lecture10(ch10)

1、the mcgraw-hill companies, inc.,2001 10- 1 irwin/mcgraw-hillirwin/mcgraw-hill chapter 10 fundamentals of corporate finance third edition risk, return, and capital budgeting brealey myers marcus slides by matthew will irwin/mcgraw-hillthe mcgraw-hill companies, inc.,2001 the mcgraw-hill companies, in

2、c.,2001 10- 2 irwin/mcgraw-hill topics covered measuring beta portfolio betas capm and expected return security market line capital budgeting and project risk the mcgraw-hill companies, inc.,2001 10- 3 irwin/mcgraw-hill measuring market risk market portfolio - portfolio of all assets in the economy.

3、 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. the mcgraw-hill companies, inc.,2001 10- 4 irwin/mcgraw-hill measuring market risk example - turbo charged seafood has the

4、 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. the mcgraw-hill companies, inc.,2001 10- 5 irwin/mcgraw-hill measuring market risk monthmarket return %turbo return % 1+

5、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 the mcgraw-hill companies, inc.,2001 10- 6 irwin/mcgraw-hill measuring market risk when the market was up 1%, turbo average % change was +0.8% when the market was down 1%, turbo average % change was -0.8% the average change

6、 of 1.6 % (-0.8 to 0.8) divided by the 2% (-1.0 to 1.0) change in the market produces a beta of 0.8. example - continued the mcgraw-hill companies, inc.,2001 10- 7 irwin/mcgraw-hill measuring market risk b = 0.8 1.6 2 when the market was up 1%, turbo average % change was +0.8% when the market was do

7、wn 1%, turbo average % change was -0.8% the average change of 1.6 % (-0.8 to 0.8) divided by the 2% (-1.0 to 1.0) change in the market produces a beta of 0.8. example - continued the mcgraw-hill companies, inc.,2001 10- 8 irwin/mcgraw-hill measuring market risk example - continued -0.8 -0.6 -0.4 -0.

8、2 0 0.2 0.4 0.6 0.8 1 -0.8 -0.6 -0.4 -0.60.81 market return % turbo return % the mcgraw-hill companies, inc.,2001 10- 9 irwin/mcgraw-hill portfolio betas diversification decreases variability from unique risk, but not from market risk. the beta of your portfolio will be an average of the b

9、etas of the securities in the portfolio. if you owned all of the s&p composite index stocks, you would have an average beta of 1.0 the mcgraw-hill companies, inc.,2001 10- 10 irwin/mcgraw-hill measuring market risk market risk premium - risk premium of market portfolio. difference between market ret

10、urn and return on risk-free treasury bills. 0 2 4 6 8 10 12 14 00.81 beta expected return (%) . market portfolio the mcgraw-hill companies, inc.,2001 10- 11 irwin/mcgraw-hill measuring market risk capm - theory of the relationship between risk and return which states that the expected risk

11、premium on any security equals its beta times the market risk premium. market risk premium = r- r risk premium on any asset = r - r expected return = r+ b(r- r ) mf f fmf the mcgraw-hill companies, inc.,2001 10- 12 irwin/mcgraw-hill measuring market risk security market line - the graphic representa

12、tion of the capm. 01 beta 0 20 40 expected return (%) . rf rmsecurity market line the mcgraw-hill companies, inc.,2001 10- 13 irwin/mcgraw-hill capital budgeting & project risk the project cost of capital depends on the use to which the capital is being put. therefore, it depends on the risk of the

13、project and not the risk of the company. the mcgraw-hill companies, inc.,2001 10- 14 irwin/mcgraw-hill capital budgeting & project risk example - based on the capm, abc company has a cost of capital of 17%. (4 + 1.3(10). a breakdown of the companys investment projects is listed below. when evaluatin

14、g a new dog food production investment, which cost of capital should be used? 1/3 nuclear parts mfr. b=2.0 1/3 computer hard drive mfr. b=1.3 1/3 dog food production b=0.6 avg. b of assets = 1.3 the mcgraw-hill companies, inc.,2001 10- 15 irwin/mcgraw-hill capital budgeting & project risk example -

15、based on the capm, abc company has a cost of capital of 17%. (4 + 1.3(10). a breakdown of the companys investment projects is listed below. when evaluating a new dog food production investment, which cost of capital should be used? r = 4 + 0.6 (14 - 4 ) = 10% 10% reflects the opportunity cost of cap

16、ital on an investment given the unique risk of the project. the mcgraw-hill companies, inc.,2001 10- 16 irwin/mcgraw-hill derivation of capm capital market line individuals efficient frontier with risk free asset e(r) rf m the mcgraw-hill companies, inc.,2001 10- 17 irwin/mcgraw-hill derivation of c

17、apm homogeneous expectation-one market efficienf frontier:capital market line (cml) the slope of capital market line is: e(r) rf m cml e(rm)-rf m e(rm) m m fm rre )( the mcgraw-hill companies, inc.,2001 10- 18 irwin/mcgraw-hill derivation of capm seurity market line (capm) if a portfolio is consiste

18、d of a and market portfolio m with asset a, w%, and m, (1- w%), then e(r) rf m a cml ),()1 ()()( map rewrwere ) 2 1 ()1 (2)1 ()( 222 expwwwwr immap the mcgraw-hill companies, inc.,2001 10- 19 irwin/mcgraw-hill derivation of capm 對 w 取一階導數: when in equilibrium, w=0 and . )()( ma p rere dw dr p maammmaammap w dw d 222 )2( )()(| 0maw p rere dw dr m mam p maamm w p dw d 22 0 | mp the mcgraw-hill companies, inc.,2001 10- 20 irwin/mcgraw-hill deriva