Exam #3 Review

Systematic risk principle

According to the ____, expected return on a risky asset depends only on the asset's non diversifiable risk.

Adjust the Effectiveness of the Entry Mode

Acquire additional knowledge of the market before entry. Inventory in new processes and technology, brand franchise and large scale investments in R&D

Forward Trade

Agree today to exchange currency at some future date and some specified price.

The risky assets beta and the market risk premium

An analysist wishes to estimate the amount of additional reward she will receive by investing in a risky asset rather than a risk free asset. The minimum values she will need to know are:

Unsystematic risk

An investor who owns a well diversified portfolio would consider ____ to be irrelevant.

Geometric Average

Average compound return per period over multiple periods.

Awareness of Profitable Investments

Capitalize on or enhance a firm's differential advantage. build competitive advantage

Estimate the longevity of competitive advantage

Create barriers to entry and not duplicated

Innovation Based Strategy of the Multinational Corporation

Create barriers to entry by introduction of new products and differentiating existing ones. Large amounts of money go to R&D. and technological advancement

Cross Exchange Rate

Currency against currency trade is a non dollar to non dollar trade.

The Mature Multinational Corporation

Firms that have viable international operations long after innovation leads have disappeared, but continue how to have erected barriers to entry. Economies of scale

Cost of capital

Fisher Co is intending to invest in a new project. The____ is the minimum rate of return the firm will accept on this project.

Foreign currency is selling at a premium

If the forward rate is higher than the spot rate, then ?

The foreign currency is selling at a discount

If the forward rate is lower than the spot rate, then?

Use appropriate evaluation criteria

Impact on corporate cash flow and risk. Employ NPV analysis on decisions.

Beta

Of the options below, which is the best measure of systematic risk?

Expected rate of return

Of the options listed below, which is most directly impacted by the level of systematic risk?

True

On average, small company produce a greater return than large company stocks. But also present a much greater likelihood of a loss in any given year.

Absolute Purchasing Power Parity

Price of an item is the same regardless of the currency used to purchase it. This is unrealistic

Strong Form Efficiency

Prices reflect all information, including public and private. Prices are usually not strong form efficient. Investors do not earn abnormal returns.

Weak Form Efficiency

Prices reflect all past market information such as price and volume. Investors can not earn abnormal returns by trading on market information. Markets are generally weak from efficient.

Semi Strong Efficiency

Prices reflect all publicly available information including trading information, annual reports, and press release. Investors can not earn abnormal returns by trading on public information. Fundamental analysis does not lead to abnormal returns.

Relative Purchasing Power Parity

Provides information about what causes changes in exchange rates

Portfolio weight

Rafia owns 15 different companies. Together, the stocks have a value of $78,640. Twelve percent of that total value is from one company. The 12% figure is called what?

Arithmetic Average

Return earned in an average period over multiple periods.

Systematic Risk

Risk factors that affect a large number of assets. AKA market risk or diversifiable risk. GDP, inflation, interest rates

Unsystematic Risk

Risk factors that affect a limited number of assets. Unique risk and asset specific risk. Labor strikes, part shortages

Efficient market hypothesis

Strong form efficiency, semi strong form efficiency, weak form efficiency.

Selecting a Mode of Entry

Systematically evaluation of individual entry strategies in foreign markets.

International Fisher Effect

Tells us that the real rate of return must be constant across countries.

Risk premium

The ___ is the excess return earned by a risky asset over the return earned by a risk free asset.

Hedging

The act of reducing exchange rate risk.

Risk Premium

The added return (over and above the risk free rate) resulting from bearing risk.

Expected Return Variance and standard deviation Covariance and correlation

The characteristics of individual securities that are of interest are?

Net Present Value

The difference between market value and cost.

True

The geometric average will be less than the arithmetic average unless all the returns are equal.

Debt

The most preferred form of securities for funding by firms in the U.S. has been

True

The most rewarding investments have the most volatile returns.

Transfer Pricing

The process of selling goods and services internally between divisions.

Market risk premium

The slope of the security risk market line is the

1) Awareness of profitable investments 2) Selecting a mode of entry 3) Adjusting the effectiveness of the entry mode 4) Using appropriate evaluation criteria 5) Estimating the longevity of competitive advantage

What are 5 Necessary Elements for designing a global expansion strategy.

Senescent Aging Multinational Corporation

When competitive advantages and barriers to trade are diminished. Companies move to where limited competition exists. Lower cost production sites

It can be less than the weighted average of the standard deviations of the individual securities held in that portfolio.

Which of the following statements is true of a portfolio's standard deviation?