AC1117
Lecture 18: CAPM 1
Celine McInerney
Introduction to the CAPM
Portfolio theory deals with selection of optimal
portfolios for individual investors
Capital market theory deals with an
equilibrium model of asset prices (for all
investors)
CAPM expl
AC1117
Lecture 3+4: Valuation Stock Valuation
Using Dividend Valuation Models
Celine McInerney
Overview
Topics Covered
How Common Stocks are Traded
Calculating the Price of Common Stock
How To Value Common Stock using
Zero Dividend Growth Model
Const
AC1117
Lecture 4: Stock Valuation P/E Ratios
etc
Celine McInerney
Key Concepts and Skills
Measures of Return on Investment
P/E Ratios
PEG Ratio
How to interpret the financial press
2
Measures of Return on Investment
Return on Equity
Earnings per share (EP
AC1117
Lecture 22 and 23: Efficient Markets
Hypothesis
Celine McInerney
Insider Trading
Raj Rajaratnam, the billionaire founder of Galleon Group, and former
directors at a Bear Stearns Cos. hedge fund were among six people
charged in a $20 million insider
AC1117
Lecture 5: Stock Valuation Valuation in
Practice
Celine McInerney
Key Concepts and Skills
Valuation in Practice
NAV
Comparable Companies
Precedent Transactions
Premiums Paid Analysis
DCF
LBO
2
Share valuation: the challenge
Two skills are needed t
AC1117
Lecture 11: Portfolio Theory
Celine McInerney
Risk and Return
As discussed previously, investors will seek a
higher level for return for investments with
higher risk
How do investors manage the risk return
relationship?
Portfolio theory provides
AC1117
Lecture 15+16: The Efficient Frontier
Celine McInerney
Indifference Curves
Draws on the concept of utility to present alternative tradeoffs between risk and return each equally acceptable to the
investor
Each individual has unique preferences for
AC1117
Lecture 22 and 23: Cost of Capital and
Capital Budgeting Implications of CAPM
Celine McInerney
The Cost of Equity Capital
Firm with
excess cash
Pay cash dividend
Shareholder
invests in
financial
asset
A firm with excess cash can either pay a
divide
AC1117
Lecture 19 and 20: CAPM 2
Celine McInerney
Summary of Terminology
E(RA) = expected return on asset A
A = standard deviation of returns on asset A
A2 = variance of returns on asset A
AB = covariance of returns of asset A with returns of asset B
AB =
AC1117
Lecture 21: CAPM 3
Celine McInerney
CAPM What is it All About?
At the heart of CAPM is the idea that the returns on a financial asset
increase with risk
The breakthrough of CAPM was to define risk in a particular way
CAPM postulates that logical in
AC1117
Lecture 9+10: Portfolio Theory Risk
Measurement
Celine McInerney
Key Concepts and Skills
Know how to calculate the return on an
investment
Know how to calculate the standard deviation of
an investments returns
Understand the historical returns a