UsefulNotes_RiskandReturn

UsefulNotes_RiskandReturn - Sessions 8, 9 & 10...

Info iconThis preview shows pages 1–11. Sign up to view the full content.

View Full Document Right Arrow Icon
Sessions 8, 9 & 10 Introduction to risk, return and the opportunity cost of capital 6049 Corporate Finance Lecture Slides, Academic Year 2010/2011 ssions 8 9 and 10: Introduction to Risk Sessions 8, 9 and 10: Introduction to Risk, Return, and the Opportunity Cost of Capital annes Wagner -1- 6049 Corporate Finance 1 Hannes Wagner
Background image of page 1

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

View Full DocumentRight Arrow Icon
Sessions 8, 9 & 10 Introduction to risk, return and the opportunity cost of capital Chapter 8: Topics Covered 100 years of market data isk nd r turn findividual curities Rskad etu o dvdua l secu t es Risk and return of portfolios Expectations: This is a more advanced chapter. If this is your first exposure to the material, it will be challenging. So roll up ur eeves your sleeves… Literature: MA apter -2- 6049 Corporate Finance BMA Chapter 8
Background image of page 2
Sessions 8, 9 & 10 Introduction to risk, return and the opportunity cost of capital e Value of an Investment of $1 in 1900 The Value of an Investment of $1 in 1900 Nominal Returns -3- 6049 Corporate Finance
Background image of page 3

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

View Full DocumentRight Arrow Icon
Sessions 8, 9 & 10 Introduction to risk, return and the opportunity cost of capital e Value of an Investment of $1 in 1900 The Value of an Investment of $1 in 1900 Real Returns -4- 6049 Corporate Finance
Background image of page 4
Sessions 8, 9 & 10 Introduction to risk, return and the opportunity cost of capital Average Market Risk Premia (by country) isk premium % Risk premium, % -5- 6049 Corporate Finance
Background image of page 5

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

View Full DocumentRight Arrow Icon
Sessions 8, 9 & 10 Introduction to risk, return and the opportunity cost of capital Dividend Yield (1900-2006) -6- 6049 Corporate Finance
Background image of page 6
Sessions 8, 9 & 10 Introduction to risk, return and the opportunity cost of capital ates of Return 1900 006 Rates of Return 1900-2006 Stock Market Index Returns rn ge Retu r rcenta g Pe ar -7- 6049 Corporate Finance Source: Ibbotson Associates Year
Background image of page 7

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

View Full DocumentRight Arrow Icon
Sessions 8, 9 & 10 Introduction to risk, return and the opportunity cost of capital Calculating returns Recall: A return is profit divided by amount invested. Formally, we have the return R as Where P 1 is the end-of-period price of the asset/investment, P 0 is the beginning-of-period price of the asset/investment, D 1 isthecash distributed over theperiod (dividend) Throughout the chapter, the assets under consideration will be ocks ut e iscussion so plies ther sets ch -8- 6049 Corporate Finance stocks. But the discussion also applies to other assets such as investment projects!
Background image of page 8
Sessions 8, 9 & 10 Introduction to risk, return and the opportunity cost of capital Measuring Risk in ss ame- lculating riance nd andard eviation Coin Toss Game calculating variance and standard deviation Head: return +20% Tail: return -10% Two coin tosses ) (2) (3) (1) Percent Rate of Return Deviation from Mean Squared Deviation +40 +30 900 +10 0 0 0 0 -20 -30 Variance=average of squared deviations=1800/4=450 -9- 6049 Corporate Finance Standard deviation=square root of variance= 450 =21.2%
Background image of page 9

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

View Full DocumentRight Arrow Icon
Sessions 8, 9 & 10 Introduction to risk, return and the opportunity cost of capital A note on calculating variance When variance (or std dev) is estimated from a sample of observed returns, the squared deviations are usually divided by N-1, where N is the number of observations.
Background image of page 10
Image of page 11
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 11/02/2011 for the course FIN 500 taught by Professor Binder during the Summer '11 term at Ill. Chicago.

Page1 / 72

UsefulNotes_RiskandReturn - Sessions 8, 9 & 10...

This preview shows document pages 1 - 11. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online