全套電子課件：金融學(xué)-第十套

1Chapter1:

WhatisFinance?ObjectiveToDefineFinanceTheValueofFinanceIntroductiontothePlayers2Chapter1Contents1DefiningFinance2WhyStudyFinance3HouseholdFinance4FinancialDecisions--Firms5FormsofBusinessOrganization6SeparationofOwnershipandManagement7TheGoalofmanagement8MarketDiscipline--Takeovers9RoleoftheFinancialSpecialistsinaCorporation3ImportantTermsAssetsPersonalinvesting&AssetallocationLiability,DebtNetWorth=Assets-LiabilitiesExogenousandendogenouselements4(1.9)TheRolesofCorporateFinancialSpecialistsFinancialexecutive--apersonwithauthorityinthefollowingfunctions:5FinancialFunctionsinaCorporation:PlanningProvisionofCapitalAdministrationofFundsAccountingandControlProtectionofAssetsTaxAdministrationInvestorRelationsEvaluationandConsultingManagementInformationSystems6Planninglongandshort-termfinancialplanningbudgetingforcapitalexpendituresbudgetingforoperationssalesforecastingperformanceevaluationpricingpolicieseconomicappraisalsanalysisofacquisitionsanddivestments7AccountingandControlestablishmentofaccountingpoliciesdevelopment&reportingofaccountingdatacoststandardsinternalauditingsystemsandprocedures(accounting)governmentreportingreporting&interpretingoperationsresultscomparingperformancewithoperatingplansandstandards8Chapter2:TheFinancialSystemObjectiveUnderstandingtheworkingsofthefinancialsystemDeterminingratesofreturn9Chapter2Contents1WhatisaFinancialSystem2TheFlowofFunds3TheFunctionalPerspective4FinancialInnovation&the“InvisibleHand”5FinancialMarkets6FinancialMarketRates7FinancialIntermediaries8FinancialInfrastructureandRegulation9Governmental&Quasi-GovernmentalOrganizations10TheFlowofFundsDiagramMarketsIntermediariesSurplusUnitsDeficitUnits11FundFlowsviaMarketMarketsIntermediariesSurplusUnitsDeficitUnits12FundFlowsviaIntermediaryMarketsIntermediariesSurplusUnitsDeficitUnits13FundFlowsviaIntermediaryandMarketMarketsIntermediariesSurplusUnitsDeficitUnits14FundsFlowviaMarketsandIntermediaries

