Coefficient of correlation: 1. Provides a measure of strength of the relationship between the expected returns of two securities 2.

Can vary between values of +1 and -1 3. It is perfective positive correlation(+1), it would indicate the expected returns will move in the same direction in the same proportion at all times 4. It is perfect negative correlation(-1), it would indicated the expected returns will move in the opposite direction in the same magnitude at all times 5. Portfolio of shares will not diversify risk if the returns of the shares within the same portfolio are highly correlated. 6. {Portfolio of shares will diversify risk if the returns of the shares within the same portfolio are low correlated. Errors of portfolio theory/Alpha: 1. 2. 3. 4. 5. The historical date is unlikely to be repeated in the future The historical date contain errors The market is not perfect CAPM has many assumption(market not perfect) The company may have borrowings, which affects its quality beta and share price

APV is better than NPV when: 1. There is significant change in capital structure as a result of the investment 2. The investment involves complex tax payments & tax allowances, and/or has period when taxation is not paid 3. Subsidized loans, issue costs exist. Transaction risk: 1. This is the risk of adverse exchange rate movements occurring in the course of normal trading transaction 2. Typically arise as a result of exchange rate fluctuations between the date when the price is agreed and the date when the cash is paid 3. This type of risk can give rise to real cash flow gains and losses 4. It would necessary to set up a treasury management function whose role would be to assess and manage the risk through various hedging techniques Translation risk: 1. Arise from fluctuations in the exchange rate used to convert any foreign denominated assets or liabilities, or foreign denominated income or expenses when reporting back to the head office and thereby impacting on the investment performance 2. This type of risk has no direct cash flow implications then typically arise when the result of the subsidiary denominated in a foreign currency are translated into the home currency for consolidation purposes

Even though the systematic risk is not reduced the reduction in earnings volatility is likely to make it easier and cheaper to obtain additional source of loan finance c)Market position The formation of a larger entity may mean that the new group is able to exert more control over prices charged to its customers.g the purchases of supplier by its main customer may improve the quality of the supply of material b) Financial strategies Earnings stability is likely to improve as a result of there being a wider spread of activities within the business.g larger machine can be used to produce at lower cost per unit than smaller machine Control of resources may be improved in a vertical integration.Synergy: 1. whereby a group after a takeover achieve combined results that reflect a better rate of return than was being achieved by the same resources used in two separate operations before takeover 2. The company’s profile may become higher. and thereby improve its profitability. . Reasons for why synergy exist: a) Operating economies EOS arise when fixed operating costs can be spread over a larger production volume. E. E. It can be used to describe as the 2+2 = 5 effect.

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