1Chapter SixRisk and Return MGMT 109Managerial FinanceProfessor Lu ZhengMotivation•The goal of financial management is to maximize the value of a firm by taking positive NPV projects. •The NPV of a project is determined by project cash flows and project cost of capital. •Our goal is to develop a theory of risk and return so that we can estimate the cost of capital. •The cost of capital measures the expected return on other investments with similar risk.About RiskThere are two times in a man's life when he should not speculate: when he can't afford it and when he can.[Mark Twain, Following the Equator]
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