MarketsIntermediariesSurplusUnitsDeficitUnits15FundsFlow:DisintermediationMarketsIntermediariesSurplusUnitsDeficitUnitsMarketsIntermediariesSurplusUnitsDeficitUnits16FundsFlow:SecuredCreditMarketsIntermediariesSurplusUnitsDeficitUnitsPoorCreditRisk17SixKeyFinancialFunctions:TransferringResourcesAcrossTime&SpaceManagingRiskClearingandSettlingPaymentsPoolingResourcesandSubdividingSharesProvidingInformationDealingwithIncentiveProblems18ExchangeRateExample15000￥15260￥15450￥￡100￡109Time3%￥/￥(direct)1.73%￥/￡/￡/￥150￥/￡9%￡/￡140￥/￡JapanU.K.19ExchangeRateExample15000￥16241￥15450￥￡100￡109Time3%￥/￥(direct)8.27%￥/￡/￡/￥150￥/￡9%￡/￡149￥/￡JapanU.K.20ExchangeRateExample15000￥(borrowed)15450￥15450￥Repaid￡100Invested￡109MaturesTime3%￥/￥(direct)3%￥/￡/￡/￥150￥/￡9%￡/￡Forward￥/￡JapanU.K.2122YieldComparisons23ComputationofReturn24252627NominaltoReal28Chapter3:InterpretingFinancialStatementsObjectiveContrastEconomicandAccountingModels<=>ValueofAccountingInformation29FinancialStatementsReviewFinancialStatementsProvide:currentandhistoricalinformationtoownersandcreditorsaconvenientwayforownersandcreditorstosetperformancetargetsaconvenientstandardtemplateforfinancialplanning30Chapter3Contents3.1FunctionsofFinancialStatements3.2InternationalDifferencesinAccounting3.3Marketvaluesv.BookValues3.4Accountingv.EconomicMeasuresofIncome3.5ReturnonShareholdersv.ReturnonEquity3.6AnalysisUsingFinancialRatios3.7TheFinancialPlanningProcess3.8ConstructingaFinancialPlanningModel3.9Growth&theNeedforExternalFinancing3.10WorkingCapitalMgnt.3.11Liquidity&CashMgnt.313.1FunctionsofFinancialStatementsFinancialStatements:Provideinformationtotheowners&creditorsofafirmaboutthecurrentstatusandpastperformanceProvideaconvenientwayforowners&creditorstosetperformancetargets&toimposerestrictionsofthemanagersofthefirmProvideaconvenienttemplatesforfinancialplanning323.2ReviewofFinancialStatements33TheBalanceSheetSummarizesafirmsassets,liabilities,andowner’sequityatamomentintimeAmountsmeasuredathistoricalvaluesandhistoricalexchangeratesPreparedaccordingtoGAAP,GenerallyAcceptedAccountingPrinciplesGAAPmodifiedoccasionallybytheFinancialAccountingStandardsBoardExchange-listedcompaniesmustcomplywithSecuritiesandExchangeCommission(SEC)rules34TheBalanceSheetMajorDivisions:AssetsCurrentassets(lessthanayear)Long-termassets(longerthanayearDepreciationLiabilitiesandStockholder’sEquityLiabilitiesCurrentLiabilitiesLong-termdebtEquity3536TheIncomeStatementSummarizestheprofitabilityofacompanyduringatimeperiodMajorDivisions:Revenue&costofgoodssoldGrossmarginGeneraladministrativeandsellingexpenses(GS&A)OperatingincomeDebtserviceTaxableincomeCorporateTaxesNetincome37TheIncomeStatementImportantReminders:Retainedearningsarenotaddedtothecashbalanceinthebalancesheet,butareaddedtoshareholder’sequityAccountsshowhistoricalvalues,notmarketvalues.Theshareholder’sequitymaybemuchhigherorlowerthanthemarketvalueofthefirm.Thevalueofthefirm’slandmayhavehalvedordoubled,butthiswouldnotbereportedinthebalancesheet3839TheCash-FlowStatementShowthecashthatflowedintoandfromafirminduringatimeperiodFocusesattentiononafirm’scashsituationAfirmmaybeprofitableandshortofcashUnlikethebalancesheetandincomestatement,cashflowstatementsareindependentofaccountingmethodsTheIRSusesaccountingincometocomputetax,soaccountingruleshaveasecondordereffectoncashflowsthroughtaxes4041423.4ReturnstoShareholdersv.ReturnonEquityRecallourdefinitioninChapter2oftheholdingperiodreturn,andcomparethiswiththeeconomicmeasureofincomeThisistheTotalShareholderReturn43ReturnstoShareholdersv.ReturnonEquity(Continued)Traditionally,corporateperformancehasbeenmeasuredbyReturnonEquity,ROE44Profitability45AssetTurnover46FinancialLeverage47Liquidity48MarketValue49RatioComparisonsEstablishYourPerspectiveShareholderemployee,Management,orUnionCreditorPredator,Customer,Supplier,Competitor,TradeAssociationBenchmarksOthercompaniesratiosThefirm’shistoricalratiosDataextractedfromfinancialmarketsSourcesDun&Bradstreet,RobertMorris,CommerceDepartment'sQuarterlyFinancialReport,TradeAssociations50RelationshipsAmongstRatiosItissometimesvaluabletodecomposeratiosintosums,differences,productsandquotientsofotherratios.Manysuchschemesstartwith:51Illustration(Table3.7&3.8oftextbook)ConsidertwofirmsthatareidenticalexceptthatNodebtisfinancedusing$1,000,000ofequityandHalfdebtisfinancedusing$500,000ofequityand$500,000ofdebtfurtherassumethattheEBITofbothfirmsis$120,000andtaxis40%52Case:Borrowat10%53Case:Borrowat15%54Case:Borrowat10%:EffectofBusinessCycleonROE555657585960616263ExternalFundsNeeded6465Observation:Sometimesthenewassetsrequiredtogenerateincomearenotahighasinthisexample,andthecompanymayabletosupportalevelofgrowthwithnoexternalfunding(-0.00038inourcase)66Chapter4:TimeValueofMoneyObjectiveExplaintheconceptofcompoundinganddiscountingandtoprovideexamplesofreallifeapplications67ValueofInvesting$1Continuinginthismanneryouwillfindthatthefollowingamountswillbeearnt:68Valueof$5InvestedMoregenerally,withaninvestmentof$5at10%weobtain69FutureValueofaLumpSum70Example:FutureValueofaLumpSumYourbankoffersaCDwithaninterestrateof3%fora5yearinvestments.Youwishtoinvest$1,500for5years,howmuchwillyourinvestmentbeworth?71PresentValueofaLumpSum72Example:PresentValueofaLumpSumYouhavebeenoffered$40,000foryourprintingbusiness,payablein2years.Giventherisk,yourequireareturnof8%.Whatisthepresentvalueoftheoffer?73SolvingLumpSumCashFlowforInterestRate74Example:InterestRateonaLumpSumInvestmentIfyouinvest$15,000fortenyears,youreceive$30,000.Whatisyourannualreturn?75ReviewofLogarithmsThebasicpropertiesoflogarithmsthatareusedbyfinanceare:76ReviewofLogarithmsThefollowingpropertiesareeasytoprovefromthelastones,andareusefulinfinance77SolvingLumpSumCashFlowforNumberofPeriods78EffectiveAnnualRatesofanAPRof18%79TheFrequencyofCompoundingNotethatasthefrequencyofcompoundingincreases,sodoestheannualeffectiverateWhatoccursasthefrequencyofcompoundingrisestoinfinity?80TheFrequencyofCompounding81TheFrequencyofCompounding82DerivationofPVofAnnuityFormula:Algebra.1of583DerivationofPVofAnnuityFormula:Algebra.2of584DerivationofPVofAnnuityFormula:Algebra.3of585DerivationofPVofAnnuityFormula:Algebra.4of586DerivationofPVofAnnuityFormula:Algebra.5of587PVofAnnuityFormula88PVAnnuityFormula:Payment89PVAnnuityFormula:NumberofPayments90AnnuityFormula:PVAnnuityDue91DerivationofFVofAnnuityFormula:Algebra92FVAnnuityFormula:Payment93FVAnnuityFormula:NumberofPayments94PerpetualAnnuities/PerpetuitiesRecalltheannuityformula:Letn->infinitywithi>0:95Mortgage:ThepaymentWewillexaminethisproblemusingafinancialcalculatorThefirstquantitytodetermineistheamountoftheloanandthepoints96CalculatorSolutionThisisthemonthlyrepayment97CalculatorSolutionOutstanding@60Months98SummaryofPaymentsThefamilyhasmade60payments=$2687.98*12*5=$161,878.64Theirmortgagerepayment= 450,000-418,744.61=$31,255.39Interest=payments-principlereduction=161,878.64-31,255.39=$130,623.2599100101102103$10,000$11,000￥1,000,000￥1,030,000￥Time10%$/$(direct)0.01$/￥3%￥/￥?$/￥U.S.A.Japan104$10,000$11,124$11,000￥1,000,000￥1,030,000￥Time10%$/$(direct)0.01$/￥3%￥/￥0.0108$/￥U.S.A.Japan105$10,000$10,918￥$11,000￥1,000,000￥1,030,000￥Time10%$/$(direct)0.01$/￥3%￥/￥0.0106$/￥U.S.A.Japan106$10,000$11,000￥$11,000￥1,000,000￥1,030,000￥Time10%$/$(direct)0.01$/￥3%￥/￥0.01068$/￥U.S.A.Japan107Chapter5:LifeCycleFinancialPlanningObjectiveFinancialdecisionsinanuncertainworld;Humancapital,permanentincomedecisionsoverlifecycle108ObjectivesHowmuchtosaveforretirementWhethertodefertaxesorpaythemnowWhethertogetaprofessionalDegreeWhethertobuyorrentanapartment109110111TheInter-temporalBudgetConstrainti=realinterestrateR=numberofyearstoretirementT=numberofyearsofremaininglifeW0=initialwealthB=bequest112SolutionbyRealConversionWearealmostdone.Allthatremainsistoassembletheparts,andsolvetheresultingequation113SolutionbyGrowingAnnuityEquation114SolutionbyGrowingAnnuity115Algebra116117HowMuchMustISave?TheNominalApproach118Chapter6:AnalyzingInvestmentProjectsObjectiveExplainCapitalBudgetingDevelopCriteria119Chapter6Contents1TheNatureofProjectAnalysis2WheredoInvestmentsIdeascomefrom?3TheNPVInvestmentRule4EstimatingaProject.sCashFlows5CostofCapital6SensitivityAnalysis7AnalyzingCost-ReducingProjects8ProjectswithDifferentLives9RankingMutuallyExclusiveProjects10Inflation&CapitalBudgeting120ObjectivesToshowhowtousediscountedcashflowanalysistomakedecisionssuchas:WhethertoenteranewlineofbusinessWhethertoinvestinequipmenttoreducecosts121DoProjectDCFPayback122Don’tDoProject123IndifferentInternalRateofReturn124125AverageCostofCapital:Examplewith3-SecuritiesLetkebethereturnonequitykdbethereturnondebtkpbethereturnonpreferredVebethemarketvalueofissuedequityVdbetheMarketvalueofissuedbondsVpbethemarketvalueofissuedpreferredtbethetaxrate126AverageCostofCapital:Examplewith