Scribd
Upload
88 views2 pages

Fin 301 Mid Term Viva

This document discusses various types of risk associated with investments such as business risk, liquidity risk, default risk, and market risk. It also defines key financial terms like standard deviation, variance, and expected return. Additionally, it covers capital budgeting techniques used to analyze investments like discounted payback period, payback period, and net present value (NPV). The discounted payback period considers the time value of money and riskiness of cash flows, while the payback period ignores the time value of money and risk of future cash flows. NPV is calculated as the total present value of cash inflows minus the initial investment.

Uploaded by

கப்பல்ஹசன்நபி
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
88 views2 pages

Fin 301 Mid Term Viva

This document discusses various types of risk associated with investments such as business risk, liquidity risk, default risk, and market risk. It also defines key financial terms like standard deviation, variance, and expected return. Additionally, it covers capital budgeting techniques used to analyze investments like discounted payback period, payback period, and net present value (NPV). The discounted payback period considers the time value of money and riskiness of cash flows, while the payback period ignores the time value of money and risk of future cash flows. NPV is calculated as the total present value of cash inflows minus the initial investment.

Uploaded by

கப்பல்ஹசன்நபி
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 2

Chapter-07

Risk-risk refers to variability of expected returns associated with given investment.

Return-Return, is the amount of money receive from an investment.

Expected return- R1×P1+R2×P2……Rn×Pn

Relationship risk and return -Higher risk is associated with greater probability of higher return
and lower risk with a greater probability of smaller return.

Standard deviation:, the standard deviation is a measure of the amount of variation or dispersion of
a set of values. the smaller the standard deviation ,the tighter the probability distribution and thus the
lower the risk of investment. Formula- σ 2 = √r −rbar square × p
❑

Variance- The variance is the average of the squared differences from the mean. Variance formula-

Types of Risk:

Business Risk-business risk is the risk by fluctuations of earnings before interest and taxes.

Types-compliance risk, financial risk, reputation risk

Liquidity Risk-liquidity risk is the risk that a company or bank may be unable to meet short term
financial demands. example: account receivable, bank deposit, debt terms

Default risk - default risk is the risk that a lender takes on the chance that a borrower will be unable
to make the required payments on their debt obligation. example-strategic default, consumer default,
sovereign risk .

Market Risk-Market risk is the risk of losses in positions arising from movements in market prices.
Example: changes in equity prices, interest rate moves or foreign exchange fluctuations.

Interest Rate Risk: Interest rate risk is the risk that arises for bond owners from fluctuating
interest rate .example- if interest rates rise bond prices fall.

Purchasing power risk: purchasing power risk, is the risk that inflation reduces the value of an
investment. example: when rise in price will reduce the quantity of goods that can be purchased with a
fixed sum of money.
Chapter-08
Capital budgeting-is the process of making long term planning decisions for investments.
Example: payback period, accounting rate of return, net present value, discounted payback period.
Internal rate of return, provability index.

Discounted payback period- The discounted payback period is a capital budgeting


procedure used to determine the profitability of a project. FORMULA= Discounted Cash Inflow =
Actual cash inflow / (1 + i) n

Discounted pay back period -pros and cons—pros-i)consider the time value of money. ii)
considers the riskiness of the project cash flows. Cons-i)may reject positive npv investment.calls
for a cost of capital

Payback period- The payback period refers to the amount of time it takes to recover the cost of an
investment. FORMULA=total cash outlay ÷ average annual cash. Year before full recovery+unrecoverd
cost at start of the year/cash flow during the year.

Payback period-pros-i)simple to compute .ii)provides some information on the risk of the


investment. Cons - i)Ignores the time value of money .ii)ignores the risk of future cash flows.

Npv- Net present value (NPV): is the difference between the present value of cash inflows
and the present value of cash outflows over a period of time. Formula-total present value –
initial investment.

You might also like