7 Questions
What does a Beta factor less than 1 imply about a security's risk level?
Low risk
What does the Alpha factor measure in investments?
Abnormal returns
In the CAPM formula Ri = Rf + B (Rm - Rf), what does 'Rf' represent?
Risk-free return rate
'Abnormal returns' as defined in the text refer to differences between...
Actual and expected returns
Anomaly in practice: Companies with Beta values greater than 1 tend to give...
Lower returns than expected
When companies have beta values less than 1, they tend to produce...
Slightly higher returns than expected
'Alpha' is used to measure abnormal returns. What are abnormal returns in this context?
'Difference between actual and expected returns'
Study Notes
Government Influence on Businesses
- Governments can influence businesses through fiscal and monetary policy, as well as other policies and regulations.
- Government control of inflation rates can lead to greater real economic growth in the long term.
Monetary Policy
- Changes in interest rates affect the cost of borrowing and consumer spending.
- Exchange rate changes can affect multi-national companies.
Competition Policy
- The government ensures a competitive business environment by preventing monopolies and anti-competitive behaviors.
- The government regulates proposed mergers and acquisitions to prevent monopolies.
Government Assistance for Businesses
- Government assistance can come in the form of grants for companies investing in specific industries or regions.
Bills of Exchange
- A bill of exchange is a promise to pay a stated amount of money at a future date.
- It has a drawer and a drawee, and can be used as a source of short-term finance for companies.
- A bill of exchange accepted by a bank is called a bank bill.
Certificate of Deposit (CD)
- A CD is a certificate issued by a bank stating that the bank is holding a specified amount of money as a term deposit with interest earned at a specified rate.
Commercial Paper (CP)
- CP is an unsecured promising note issued to pay a specific amount of money on a specified date.
International Financial Institutions
- The World Bank provides loans and grants for health, education, and infrastructure development projects in developing countries.
- The International Monetary Fund (IMF) grants loans to countries facing financial and economic difficulties, but with strict conditions.
Central Bank of Nigeria (CBN)
- The CBN has overall control and administration of monetary and financial sector policies of the federal government.
- The CBN ensures high standards of banking practice and financial stability through surveillance activities.
Portfolio Theory and Capital Asset Pricing Model (CAPM)
- Portfolio Theory helps investors build a portfolio of investments with a suitable balance between return and investment risk.
- CAPM is a model that provides a theoretical basis for Portfolio Theory.
- CAPM formula: Ri = Rf + B (Rm - Rf), where Rm - Rf is the risk premium and B is the beta factor.
Test your knowledge on the various ways in which government policies and regulations impact businesses. Explore the effects of inflation rates, interest rates, consumer spending, and exchange rate changes on companies' operations and financial decisions.
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