10 15 15 calculating beta calculating xyz

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Unformatted text preview: ;P 500 returns -15 .. . .. . . 10 . . . . .. . . . . 5. . .. . . .. . 5 . -10 -5 -5 10 .. . . . . . . -10 .. . . . . . -15 . 15 Calculating Beta Calculating XYZ Co. returns 15 S&P 500 returns -15 .. . Beta = slope = 1.20 1.20 .. . . 10 . . . . .. . . . . 5. . .. . . .. . 5 . -10 -5 -5 10 .. . . . . . . -10 .. . . . . . -15 . 15 Summary: Summary: We know how to measure risk, using measure standard deviation for overall risk standard and beta for market risk. beta We know how to reduce overall risk We reduce to only market risk through diversification. diversification We need to know how to price risk so We price we will know how much extra return we should require for accepting extra risk. risk. What is the Required Rate of Return? Return? The return on an investment The required by an investor given required market interest rates and the investment’s risk. risk Required Required rate of rate return return = Required Required rate of rate return return = Risk-free rate of rate return return + Required Required rate of rate return return = Risk-free rate of rate return return + Risk premium Required rate of rate return return = Risk-free rate of rate return return market market risk + Risk premium Required rate of rate return return = Risk-free rate of rate return return market market risk + Risk premium companyunique risk Required rate of rate return return = Risk-free rate of rate return return market market risk + Risk premium companyunique risk can be diversified away Required Required rate of rate return return Let’s try to graph this relationship! Beta Required Required rate of rate return return 12% . Risk-free rate of return (6%) 1 Beta Required Required rate of r...
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