3-Securitiesk=ke*Ve+kp*Vp+kd*Vd*(1-t)Theaveragecostofcapitalisalsothecostofcapitalforeachofthefirmsbusinessdivisionsweightedaccordingtotheirmarketvalue127128129Was15%130Was40%131Was0%132Was75%133Was$3,100,000134Table6.4ProjectSensitivitytoSalesVolume135136137138139140141Chapter7:PrinciplesofAssetValuationObjectiveExplaintheprinciplesofassetevaluation142Chapter7Contents1Therelationshipbetweenanasset’svalue&price2Valuemaximization&financialdecisions3Thelawofoneprice&arbitrage4Arbitrage&thelawofoneprice5Interestrates&thelawofoneprice6Exchangerates&triangulararbitrage7Valuationusingcomparables8ValuationModels9Accountingmeasuresofvalue10Howinformationisreflectedinsecurityprices11Theefficientmarketshypothesis143TriangularArbitrageUSAJapanUK￥100/$or$0.01/￥￡0.005/￥or￥200/￡$2/￡or￡0.5/$144TriangularArbitrageMoregenerallyRA/C=RA/B*RB/CRA/B=1/RB/A145TriangularArbitrageMorespecifically,intheexampleR￡/￥=R￡/$*R$/￥=0.5*0.01=0.005R￥/￡=1/R￡/￥=1/0.005=200Theothertwopairfollowthesameform146PastFeatureDifferentialOldsaleofthisworkRecentsaleofunrelatedworkRecentwell-matchedsale147Chapter8Contents1UsingPresentValueFormulastoValueKnownFlows2TheBasicBuildingBlocks:PureDiscountBonds3CouponBonds,CurrentYield,andYield-to-Maturity4ReadingBondListings5WhyYieldsforthesameMaturityDiffer6TheBehaviorofBondPricesOverTime148BondPricesRiseastheInterestRatesFallWritethePVofthefixedincomesecurityasthesumterms149150PureDiscountBondsThepurediscountbondisanexampleofthepresentvalueofalumpsumequationweanalyzedinChapter4Solvingthis,theyield-to-maturityonapurediscountbondisgivenbytherelationship:151PureDiscountBondsInthisequation,PisthepresentvalueorpriceofthebondFisthefaceorfuturevaluenistheinvestmentperiodiistheyield-to-maturity152PureDiscountBonds153BondsTradingatParBondPricingPrinciple#1:(ParBonds)Ifabond’spriceequalsitsfacevalue,thenitsyield-to-maturity=currentyield=couponrate. Proof:154FirstSolutionMethod155SecondSolutionMethod156TheYTMoftheCouponBond157158159160161162163164165Chapter9:ValuationofCommonStocksObjectiveExplainequityevaluationusingdiscountingDividendpolicyandwealth166Chapter9Contents9.1Readingstocklistings9.2Thediscounteddividendmodel9.3Earningandinvestmentopportunity9.4Areconsiderationofthepricemultipleapproach9.5Doesdividendpolicyaffectshareholderwealth?167ReadingStockListings168PresentValueofDividends169ExpectedRateofReturnThepriceanddividendnextyearareexpectedprices,soTheexpectedrateofreturninanyperiodequalsthemarketcapitalizationrate,k170RateRelationshipThisrelationshiptellsyouthatnextyear’sexpecteddividendyield+theexpectedcapitalgainyieldisequaltotherequiredrateofreturn171Price0IsDiscountedExpected(Dividend1+Price1)Priceisthepresentvalueoftheexpecteddividendplustheend-of-yearpricediscountedattherequiredrateofreturn172EaseofUseRecallfromchapter4that,foraperpetuity,thepresentvalueistherealvalueofthefirstcashflowdividedbytherealrate173PuttingThisTogether174SolvingforK

