How Are Risk and the Cost of Capital Related(公司金融讲义-上海交大 Fei YIwen ).pptVIP

How Are Risk and the Cost of Capital Related? An investment results in a realized return When the investment is made, the investor evaluates the expected return Opportunity Cost and Risk When investments are risky, the opportunity cost must be based on comparable risk. We are concerned with how to measure risk (so we can be specific about the term ‘comparable’) how this measure of risk influences the required return. Sears and HBC are in the Same Industry – are they ‘Comparable’? One $ invested in each stock Rate of Return: These Companies Are in the Same Industry But Are They of Equal Risk? Average Returns and Std. Deviation (monthly) Asset Pricing Model With future price and dividends given, a return implies a price, P0 Issues: How do we measure risk so that we can compare similar investments? Use statistics. How do we evaluate the ‘reward’ that must be paid to entice investors to hold risky securities? