McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Slides:

Advertisements

Similar presentations

Where Do We Stand? Earlier chapters on capital budgeting focused on the appropriate size and timing of cash flows. This chapter discusses the appropriate.

Advertisements

Chapter 8 Risk and Return. Topics Covered  Markowitz Portfolio Theory  Risk and Return Relationship  Testing the CAPM  CAPM Alternatives.

Chapter 8 Principles PrinciplesofCorporateFinance Tenth Edition Portfolio Theory and the Capital Asset Pricing Model Slides by Matthew Will Copyright ©

 Risk and Return Principles of Corporate Finance Brealey and Myers Sixth Edition Slides by Matthew Will Chapter 8 © The McGraw-Hill Companies, Inc., 2000.

Introduction to Risk and Return

Chapter 8 Principles of Corporate Finance Eighth Edition Risk and Return Slides by Matthew Will Copyright © 2006 by The McGraw-Hill Companies, Inc. All.

The McGraw-Hill Companies, Inc., 2000

Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Return and Risk: The Capital Asset Pricing Model (CAPM) Chapter.

CAPM and the capital budgeting

12- 1 McGraw Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved Fundamentals of Corporate Finance Sixth Edition Richard.

Chapter 8 Risk and Return—Capital Market Theory

CAPM and the capital budgeting

Today Risk and Return Reading Portfolio Theory

Corporate Finance Lecture 6.

Portfolio Analysis and Theory

Chapter 9 Principles of Corporate Finance Eighth Edition Capital Budgeting and Risk Slides by Matthew Will Copyright © 2006 by The McGraw-Hill Companies,

7-1 McGraw-Hill/Irwin Copyright © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. CHAPTER 7 Capital Asset Pricing Model.

Introduction to Risk, Return, and The Opportunity Cost of Capital

Ch 6: Risk and Rates of Return Return Risk  2000, Prentice Hall, Inc.

Return and Risk: The Capital Asset Pricing Model Chapter 11 Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin.

CORPORATE FINANCIAL THEORY Lecture 2. Risk /Return Return = r = Discount rate = Cost of Capital (COC) r is determined by risk Two Extremes Treasury Notes.

Introduction to Risk and Return

Portfolio Theory and the Capital Asset Pricing Model 723g28 Linköpings Universitet, IEI 1.

 Introduction to Risk, Return, and the Opportunity Cost of Capital Principles of Corporate Finance Brealey and Myers Sixth Edition Slides by Matthew Will.

Investments, 8 th edition Bodie, Kane and Marcus Slides by Susan Hine McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights.

CORPORATE FINANCE V ESCP-EAP - European Executive MBA Dec. 2005, London Risk, Return, Diversification and CAPM I. Ertürk Senior Fellow in Banking.

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. Chapter 9 Capital Asset Pricing.

1 Chapter 2: Risk & Return Topics Basic risk & return concepts Stand-alone risk Portfolio (market) risk Relationship between risk and return.

Class 8 The Capital Asset Pricing Model. Efficient Portfolios with Multiple Assets E[r]  0 Asset 1 Asset 2 Portfolios of Asset 1 and Asset 2 Portfolios.

Chapter McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved. Cost of Capital 11.

© Prentice Hall, Corporate Financial Management 3e Emery Finnerty Stowe Cost of Capital.

McGraw-Hill/Irwin Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 7 Capital Allocation Between The Risky And The Risk-Free.

FIN 351: lecture 6 Introduction to Risk and Return Where does the discount rate come from?

Introduction to Risk and Return

Portfolio Theory and the Capital Asset Model Pricing

Risk, Return and Capital Budgeting

CAPM Capital Asset Pricing Model By Martin Swoboda and Sharon Lu.

Lecture 8 Risk and Return Managerial Finance FINA 6335 Ronald F. Singer.

Chapter 10 Capital Markets and the Pricing of Risk.

FIN 819: lecture 4 Risk, Returns, CAPM and the Cost of Capital Where does the discount rate come from?

McGraw-Hill/Irwin © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved. Efficient Diversification CHAPTER 6.

Chapter 8 Principles of Corporate Finance Tenth Edition Portfolio Theory and the Capital Asset Model Pricing Slides by Matthew Will McGraw-Hill/Irwin Copyright.

Principles of Corporate Finance Sixth Edition Richard A. Brealey Stewart C. Myers Lu Yurong Chapter 8 McGraw Hill/Irwin Risk and Return.

Chapter 11 Fundamentals of Corporate Finance Fifth Edition Slides by Matthew Will McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc.

McGraw-Hill/Irwin Copyright © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Capital Asset Pricing and Arbitrage Pricing Theory CHAPTER 7.

Risk /Return Return = r = Discount rate = Cost of Capital (COC)

1 Chapter 10 Estimating Risk and Return McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

McGraw-Hill/Irwin Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved Corporate Finance Ross  Westerfield  Jaffe Seventh Edition.

McGraw-Hill/Irwin Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter Asset Pricing Models: CAPM & APT.

