Risk Management and Capital Budgeting

  1. Geometric average
    Depicts the compount annual return earned by the investor. THis method is preferred for evaluating long-term investments
  2. Relative Risk or "coefficient of variation"
    Standard Deviation of the return / expected return
  3. Market Segmentation Theory
    States that the Treasury securities market is divided into market segments by the various financial institutions investing in the market. Life insurance companies prefer long-term securities and therefore are an identifier of long-term interest rates
  4. Effective Interest Rate (EFR)
    EFR = (1 + (Stated Interest Rate / Compounding Frequency)) ^Compounding Frequency power -1
  5. Yield Curve in relation to Inflation
    If inflation is expected to increase, interest rates are expected to rise and therefore, intermediate-term and long-term rates will be higher than short-term rates
Card Set
Risk Management and Capital Budgeting
Risk Management and Capital Budgeting section of BEC section of CPA exam