The relevant risk of an individual asset is its contribution to the riskiness of a welldiversified portfolio, which is the asset’s market risk. Since market risk cannot be eliminated by diversification, investors must be compensated for bearing it.
A stock’s beta coefficient, b, is a measure of its market risk. Beta measures the extent to which [...]
In this chapter, we described the trade-off between risk and return. We began by discussing how to calculate risk and return for both individual assets and portfolios. In particular, we differentiated between stand-alone risk and risk in a portfolio context, and we explained the benefits of diversification. Finally, we developed the CAPM, which explains how [...]
Before closing this chapter, we should note that volatility does not necessarily imply risk. For example, suppose a company’s sales and earnings fluctuate widely from month to month, from year to year, or in some other manner. Does this imply that the company is risky in either the stand-alone or portfolio sense? If the earnings [...]
The Capital Asset Pricing Model (CAPM) is more than just an abstract theory described in textbooks—it is also widely used by analysts, investors, and corporations. However, despite the CAPM’s intuitive appeal, a number of studies have raised concerns about its validity. In particular, a study by Eugene Fama of the University of Chicago and Kenneth [...]
In a book on financial management for business firms, why do we spend so much time discussing the risk of stocks? Why not begin by looking at the risk of such business assets as plant and equipment? The reason is that, for a management whose primary objective is stock price maximization, the overriding consideration is [...]
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The slope of the Security Market Line reflects the extent to which investors are averse to risk—the steeper the slope of the line, the greater the average investor’s risk aversion. Suppose investors were indifferent to risk; that is, they were not risk averse. If rRF were 6 percent, then risky assets would also provide an [...]
Currently, there are lots of sellers in all over the world that like to sell their kinds of stuffs through online store. Yes, it can be so because there are a lot of advantages that can be got compared with using conventional selling method. The main reason of sellers sell their goods online is that [...]
As we learned in Chapter 1, interest amounts to “rent” on borrowed money, or the price of money. Thus, rRF is the price of money to a riskless borrower. We also learned that the risk-free rate as measured by the rate on U.S. Treasury securities is called the nominal, or quoted, rate, and it consists [...]
The required return for Stock i can be written as follows:
ri = 6% + (11% – 6%)(0.5)
= 6% + 5%(0.5)
= 8.5%.
