Risk and Return(公司金融,上海财经大学).pdfVIP

Lecture 8: Risk and Return Outline 8.1 A First Look at Risk and Return 8.2 Common Measures of Risk and Return 8.3 Historical Returns of Stocks and Bonds 8.4 The Historical Tradeoff Between Risk and Return 2 Preview: The Opportunity Cost of Risky Capital ? There is one more tool we need to make capital budgeting decisions: Find the discount rate. ? We need to be able to calculate our investor’s opportunity cost of capital. ? Without this we can’t tell if a project is positive NPV. ? The opportunity cost of capital r has two components: r = rf + rPremium, where, ? rf is the risk free rate (the yield that matches the horizon of the cash flow) ? rPremium is the premium for risk. ? The risk premium is going to be determined by the nature of the business/project that we are evaluating. ? For a given type of business it is fairly constant over time. 3 Preview: Investors’ Portfolio Choice ? Investors care about the expected return and the risk of their portfolio. ? Investors require more compensation (higher expected returns) for carrying additional risk in their portfolio. ? As a manager evaluating a project, the key question to ask is: ? How much risk does this project introduce into my investors’ portfolio? ? Notice that this is not the same as asking: how risky is this project? ? Thus, our first step will be to look how investors choose their investment portfolio. ? To answer: How do investors create a portfolio which provides the optimal tradeoff between risk and return? ? This will be useful for two reasons: ? (Investor) Understand how to form an optimal investment portfolio. ? (Manager) Learn how to calculate risk premium. 4 Figure: Value of $100 Invested at the End of 1925 in U.S. Large Stocks (SP 500), Small Stocks, World Stocks, Corporate Bonds, and Treasury Bills 5 8.1 A First Look at Risk and Return ? Small stocks had the highest long-term returns, while T- Bills had the lowest long-term returns. ? Small stocks had the large