Fundamentals of Corporate Finance Third edition Chapter 10 Risk Return Brealey Myers Marcus and capital Budgeting ndamentals of Corporate Finan Brealey Myers Marcus slides by Matthew will IrwinMcGraw-Hill CThe McGraw-Hill Companies, Inc, 2001
©The McGraw-Hill Companies, Inc.,2001 10- 1 Irwin/McGraw-Hill Chapter 10 Fundamentals of Corporate Finance Third Edition Risk, Return, and Capital Budgeting Brealey Myers Marcus slides by Matthew Will Irwin/McGraw-Hill ©The McGraw-Hill Companies, Inc.,2001
10-2 Topics Covered → Measuring beta S Portfolio betas OCAPM and Expected Return U Security market Line CApital Budgeting and Project Risk Irwin/McGraw-Hill CThe McGraw-Hill Commpanies, Inc, 2001
©The McGraw-Hill Companies, Inc.,2001 10- 2 Irwin/McGraw-Hill Topics Covered Measuring Beta Portfolio Betas CAPM and Expected Return Security Market Line Capital Budgeting and Project Risk
10-3 Measuring Market Risk Market portfolio -Portfolio of all assets in the economy. In practice a broad stock market index, such as the s&P composite, is used to represent the market Beta- Sensitivity of a stocks return to the return on the market portfolio Irwin/McGraw-Hill CThe McGraw-Hill Commpanies, Inc, 2001
©The McGraw-Hill Companies, Inc.,2001 10- 3 Irwin/McGraw-Hill Measuring Market Risk Market Portfolio - Portfolio of all assets in the economy. In practice a broad stock market index, such as the S&P Composite, is used to represent the market. Beta - Sensitivity of a stock’s return to the return on the market portfolio
10-4 Measuring Market Risk Example- Turbo Charged Seafood has the following returns on its stock, relative to the listed changes in the %o return on the market portfolio. The beta of Turbo Charged Seafood can be derived from this information Irwin/McGraw-Hill CThe McGraw-Hill Commpanies, Inc, 2001
©The McGraw-Hill Companies, Inc.,2001 10- 4 Irwin/McGraw-Hill Measuring Market Risk Example - Turbo Charged Seafood has the following % returns on its stock, relative to the listed changes in the % return on the market portfolio. The beta of Turbo Charged Seafood can be derived from this information
10-5 Measuring market Risk Example continued Month Market Return Turbo Return % +0.8 +1 +1.8 0.2 1.8 5 +0.2 0.8 Irwin/McGraw-Hill CThe McGraw-Hill Commpanies, Inc, 2001
©The McGraw-Hill Companies, Inc.,2001 10- 5 Irwin/McGraw-Hill Measuring Market Risk Month Market Return % Turbo Return % 1 + 1 + 0.8 2 + 1 + 1.8 3 + 1 - 0.2 4 - 1 - 1.8 5 - 1 + 0.2 6 - 1 - 0.8 Example - continued