Corporate finance discussion questions


Question Description

Answer each question with 100 words

Understand how capital gains and percentage returns are calculated.

Explain the difference between average stock returns and risk-free returns.

Explain how the Sharpe Ratio is used to manage risk.

Explain how an investor chooses the best portfolio of stock to hold.

Discuss how diversification is used to mitigate risk in the portfolio.

Describe the relationship between risk and expected return (CAPM).

Describe the dividend discount model (DDM) approach and how is it different than CAPM..

Distinguish between forward contracts and future contracts.

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School: UC Berkeley

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Discussion Questions Corporate Finance
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Discussion Questions Corporate Finance
Q1. Capital Gains and Percentage Returns
In corporate finance, capital gain entails the rising in the value of a capital investment
giving a higher worth than the purchasing price, gain realized after selling the asset. Capital
Asset involves investments in products such as the stocks and real estates among others. Capital
gain can either short or long-term depending on the number claimed on the income taxes. As a
result, the formula for calculating capital gain on assets involves the subtraction of the current
price from the original prices of the capital asset (Current price – Original price).
Percentage returns entail the gain or loss incurred on an investment over a specified
period from a capital asset. Expressed as a percentage, the formula for calculating the rate of
return entails subtracting the current price from the original price and dividing by the results by
origin price of an asset ((Current price-Original price)/Original price).
Q2. Difference between Average Stock Returns and Risk-Free Returns
The difference between the average stock return and risk-free return arise from the
application and the calculation of the two investment concepts. Average stock return entails the
average return from a purchased stock over a selected duration, for instance, monthly returns
from a stock for one year. Unlike, average stock return that entails calculating the average
returns from an investment, risk-free returns encompass a theoretical return attributable to a
specific investment providing a guaranteed return with no risk of making such investments. This
implies that investors making risk-free return investment stand no chance of losing an investment
(Schiessl, 2014). Besides, calculating average stock involves the use of the simple...

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