This preview shows page 1. Sign up to view the full content.
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 = Riskfree
rate of
rate
return
return + Required
Required
rate of
rate
return
return = Riskfree
rate of
rate
return
return + Risk
premium Required
rate of
rate
return
return = Riskfree
rate of
rate
return
return market
market
risk + Risk
premium Required
rate of
rate
return
return = Riskfree
rate of
rate
return
return market
market
risk + Risk
premium companyunique risk Required
rate of
rate
return
return = Riskfree
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% . Riskfree
rate of
return
(6%) 1 Beta Required
Required
rate of
r...
View
Full
Document
 Winter '08
 SWEO

Click to edit the document details