Lecture_12 + Notes

Lecture_12 + Notes -...

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Unformatted text preview: 2-1Lecture#12•Beta•CAPM•DDM•WACC2-2Risk expressed in beta•the best measure of the risk of a security (or the project’s equity) is the beta(β)of the security.•Beta measures the responsiveness of a security to movements in the market (i.e., systematic risk)2-3Beta, Covariance and Correlation•Beta and correlation are related=iβ2-4Financial Leverage and Beta•Operating leverage– refers to the sensitivity to the firms fixed costs of production•Financial leverage– is the sensitivity to a firms fixed costs of financing2-5Estimating βwith RegressionSecurity ReturnsSecurity ReturnsReturn on Return on market %market %Slope = βi2-6Relationship between Risk and Expected Return (CAPM)•Expected Return on the Market:RM= RF+ Market Risk Premium•Expected return on an individual security:Ri= RF+ βix (RM– RF)2-7Expected Return on a Security•Capital Asset Pricing Model (CAPM):Ri= RF+ βix (RM– RF)• Assume β=0, then expected return is RF• Assume β=1, then Ri=RM2-8Relationship Between Risk & ReturnExpected returnβFR1.0MR2-9Stability of Beta•Betas are generally stable for firms remaining in the same industry.remaining in the same industry....
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This note was uploaded on 07/04/2011 for the course FINA 463 taught by Professor Tsyplakov during the Fall '10 term at South Carolina.

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Lecture_12 + Notes -...

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