Ch 6 Slide Show

# Ch 6 Slide Show - CHAPTER6 Risk,Return,andtheCapital...

This preview shows pages 1–14. Sign up to view the full content.

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

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
2 Topics in Chapter Basic return concepts Basic risk concepts Stand-alone risk Portfolio (market) risk Risk and return: CAPM/SML
Value =                         +                         +     + FCF 1 FCF 2 FCF (1 + WACC) 1 (1 + WACC) (1 + WACC) 2 Free cash flow (FCF) Market interest rates Firm’s business risk Market risk aversion Firm’s debt/equity mix Cost of debt Cost of equity Weighted average cost of capital (WACC) Net operating profit after taxes Required investments in operating capital = Determinants of Intrinsic Value: The Cost of Equity ...

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
4 What are investment returns? Investment returns measure the  financial results of an investment. Returns may be historical or  prospective (anticipated). Returns can be expressed in: Dollar terms. Percentage terms.
5 An investment costs \$1,000 and is  sold after 1 year for \$1,100. Dollar return: Percentage return: \$ Received  -  \$ Invested     \$1,100      -   \$1,000       = \$100. \$ Return/\$ Invested       \$100/\$1,000        = 0.10 = 10%.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
6 What is investment risk? Typically, investment returns are not  known with certainty. Investment risk pertains to the  probability of earning a return less than  that expected. The greater the chance of a return far  below the expected return, the greater  the risk.
7 Probability Distribution: Which  stock is riskier?  Why? -30 -15 0 15 30 45 60 Returns (% ) Stock A Stock B

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
8 Consider the Following Investment Alternatives Econ. Prob. T-Bill Alta Repo Am F. MP Bust  0.10 8.0% -22.0%   28.0%   10.0% -13.0% Below avg.  0.20 8.0   -2.0   14.7 -10.0   1.0 Avg.  0.40 8.0   20.0     0.0   7.0   15.0 Above avg.  0.20  8.0   35.0 -10.0   45.0   29.0 Boom  0.10  8.0   50.0 -20.0   30.0   43.0  1.00
9 What is unique about the T-bill  return? The T-bill will return 8% regardless of  the state of the economy. Is the T-bill riskless?  Explain.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
10 Alta Inds. and Repo Men vs.  the Economy Alta Inds. moves with the economy, so  it is positively correlated with the  economy.  This is the typical situation. Repo Men moves counter to the  economy.  Such negative correlation is  unusual.
11 Calculate the expected rate of  return on each alternative. r = expected rate of return. r Alta  = 0.10(-22%) + 0.20(-2%)  + 0.40(20%) + 0.20(35%)  + 0.10(50%) = 17.4%. ^ ^ n r =    ^ i=1 r i P i .

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
12 Alta has the highest rate of  return. Does that make it best? ^ r Alta    17.4% Market 15.0 Am. Foam 13.8 T-bill   8.0 Repo Men   1.7
What is the standard deviation of returns for each alternative? σ

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### Page1 / 51

Ch 6 Slide Show - CHAPTER6 Risk,Return,andtheCapital...

This preview shows document pages 1 - 14. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online