1. Corporate Finance CAPM and Beta ( 資産評価モデル )

2. N. Takezawa (ICU) 20012 Std Dev （標準偏差） Expected Return ( 期待収益率） Riskfree ( 安全 利子率） market risk Capital Market Line 資本市場線 REVIEW Market Portfolio 市場ポートフォリオ

3. N. Takezawa (ICU) 20013 Risk free rate=5%, market ret = 10% risk of market portfolio=20% Weight in MarketPortfolio Ret.Portfolio Risk 050 0.57.510 1.01020 1.51530 2.017.540

4. N. Takezawa (ICU) 20014 Required Return/ Expected Return We need a model which will give us the required return on an investment. This will be our discount rate for risky projects or cash flows. Required return = riskfree rate + risk premium.

5. N. Takezawa (ICU) 20015 The Capital Asset Pricing Model (CAPM) 資産評価モデル

6. N. Takezawa (ICU) 20016 CAPM Since, the market risk cannot be diversified away, we should be compensated for taking on such risk. The Capital Asset Pricing Model, is a formal expression giving us the relationship between expected (excess) return and the market premium.

7. N. Takezawa (ICU) 20017 CAPM cont. We use excess returns: The risk free rate is the return for an asset with zero risk by definition. So we are interested in knowing the extra return above the risk free rate needed to compensate us for the taking risk. If the risk free rate is 1% and the extra required return for holding risk is 5%, then the return on the stock should be 6% (=1%+5%). 5% (=6%-1%) is also the excess return.

8. N. Takezawa (ICU) 20018 CAPM cont. Risk is measured relative to the market portfolio. Market portfolio contains all assets. Beta ( ベータ値 ) is a measure of this risk. Beta>1. You need a return greater than that received on the market portfolio (premium) to compensate for risk. Implies very risky asset. Beta<1. You need a return less than the market premium to compensate for risk. Implies less risky asset.

9. N. Takezawa (ICU) 20019

10. 10 Measures the contribution of asset i to the risk of the Market portfolio. It is only the covariance risk that matters. The firm specific risk is not relevant here. Recall that the average covariance was the limit when discussing the effects of diversification. BETA Note,

11. N. Takezawa (ICU) 200111 In words … Return on Toyota stock = risk free rate + premium for risk. Notice that the Premium for risk=Beta x Market Premium in the case of the CAPM. Return on Toyota stock = risk free rate + Beta x Market Premium. OR, Excess return on Toyota stock = Beta x Market premium. Note that the market premium is the return on the market portfolio less the riskfree rate.

12. N. Takezawa (ICU) 200112 CAPM(capital asset pricing model, 資産評価モデル ) Beta ベータ値 Expected Return ( 期待収益率） Riskfree 安全 利子率 1 (=beta for market) slope market premium SML Security Market Line 証券市場線

13. N. Takezawa (ICU) 200113 E(r) rfrf  E(r m )  Capital Market Line 資本市場線 Security Market Line 証券市場線 Std. Dev. (Risk) 標準偏差 Beta ベータ－値

14. N. Takezawa (ICU) 200114 Slope of CML and SML Slope of CML Slope of SML Market Risk Premium Expectation notation dropped for convenience

15. N. Takezawa (ICU) 200115 Simple Exercises If the required return for ICU Inc. is 15%, the riskfree rate is 5%, and the market premium is 10%, what is the beta for ICU Inc. (stocks). If the beta for IS Inc. is 1.5 and the market premium is 10%, what is the required return for IS Inc.? You may assume a 5% riskfree rate.