Business Administratio2

Business Administratio2 - Business Administration Risk and...

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Business Administration Risk and Return Basics: Present value of a perpetuity: C/r Present value of a growing (or shrinking) perpetuity: C/(r-g) Present value of C dollars t years from now: C/[(1+r) t ] Present value of a C-dollar t-year annuity: C[(1/r)-(1/[r(1+r) t ]) beta = [E((r 1 -E(r 1 ))(m-E(m))]/E[(m-E(m)) 2 ] r* i = r* f + beta i (r* m -r f ) Introduction to Risk and Return "The opportunity cost of capital depends on the risk of the project": I've been saying this for three and a half weeks now. But what does it mean? What is the risk of a project? Why should the appropriate cost of capital vary depending on how risky the project is? Let's start with risk. Portfolio Average real return (inflation-adjusted) Average risk premium (vis-a-vis Treasury bills) Treasury bills 0.6%/year 0 Treasury bonds 2.1%/year 1.4%/year Corporate bonds 2.7%/year 2.0%/year Stocks (S&P 500) 8.9%/year 8.3%/year Small stocks 13.9%/year 13.2%/year Arithmetic average returns--not compound annual rates of return. Difference? Compound annual
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This note was uploaded on 11/10/2011 for the course GEB GEB1011 taught by Professor Henn during the Fall '10 term at Broward College.

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Business Administratio2 - Business Administration Risk and...

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