Effect of Financial Leverage on Net Income and ROE
Financial leverage refers to the extent to which a company finances its operations using fixed-cost financial obligations such as debt and preferred equity. The more a company uses debt financing, the higher its financial leverage and exposure to financial risk….
Breakeven Quantity of Sales
“Breakeven point” or “breakeven quantity of sales” refers to the number of units of a company’s product that is produced and sold at which point the company’s net income becomes zero. Computing Breakeven Quantity of Sales At the point where…
Operating Breakeven Quantity of Sales
The breakeven quantity of sales or just simply breakeven point indicates the number of units of a company’s product that is produced and sold at which point the company’s net income becomes zero. Similarly, we can specify the breakeven point…
Dividends
When a company pays dividends to its shareholders, it is giving them a portion of its earnings. The amount that is paid to each shareholder is dependent on the number of shares that they own. Indeed, the payout and is…
Mean, Variance and Covariance
The computation of mean, variance, and covariance statistics allows portfolio managers to compare the underlying securities’ return-risk characteristics and potential portfolio impact. These metrics are quantitatively determined and rely on historical price or return data. While we can compute the…
Risk Aversion
Risk aversion is related to investor behavior. Some investors are more comfortable with uncertainty in the outcome than others and are prepared to tolerate more risk in the pursuit of greater portfolio returns. Risk Seeking Risk seekers actively pursue risk…
Portfolio Standard Deviation
The standard deviation of a portfolio of assets, or portfolio risk, is simply not the sum of the risk of the underlying securities. Due to the correlation between securities, the computation of portfolio risk must incorporate this correlation relationship. Computing…
Uncorrelated Portfolio Holdings
The portfolio standard deviation, or risk, is not simply the addition of the risk of each portfolio holding. The interaction between portfolio holdings contributes to the overall portfolio risk. Correlation Correlation is a statistical measure of the relationship between two…
Minimum-Variance Portfolios
In theory, we could form a portfolio made up of all investable assets. However, this is not practical, and we must find a way to filter the investable universe. A risk-averse investor wants to find a combination of portfolio assets…
Optimal Portfolios
Risk-free assets are usually government-issued with no risk. When you combine them with risky assets, you create a capital allocation line on a graph. This line connects the best risky portfolio to the risk-free asset. The Two-fund Separation Theorem The…