Portfolio theory and the capital asset pricing model

Return, Risk, and the Security Market Line

12-1. Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin 12 Return, Risk, and the Security Market Line.

13-0 Return, Risk, and the Security Market Line Chapter 13 Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin.

Chapter 12 Estimating the Cost of Capital. Copyright ©2014 Pearson Education, Inc. All rights reserved The Equity Cost of Capital The Capital.

McGraw-Hill/Irwin Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved Corporate Finance Ross  Westerfield  Jaffe Seventh Edition.

1 CHAPTER 2 Risk and Return. 2 Topics in Chapter 2 Basic return measurement Types of Risk addressed in Ch 2: Stand-alone (total) risk Portfolio (market)

Chapter 11 Cost of Capital Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin.

3- 1 Outline 3: Risk, Return, and Cost of Capital 3.1 Rates of Return 3.2 Measuring Risk 3.3 Risk & Diversification 3.4 Measuring Market Risk 3.5 Portfolio.

FIN 350: lecture 9 Risk, returns and WACC CAPM and the capital budgeting.

Chapter McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. Return, Risk, and the Security Market Line.

© The McGraw-Hill Companies, Inc., 2000 Irwin/McGraw Hill 7- 1 B Class #3  BM6 chapters 7, 8, 9  Based on slides created by Matthew Will  Modified.

2 - 1 Copyright © 2002 by Harcourt College Publishers. All rights reserved. Chapter 2: Risk & Return Learning goals: 1. Meaning of risk 2. Why risk matters.

1 CHAPTER 6 Risk, Return, and the Capital Asset Pricing Model (CAPM)

Copyright © 2011 Pearson Prentice Hall. All rights reserved. Risk and Return: Capital Market Theory Chapter 8.

FIN 351: lecture 5 Introduction to Risk and Return Where does the discount rate come from?

Chapter 8 Portfolio Theory and the Capital Asset Pricing Model

The McGraw-Hill Companies, Inc., 2000

Portfolio Theory and the Capital Asset Pricing Model

Introduction to Risk & Return

Presentation transcript:

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

12-2 Risk, Return and the Capital Budget This chapter introduces the quantitative techniques used to estimate the required returns on equity. It also establishes the relationship between market risk and the relative riskiness of the firm.

12-3 Measuring Market Risk  Market Portfolio - Portfolio of all assets in the economy.  Beta - Sensitivity of a stock’s return to the return on the market portfolio.

12-4 Measuring Beta: Example Example – The Fosterhouse Gourmet Foods corporation has the following % returns on its stock, relative to the listed changes in the % return on the market portfolio. Its beta (β) can be derived from this information. * The returns are expressed as percentages, though the results will be identical if expressed as decimals.

12-5 Measuring Beta: Example (ctd)  When the market was up 1%, Fosterhouse Corporation’s average percent change was +.4%.  When the market was down 1%, Fosterhouse Corporation’s average percent change was -.4%.  The change of.8% (-.4% to.4%) divided by the 2% (-1.0% to 1.0%) change in the market produces a beta of.4.

12-6 Measuring Beta Graphically Fosterhouse Corporation Returns (%)

12-7 Stock Betas for Common Stocks (May April 2010) What factors contribute to the variation in these betas?

12-8 Total Risk and Market Risk Recall that total risk is a combination of unique risk and market risk. What are the effects of diversification on unique risk and market risk?

12-9 Portfolio Beta  The beta of your portfolio will be an average of the betas of the securities in the portfolio.  What would be the average beta if you owned all of the S&P Composite Index stocks?  What is the beta of the risk-free return, U.S. Treasury Bills?

12-10 Portfolio Beta: Example Example – Calculate the beta of a portfolio that consists of 25% Ford, 25% Boeing, and 50% McDonald’s.

12-11 Measuring Market Risk: The Market Risk Premium Market Risk Premium - Risk premium of market portfolio; the difference between the market return and the return on risk-free Treasury bills.

12-12 Market Risk Premium: Example Example: Market Portfolio (market return = 12%)

12-13 Capital Asset Pricing Model (CAPM) Let r = expected return on any asset * Note: These are identical, the risk-free rate has just been moved to the right hand side.

12-14 CAPM: Example

12-15 Graphic Representation of CAPM Security Market Line - The relationship between expected return and beta.

12-16 CAPM Tested Beta vs. Average Risk Premium What do these results imply?

12-17 Alternative Explanations to CAPM Small minus big High minus low book-to-market

12-18 Alternative Explanations Tested

12-19 CAPM and Expected Returns Is CAPM useful?

12-20 Project Risk and the Security Market Line Which should be used to assess the value of a proposed project? Company Cost of Capital: Expected rate of return demanded by investors in a company, determined by the average risk of the company’s securities Project Cost of Capital: Minimum acceptable expected rate of return on a project given its risk.

12-21 Determinants of Project Risk Consider: 1.Operating Leverage and Project Risk 2.The presence of non-diversifiable risk

12-22 Project Risk and the Security Market Line Should this project be accepted? Why? What does this imply, if anything, about this project’s NPV?