Name: Date: Period:
T2 – Basic Financial Concepts
Location / Speed / Mission /1. Introduction /
Read Quickly / a.
2. The Risk/ Return Tradeoff / Stop, Think, Write / a. Explain this chart:
b. What type of investment gives you a risk-free rate of return?
a. What is the risk premium? Give an example:
3. Diversifica- tion / Slow Down, Write / a. What is diversification and why is it important?
b. What 3 practices help to create diversification?
c. What do economists say will reduce almost all the risk in the individual securities in a portfolio?
4. Dollar Cost Averaging / Slow Down, Write / a. How does dollar cost averaging work?
b. Give an example?
5. Asset Allocation / Slow Down, Write / a. Why is proper Asset Allocation important?
b. Give an example:
6. Random Walk Theory /
Read Quickly / a. What does the Random Walk Theory state?
b. What path do stocks take based on this theory?
7. Efficient Market Hypothesis /
Read Quickly / a. What does Efficient Market Hypothesis say about the price of stock and the ability to buy undervalued stock at a bargain?
8. Optimal Portfolio Theory /
Read Quickly / a. What does the Optimal Portfolio Theory say about how investors act?
9. Capital Asset Pricing Model / Stop, Think, Write / a. What is the purpose of the cap-m? What does it do? What does the cap-m say about the expected rate of return of a security or portfolio?
b. What is the cap-m formula?
c. Example… let’s say the current risk-free rate is 3% and the S&P 500 is expected to return 10% next year. What would next year’s return be of Buddy’s Juice Bar, whose beta value is 1.8 The overall stock market has a beta of 1.0
d. What does Buddy’s beta of 1.8 tell you about the risk it carries compared to the overall stock market? Should you expect Buddy’s to have a higher or lower potential return than the overall stock market?
e. What is the formula for expected return based on cap-m?
f. Based on the cap-m, what is Buddy’s Juice Bar’s expected return?
10. Conclusion /
Read Quickly / a. Missing from my notes…
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