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exam questions - Essay Example
Author : astiedemann
Finance & Accounting
Pages 2 (502 words)
However, there are instances when a portfolio combination would not be profitable. A portfolio between two profit-generating companies will increase the portfolio…
Further, a portfolio company having high risk may financially endanger the financial output of a company having miniscule risk. Portfolio analysis should include the influence of risk on the company’s returns (Livermore, 1998, p. 584). CAPM is used to determine the relationship between risk and portfolio returns. In terms of question 1b, the Capital Asset Pricing Model (CAPM) is used to determine the effect of the risks on the returns. The CAPM model includes the risk free rate of return portion of the asset return. The CAPM is used to determine the expected capital asset return. The CAPM analysis includes a risk-free rate. The CAPM includes a risk premium and a market premium (Semmler, 2011, p. 106). The portfolio CAPM formula is shown in the following diagram:
E(Rp) = P1R1 + P2R2…+ PnRn Further, the formula is used to whether the average return on a portfolio of stocks is positively related portfolio’s beta data. The limitations include a wrong proxy is chosen. Another limitation is that the financial economists had not discovered a fool-proof they that explains why investors demand premiums for investing in low price/earnings for converting such concepts into risk premium estimations (OByrne, 2001, p. 180). In terms of question 2a, there are several motives for taking over another company. First, the “economies of scale” theory dictates that come entities or corporations takeover other companies in order to increase revenues. The total revenue of two companies will normally be higher than the revenue generated by all companies, given that the total sales of each company or equity is similar, under the synergy principle. Second, some companies takeover other companies in order to acquire the other company’s current and prospective customer database. Third, takeovers allow the new owner to acquire the expertise of the acquired company (Nuchtern, ...