175G=CapitalGainsYieldComparingpriorresults:176EarningandInvestmentOpportunityTosimplifytheanalysis,supposethatnonewsharesareissues,andnotaxesDividends=earnings-netnewinvestment“D=E-I”.Theformulaforvaluingstockis177GrowthStockOriginalwealthKeptReinvestedWealthMultiplier178GrowthStock179GeneralizeLettheV=valueoftheshareswithoutreinvestmentG=thegrowthfromnewinvestmentR=retentionratioM=wealthmultiplier=g/iWealthg=wealth0*(1-r)/(1-w*r)180ReinvestmentUnderNormalGrowthRetentionRatioGrowthRateCostofCapital181Illustration:Dividends182Illustration:DividendPaymentWas2Was10Were12Were12183Illustration:ShareRepurchase184Illustration:ShareRepurchaseWas2Was10Were12Were12185Chapter10:RiskManagementObjectiveRiskandFinancialDecisionMakingConceptualFrameworkforRiskManagementEfficientAllocationofRisk-Bearing18610.1WhatisRisk?10.2RiskandEconomicDecisions10.3TheRiskManagementProcess10.4TheThreeDimensionsofRiskTransfer10.5RiskTransferandEconomicEfficiency10.6InstitutionsforRiskManagement10.7PortfolioTheory:QuantitativeAnalysisforOptimalRiskManagement10.8ProbabilityDistributionsofReturns10.9StandardDeviationasaMeasureofRisk187s=0.2000s=0.1421s*=0.1342TheoreticalMinimum188EquationforHomogeneousDiversificationwithnStocks189ReturnsonGENCO&RISCO190191Equations:Mean192Equations:StandardDeviation193194195Chapter11:HedgingandInsuringObjectiveExplainmarketmechanismsforimplementinghedgesandinsurance196Chapter11Contents11.1UsingForward&FuturesContractstoHedgeRisks11.2HedgingForeign-ExchangeRiskwithSwapContracts11.3HedgingShortfall-RiskbyMatchingAssetstoLiabilities11.4MinimizingtheCostofHedging11.5InsuringversusHedging11.6BasicFeaturesofInsuranceContracts11.7FinancialGuarantees11.8Caps&FloorsonInterestRates11.9OptionsasInsurance11.10TheDiversificationPrinciple11.11InsuringaDiversifiedPortfolio197MarketValueofMortgagesBookValueofMortgages198CDInterestPaymentsMortgageInterestPayments199200201Standarddeviation,1firmTheStandardDeviationis$200,000202Standarddeviation,2firmsTheStandardDeviationisabout$141,000(c.f.$200,000)203Standarddeviation,equalinvestmentin“n”firmsGeneralizingtheargument,itiseasytoprovethatthestandarddeviationinthiscaseisjust$200,000/SqrareRoot(n)Conclusion:Giventhefactsofthisexample,theriskmaybemadeasclosetozeroaswewishiftherearesufficientsecurities!Inreality,however…nismustbefinite,andpharmaceuticalprojectshaveanon-zerocorrelations204CorrelatedHomogeneousSecuritiesPharmaceuticalprojectsdohavepositivecorrelation(Why?)Loosentheassumptionsmadeaboutthecorrelation,andsetittoρ,andusethegeneralizationof205CorrelatedHomogeneousSecuritiesWeobtaintherelationshipσport=σsec*QSRT(ρ+1/n)Inthecaseofn->Infinity,thereremainstheterm σport=σsec*QSRT(ρ)Thisriskisnotdiversifiable 206207208209DiversifiableSecurityRiskNondiversifiableSecurityRisk210AllriskisdiversifiableAllriskisdiversifiable211212Chapter12:PortfolioSelectionandDiversificationObjectiveTounderstandthetheoryofpersonalportfolioselectionintheoryandinpractice213Chapter12Contents12.1Theprocessofpersonalportfolioselection12.2Thetrade-offbetweenexpectedreturnandrisk12.3Efficientdiversificationwithmanyriskyassets214ObjectivesTounderstandtheprocessofpersonalportfolioselectionintheoryandpractice215216217218…andLotsMore!219220221222223Mode=104Mode=106Median=104Mean=104Median=111Mean=113224225Mode=122Mode=135Median=126Mean=128Median=165Mean=182226227Mode=503Mode=1,102Median=650Mean=739Median=5,460Mean=12,151228229230231232CombiningtheRisklessAssetandaSingleRiskyAssetTheexpectedreturnoftheportfolioistheweightedaverageofthecomponentreturnsmp=W1*m1+W2*m2

