Chapter 17

Is a measure of systematic risk inherent in security i.

This states that the equilibrium expected rate of return on a stock (or more generally any security) is a linear function of the systematic risk inherent in the security.

The balance between the debts and assets used by a firm for its expansion and day to day operations. It gives multinational corporations an advantage over small domestic firms who cannot access credit.

Where no assets are internationally tradable, they will be priced according to their respective country systematic risk.

Minimum rate of return an investment project must generate in order to pay its financing costs.

In banking and investment, it is the probability that unexpected events in a coutnry will influence its ability to repay loans and repatriate dividends. It includes political and credit risks.

Firms with nontradable assets get this from firms with tradable assets in the sense that the former indirectly benefit from international integration in terms of a lower cost of capital and higher asset pries, without incurring any associated costs.

Where all assets are internationally tradable, each asset will be priced according to the world systematic risk.

The covariance between a nontradable asset and the world market portfolio that is induced by tradable assets. In the presence of internationally tradable assets, nontradable assets will be priced partly by the indirect world systematic risk and partly by the pure domestic systematic risk.

The market-value-weighted portfolio of all assets.

Where some assets are internationally tradable (i.e., those that are cross-listed) while others are nontradable.

Holds that nontradable assets will not be priced as if world financial markets were completely segmented.

Because the constraint is effective in limiting desired foreign ownership, foreign and domestic investors may face different market share prices. This is due to legal restrictions imposed on foreigners.

The portfolio of domestic country assets that is most highly correlated with the foreign market portfolio. It can thus be regarded as the domestic country investors' best homemade __________ for the foreign market portfolio.

The non-diversifiable market risk of an asset.

When a firm has both debt and equity in its capital structure, its financing cost can be represented by this. It can be computed by weighing the after-tax borrowing cost of the firm and the cost of equity capital, using the capital structure ratio as the weight.

Comprises both the domestic and foreign portfolios.