1) Describe the 3 forms of market efficiency. Why must a financial decision maker, like a corporate treasurer or CFO, be concerned with market efficiency?
2) We regularly suppose that investors are “risk-averse return-seekers” (that is, they like returns and dislike risk). If so, describe why do we challenge that only systematic risk is significant? On the other hand, why is total risk, on its own, not significant to investors?
3) According to CAPM, expected return on the risky asset depends on 3 components. describe each component, and describe the role of each one in determining expected return.
4) Why must financial decision makers get a good approximation of the firm’s cost of capital? What are the outcomes of utilizing the discount rate which is higher or lower than a firm’s true required return?