlation Coefficient and Risk Reduction
A two stock riskless portfolio can be formed if (rho) = -1
Risk is not at all reduced if (rho) = +1
Generall stocks have (rho) about .35
Risk related to market movements(eg interest rates)
Variability of returns unique to the company.
In a large market a protfolio of 20 randomly selected stocks eliminates most unsystematic risk
A meausre of volatility of a security's returns relative to the broad-based market returns.
Beta for entire market = 1 since the correlation of market portfolio returns with itself is one.
Covariance of two assets
Through diversifying, investors can eliminate unique risk, so only systematic risk is priced.
The market compensates investors for accepting risk, but only for systematic risk