Ch 11 - Risk & Return
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6 terms
Terms | Definitions |
|---|---|
 Market Risk Premium | =Avg Return on a Normal Investment - Risk-free rate -Difference between average investment and US Treasury and Agency securities. |
| Systematic Risk (Market Risk) | A risk that influences a large number of assets. -Ex. uncertainties in GDP, interest rates, or inflation. These conditions nearly affect all industries. |
| Rf | Risk-free Cost of Capital -Assured of return; safest investment. **rate on US Govt. & Agency securities |
| Beta | Amount of systematic risk a particular asset has relative to that in an average asset. -Avg. Beta for all stock is 1.0. If stock is 50% riskier than avg, then Beta is 1.5. Has 1/2 as much systematic risk as an avg asset. *Expected return and risk-premium on an asset depends only on its systematic risk. Assets with larger betas will have greater systematic risks, they will have larger expected returns. |
| CAPM Model Equation | Re= Rf + [B x (Rm-Rf)] Determines Re = cost of equity. (also the expected return) *Cost of Equity Model |
| Rm | Average return on a normal investment. -"Expected return on the market" |
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