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It is a measure of the non diversiable risk for any

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Unformatted text preview: with insider influence L ow High (held by Tough to tell; Could be founder/manager of firm) insiders but only if they trade. If not, it could be individual investors. L ow High (held by wealthy Wealthy individual individual investor) L ow investor, fairly diversified L ow Small individual investor with restricted diversification Aswath Damodaran 79 Gauging the marginal investor: Disney in 2013 Aswath Damodaran 80 Extending the assessment of the investor base ¨༊  In all five of the publicly traded companies that we are looking at, insJtuJons are big holders of the company’s stock. Aswath Damodaran 81 The LimiJng Case: The Market Porlolio 82 ¨༊  ¨༊  The big assumpJons & the follow up: Assuming diversificaJon costs nothing (in terms of transacJons costs), and that all assets can be traded, the limit of diversificaJon is to hold a porlolio of every single asset in the economy (in proporJon to market value). This porlolio is called the market porlolio. The consequence: Individual investors will adjust for risk, by adjusJng their allocaJons to this market porlolio and a riskless asset (such as a T- Bill): Preferred risk level No risk Some risk A liCle more risk Even more risk A risk hog.. Aswath Damodaran Alloca?on decision 100% in T- Bills 50% in T- Bills; 50% in Market Porlolio; 25% in T- Bills; 75% in Market Porlolio 100% in Market Porlolio Borrow money; Invest in market porlolio 82 The Risk of an Individual Asset 83 ¨༊  ¨༊  ¨༊  The essence: The risk of any asset is the risk that it adds to the market porlolio StaJsJcally, this risk can be measured by how much an asset moves with the market (called the covariance) The measure: Beta is a standardized measure of this covariance, obtained by dividing the covariance of any asset with the market by the variance of the market. It is a measure of the non- diversifiable risk for any asset can be meas...
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