Ch 11 - Risk & Return
|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"