Chapter 8 RISK and RETURNS Market.Risk.Prem. = (r M – r RF ) Additional return over the risk-free rate needed to compensate investors for assuming an average amount of risk. Its magnitude depends on the stock’s beta (b), the expected market return and the expected return on the risk-free asset Varies from year to year, but most estimates suggest that it ranges between 4% and 8% / yr. If B= 1.0, the security is just as risky as the market. If B > 1.0, the security is riskier If B < 1.0, the security is less risky. CAPM r i = r RF + (r M – r RF ) b i Primary conclusion: The relative riskiness of a stock (b) is its contribution to the riskiness (P f Beta) of a well-diversified portfolio. Risk premium – the difference between the return on a risky asset and a riskless asset, which serves as compensation for investors to hold riskier securities. Chapter 16 Working Capital Management Net operating working capital (NOWC): CA (Cash + Inv. + A/R) – CL (Accruals + A/P),
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Generally Accepted Accounting Principles, expected market return, rM – rRF