MBA 702 MODULE 4 LYNN COMPREHENSIVE EXAM
QUESTIONS WITH DETAILED VERIFIED AND 100%
ACCURATE ANSWERS BRAND NEW EXAM ALREADY
GRADED (A+ PASS)
Risk defined and measured Ans✓✓✓Risk refers to potential variability
in future cash flows
-the wider the range of possible future events that can occur, the greater
the risk
-thus, returns on common stock are riskier than returns from investing in
a saving account in a bank
Types of risk Ans✓✓✓Market risk
Interest rate risk
Inflation or purchasing power risk
Liquidity risk
Political risk
Business risk
Financial risk
Exchange rate risk
Another risk to consider, the holding period of the investor
Ans✓✓✓How long do you plan to hold on to your investment?
,- the longer the holding period, the less the volatility in returns,
especially for common stocks
-over a one-year holding period, stocks are risky compared to bonds and
treasury bills, BUT over a longer period, stocks become less risky
compared to other investments
How do we measure risk? Ans✓✓✓Standard Deviation
a measure of how much the individual returns on the stock deviate from
the expected value or the mean
Beta (from the capital asset pricing model, CAPM)
a measure of how much the individual returns on the stock "move with"
the overall market (such as the S&P 500)
-this is called market risk
Total risk Ans✓✓✓is company-specific, or investment-specific.
includes both non-systematic, and systematic (market) risk.
Total risk is measured by standard deviation.
% Return Ans✓✓✓cash flow / investment
,Expected Cash Flow Ans✓✓✓probability of the states multiplied by the
expected cash flow
Expected Return Ans✓✓✓Probability of the states multiplied by %
Return
In order to determine the overall expected cash flows Ans✓✓✓we add
each of the probability weighted expected cash flow
the expected benefits or returns an investment generates come in the
form of Ans✓✓✓cash flows
-cash flows are used to measure returns
-remember our principle, cash flow matters
Expected Return, remember that cash flows ARE NOT a certain thing
Ans✓✓✓The expected cash flow is the weighted average of the possible
cash flows outcomes such that the weights are the probabilities of the
occurrence of the various states of the economy.
Expected Cash Flow (X) = ΣPbi X Cfi
-Where Pbi = probabilities of outcome i
-Cfi = cash flows in outcome i
, It all comes down to simply adding all the possible outcomes, with the
probability of each as the "weight" on each outcome
The ugly equation ((X) = ΣPbi*Cfi) is simply describing what was done
on the prior slide.
Variance and Standard Deviation Ans✓✓✓variance and standard
deviation measure the volatility of returns
-Variance (𝜎2) is the weighted average of squared deviations
-Standard Deviation (σ) is the square root of variance
Calculate Standard Deviation Ex Ans✓✓✓Note on the table:
(1) refers to the probability of each state of the economy
(2) Refers to the expected return under the given state of the economy
As earlier, we calculated the overall mean return as the sum of each
expected return * the probability of that return
(3) Is the deviation (difference) of the expected return in a given state of
the economy from the overall expected return (the probability weighted
mean return of 17.5%)
QUESTIONS WITH DETAILED VERIFIED AND 100%
ACCURATE ANSWERS BRAND NEW EXAM ALREADY
GRADED (A+ PASS)
Risk defined and measured Ans✓✓✓Risk refers to potential variability
in future cash flows
-the wider the range of possible future events that can occur, the greater
the risk
-thus, returns on common stock are riskier than returns from investing in
a saving account in a bank
Types of risk Ans✓✓✓Market risk
Interest rate risk
Inflation or purchasing power risk
Liquidity risk
Political risk
Business risk
Financial risk
Exchange rate risk
Another risk to consider, the holding period of the investor
Ans✓✓✓How long do you plan to hold on to your investment?
,- the longer the holding period, the less the volatility in returns,
especially for common stocks
-over a one-year holding period, stocks are risky compared to bonds and
treasury bills, BUT over a longer period, stocks become less risky
compared to other investments
How do we measure risk? Ans✓✓✓Standard Deviation
a measure of how much the individual returns on the stock deviate from
the expected value or the mean
Beta (from the capital asset pricing model, CAPM)
a measure of how much the individual returns on the stock "move with"
the overall market (such as the S&P 500)
-this is called market risk
Total risk Ans✓✓✓is company-specific, or investment-specific.
includes both non-systematic, and systematic (market) risk.
Total risk is measured by standard deviation.
% Return Ans✓✓✓cash flow / investment
,Expected Cash Flow Ans✓✓✓probability of the states multiplied by the
expected cash flow
Expected Return Ans✓✓✓Probability of the states multiplied by %
Return
In order to determine the overall expected cash flows Ans✓✓✓we add
each of the probability weighted expected cash flow
the expected benefits or returns an investment generates come in the
form of Ans✓✓✓cash flows
-cash flows are used to measure returns
-remember our principle, cash flow matters
Expected Return, remember that cash flows ARE NOT a certain thing
Ans✓✓✓The expected cash flow is the weighted average of the possible
cash flows outcomes such that the weights are the probabilities of the
occurrence of the various states of the economy.
Expected Cash Flow (X) = ΣPbi X Cfi
-Where Pbi = probabilities of outcome i
-Cfi = cash flows in outcome i
, It all comes down to simply adding all the possible outcomes, with the
probability of each as the "weight" on each outcome
The ugly equation ((X) = ΣPbi*Cfi) is simply describing what was done
on the prior slide.
Variance and Standard Deviation Ans✓✓✓variance and standard
deviation measure the volatility of returns
-Variance (𝜎2) is the weighted average of squared deviations
-Standard Deviation (σ) is the square root of variance
Calculate Standard Deviation Ex Ans✓✓✓Note on the table:
(1) refers to the probability of each state of the economy
(2) Refers to the expected return under the given state of the economy
As earlier, we calculated the overall mean return as the sum of each
expected return * the probability of that return
(3) Is the deviation (difference) of the expected return in a given state of
the economy from the overall expected return (the probability weighted
mean return of 17.5%)