mp=W1*m1+(1-W1)*m2233CombiningtheRisklessAssetandaSingleRiskyAssetThevolatilityoftheportfolioisnotquiteassimple:sp=((W1*s1)2+2W1*s1*W2*s2+(W2*s2)2)1/2234CombiningtheRisklessAssetandaSingleRiskyAssetWeknowsomethingspecialabouttheportfolio,namelythatsecurity2isriskless,sos2=0,and

spbecomes:sp=((W1*s1)2+2W1*s1*W2*0+(W2*0)2)1/2sp=|W1|*s1235CombiningtheRisklessAssetandaSingleRiskyAssetInsummarysp=|W1|*s1,And:mp=W1*m1+(1-W1)*rf,So:IfW1>0,

mp=[(rf-m1)/s1]*sp+rf

Else

mp=[(m1-rf)/s1]*sp+rf

236237Longriskyandshortrisk-free

Longbothriskyandrisk-free100%Risky100%Risk-less238MutualFundAverage%TotalReturns239Toobtaina20%ReturnYousettleona20%return,anddecidenottopursueonthecomputationalissueRecall:

mp=W1*m1+(1-W1)*rf

Yourportfolio:s=20%,m=15%,rf=5%So:W1=(mp-rf)/(m1-rf)=(0.20-0.05)/(0.15-0.05)=150%240Toobtaina20%ReturnAssumethatyourmanagea$50,000,000portfolioAW1of1.5or150%meansyouinvest(golong)$75,000,000,andborrow(short)$25,000,000tofinancethedifferenceBorrowingattherisk-freerateismoot241Toobtaina20%ReturnHowriskyisthisstrategy?sp=|W1|*s1=1.5*0.20=0.30Theportfoliohasavolatilityof30%242PortfolioofTwoRiskyAssetsRecallfromstatistics,thattworandomvariables,suchastwosecurityreturns,maybecombinedtoformanewrandomvariableAreasonableassumptionforreturnsondifferentsecuritiesisthelinearmodel:243EquationsforTwoSharesThesumoftheweightsw1andw2being1isnotnecessaryforthevalidityofthefollowingequations,forportfoliosithappenstobetrueTheexpectedreturnontheportfolioisthesumofitsweightedexpectations244EquationsforTwoSharesIdeally,wewouldliketohaveasimilarresultforriskLaterwediscoverameasureofriskwiththisproperty,butforstandarddeviation:245MnemonicThereisamnemonicthatwillhelpyourememberthevolatilityequationsfortwoormoresecuritiesToobtaintheformula,movethrougheachcellinthetable,multiplyingitbytherowheadingbythecolumnheading,andsumming246Variancewith2Securities247Variancewith3Securities248CorrelatedCommonStockThenextslideshowsstatisticsoftwocommonstockwiththesestatistics:meanreturn1=0.15meanreturn2=0.10standarddeviation1=0.20standarddeviation2=0.25correlationofreturns=0.90initialprice1=$57.25Initialprice2=$72.625249250251252FragmentsoftheOutputTable253SampleoftheExcelFormulae254FormulaeforMinimumVariancePortfolio255FormulaeforTangentPortfolio256Example:What’stheBestReturngivena10%SD?257AchievingtheTargetExpectedReturn(2):WeightsAssumethattheinvestmentcriterionistogeneratea30%returnThisistheweightoftheriskyportfolioontheCML258AchievingtheTargetExpectedReturn(2):VolatilityNowdeterminethevolatilityassociatedwiththisportfolioThisisthevolatilityoftheportfolioweseek259AchievingtheTargetExpectedReturn(2):PortfolioWeights260Chapter13:TheCapitalAssetPricingModelObjectiveTheTheoryoftheCAPMUseofCAPMinbenchmarkingUsingCAPMtodeterminecorrectratefordiscounting261Chapter13Contents13.1TheCapitalAssetPricingModelinBrief13.2DeterminingtheRiskPremiumontheMarketPortfolio13.3BetaandRiskPremiumsonIndividualSecurities13.4UsingtheCAPMinPortfolioSelection13.5Valuation&RegulatingRatesofReturn262IntroductionCAPMisatheoryaboutequilibriumpricesinthemarketsforriskyassetsItisimportantbecauseitprovidesajustificationforthewidespreadpracticeofpassiveinvestingcalledindexingawaytoestimateexpectedratesofreturnforuseinevaluatingstocksandprojects263SpecifyingtheModelWealsoobservedthatinthelimitasthenumberofsecuritiesbecomeslarge,weobtainedtheformulaThisformulatellsusthatthecorrelationsareofcrucialimportanceintherelationshipbetweenaportfolioriskandthestockrisk264CAPMFormula26513.2DeterminingtheRiskPremiumontheMarketPortfolioCAPMstatesthattheequilibriumriskpremiumonthemarketportfolioistheproductofvarianceofthemarket,s2Mweightedaverageofthedegreeofriskaversionofholdersofrisk,A266Example:ToDetermine‘A’267CAPMRiskPremiumonanyAssetAccordingthetheCAPM,inequilibrium,theriskpremiumonanyassetisequaltheproductof

b(or‘Beta’)theriskpremiumonthemarketportfolio268269TableofPrices270271ModelandMeasuredValuesofStatisticalParameters272273TheBetaofaPortfolioWhendeterminingtheriskofaportfoliousingstandarddeviationresultsinaformulathat’squitecomplexusingbeta,theformulaislinear274ComputingBetaHerearesomeusefulformulaeforcomputingbeta275ValuationandRegulatingRatesofReturnAssumethemarketrateis15%,andtherisk-freerateis5%Computethebetaofbetaful’soperations276ValuationandRegulatingRatesofReturnBetaofbetaful’soperationsisequaltothebetaofournewoperationTofindtherequiredreturnonthenewproject,applytheCAPM277ValuationandRegulatingRatesofReturnAssumethatyourcompanyisjustavehicleforthenewproject,thenthebetaofyourunquotedequityis278ValuationandRegulatingRatesofReturnAssumethatyourcompanyhasanexpecteddividendof$6nextyear,andthatitwillgrowannuallyatarateof4%forever,thevalueofashareis279Chapter14:Forward&FuturesPricesObjectiveHowtopriceforwardandfuturesStorageofcommoditiesCostofcarryUnderstandingfinancialfutures280Chapter14:Contents1DistinctionBetweenForward&FuturesContracts2TheEconomicFunctionofFuturesMarkets3TheRoleofSpeculators4RelationshipBetweenCommoditySpot&FuturesPrices5ExtractingInformationfromCommodityFuturesPrices6Spot-FuturesPriceParityforGold7FinancialFutures8The“Implied”Risk-FreeRate9TheForwardPriceisnotaForecastoftheSpotPr