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July 19, 2012

High return on invested capital and high pricing power are associated with:

High industry concentration (ie a small number of firms) High barriers to entry Low industry capacity

June 29, 2012

Average Accounting Return

AAR = average net income / average book value

June 14, 2012

The bank discount yield is not a meaningful measure of investors’ return because:

The bank discount yield is based on a 360-day year. The bank discount yield is annualized with simple interest. The bank discount yield is based on the face value of the bond.

June 14, 2012

Continuously Compounded Return

The continuously compounded return, Rt,t+1, associated with a holding period is the natural logarithm of 1 plus that holding period return: Rt,t+1 = ln(1 + r)

June 14, 2012

Compute portfolio standard deviation of return (only two assets)

Cov(Ra, Rb) = STDa * STDb * Cor(a, b) ϑ^2(Rp) = (Wa^2)(ϑ^2(Ra)) + (Wb^2)(ϑ^2(Rb)) + (2)(Wa)(Wb)(Cov(Ra, Rb)) STDp = Square Root of ϑ^2(Rp)

June 13, 2012

The Law of Diminishing Returns

States that at some point, as more of a resource is used in a production process, holding other inputs constant, output increases at a decreasing rate.

June 13, 2012

CAPM < Expected return of discounted future cash flows

Stock is undervalued Investor should buy CAPM considers risk of individual stocks relative to all other alternatives in the market

June 13, 2012

CAPM > Expected return on discounted future cash flows

Stock is overvalued Security should be sold CAPM considers risk of individual stock relative to all other alternatives in the market

June 10, 2012

The CAPM concludes that expected returns are:

a positive (linear) function of systematic risk

July 19, 2012

Constant Growth Rate Model

Vj = D1 / (k – g) Vj = value of the stock J D1 = Current Dividend times (1 + g) = D0 * (1 + g) k = The required rate of return g = The constant growth rate of dividends g = ROE * (1 – dividend payout ratio)

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