First the risk premium may reflect the possibility

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Unformatted text preview: s in business risk, while others reflect the underlying economic stability over the last century. The historic risk premium may overstate the risk premium demanded by investors for several reasons. First, the risk premium may reflect the possibility that the economic development could have turned out to be less fortunate. Second, stock returns have for several periods outpaced the underlying growth in earnings and dividends, something which cannot be expected to be sustained. Download free ebooks at bookboon.com 27 Corporate Finance Risk, return and opportunity cost of capital The risk of financial assets can be measured by the spread in potential outcomes. The variance and standard deviation on the return are standard statistical measures of this spread. Variance Expected (average) value of squared deviations from mean. The variance measures the return volatility and the units are percentage squared. (25) Variance(r ) V2 1N ¦ (rt  r ) 2 N 1 t 1 Where r denotes the average return and N is the total number of observations. Standard deviation Square root of variance. The standard deviation...
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This note was uploaded on 10/26/2012 for the course 19 19 taught by Professor - during the Spring '12 term at Sunway University College.

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