Term
| what are operating forecasts? |
|
Definition
| operating forecasts are short term ( less than a year) predictions of financial results |
|
|
Term
| what is the key ingredient in making a forecast? |
|
Definition
| the sales forecast is key |
|
|
Term
| how are expenses estimated? |
|
Definition
expenses are estimated using the sales forecast as a guide
variable expenses change at the same rate as sales and are estimated via percent of sales:
last years COGS/sales * this years sales forecast
fixed expenses are forecasted individually |
|
|
Term
| what is the pro forma income statement? |
|
Definition
| the pro forma income statement is created by combining the expense and sales forecasts with explicit assumptions that were used in generating the forecasts |
|
|
Term
|
Definition
| risk is defined as variation from the expected result |
|
|
Term
| how is risk, or variation from the expected, measured? |
|
Definition
| we use standard deviations to measure the variation from the expected mean. standard deviation measures total stand alone risk |
|
|
Term
| how can you eliminate firm specific risk? |
|
Definition
| by combining financial assets that behave differently from one another -- i.e. diversifying your portfolio with roughly 40 different stocks you can eliminate firm specific risk can be eliminated. |
|
|
Term
| what is the beta coefficient? |
|
Definition
| the beta coefficient measures how much systematic risk a stock will add to or subtract from an already well diversified portfolio by measuring the return of a stock relative to the return of the whole market |
|
|
Term
| what is the average market risk? |
|
Definition
the average market risk aka average market volatility has a beta as one. if a stocks beta is greater than 1, it is more volatile than average and will increase the a total market portfolio and will then increase the expected return
if a stock has a beta less than one, it is less risky and will decrease the expected return of the portfolio |
|
|
Term
| what is the capital asset pricing model (CAPM)? |
|
Definition
CAPM uses beta to determine investor's expected rate of return on an investment
rs = rf + B(rm-rf)
rf: interest rate of 30 day t bills
b: beta
rm: the rate that is earned by the total stock market |
|
|
Term
| what are some problems with CAPM? |
|
Definition
| CAPM makes some assumptions that are not always reasonable such as that all investors can borrow at rf and have the same information, investments can be purchased in any denominations, there are no taxes or charges, etc. |
|
|
