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rockoforu
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risk premium is made up of 4 elements
 interest rate risk
 purchasing power risk (inflation)
 business risk
 financial risk

risk premium
expected return minus riskfree return

after tax return=actual return after paying income taxes
100%tax rate, then multiply times the return

15% is for both dividends and capital gains

dividends always taxed at 15%

real return takes into consideration
the inflation rate
real return = total return minus the inflation rate

bond interest rate risk
bond sold prior to maturity

in regards to interest rate risk, if all bonds are being sold prior to maturity and they show yields
pick the bond with the highest yield

reinvestment risk is on all debt security of 20 years or less and will be
held until maturity
if based on years, and they do not state if the bond is being held or sold, choose any bond under 20 years.

liquidity is also know as
marketability risk

true of false, money market vehicles are considered to be the most liquid
true

what is duration?
the measurement of the sensitivity of bond prices during changes in interest rates

how to find the duration risk or greatest price movement:
 alwasy pick the longest bond
 two bonds with the saem maturity and which has the greatest price change? pick the lowest coupon

volatility risk is measured by:
 alpha
 beta
 rsquared
 sharpe ratio
 delta
 correlation coefficient
 standard deviation

sharpe ratio
compares riskadjusted return to volatility as compared to standard deviation

large cap
5 billion or more

market capitalization
price per share x number of outstanding shares

mid cap
1 billion  5 billion

small cap
250 million  1 billion

micro cap
250 million or less




