Business Finance (Academic Assistance Program) Prepared by tutor. Daniel Pan note. Material is only subject to private tutoring Financial Management Finance Valuation Risk & Return 2Future Education Pty Ltd - All right reserved 1

未来教育的成长历程 2Future Education Pty Ltd - All right reserved Future Education 初步成立 2007, 参加课程学生超过 400 人, 网上会 员超过 600 人, 成立 MELBOURNE 第一个 学术论坛. 新开网上学生买卖平台. 2008, 每学期学员数超 500 人次, 获澳 洲移民部长颁发 CERTIFICATE OF APPRECIATION 以表扬 2FUTURE 对多 元文化的贡献. 2009, 2Future 墨尔本办公室正式成立 ; 雅思课程正式开设 ; 并成立非盈利组 织微音基金会. 2010, 横向扩展培训教育 项目, 获得 RMIT University union 聘用为该校国际学 生提供一周考前辅导。

Risk Total Risk is measured by Standard Deviation Total Risk Market risk Firm specific risk

Portfolio Investing What is a Portfolio ? – Benefit of Diversification Portfolio +-

Portfolio Investing Diversification can reduce – Firm-specific risk – But not market risk Effectiveness of diversification – Correlation Coefficient 1 ~ -1 Positively Perfectly Correlated +1 Negative Perfectly Correlated -1

Efficient frontier Portfolio investing :Lower Risk higher Return

Market Risk Portfolio investing : market risk – Diversification only eliminate firm-specific risk – But not market risk High Market Risk High Return – Market risk Premium – Market risk leads to expected return – Concept of Beta

Beta We used beta to measure market risk – Measure the sensitivity of asset which related to market movement Beta Calculation: mystery of 1

Example A) Market variances is 0.44, the covariance between the A share and market is Please calculate Beta. B) Market standard deviation is 0.24, and for A shares is The correlation coefficient between A and market return is Calculate Beta.

Capital Asset Pricing Model E.R= Rf + (Rm-Rf)*B – Drawing the security market line (SML) Winner & Loser – Risk premium theory & risk free rate – Required rate of return CML ? 2Future Education Pty Ltd - All right reserved 10 Market risk 决定 ER

SML

Exam Questions The price of ABC Company’s shares and the value of the share market index at the beginning and end of the year 2007 are given below. ABC Share PriceMarket Index 1 January 2007 $ , December 2007 $ ,600 Assume that the correlation between the returns of ABC Company and the share market index (i.e., Beta ) is 1.2. The risk free rate of return in the market is 8%, and investors hold fully-diversified portfolios. – a) What is the required rate of return of ABC Company according to the Capital Asset Pricing Model (CAPM)? – b) How does the ABC Company’s 2007 return compare with the return you believe to be a fair return, given the company’s systematic risk? (Assume ABC company’s return only comprises of capital gains or losses, i.e., there is no dividend yield). 2Future Education Pty Ltd - All right reserved 12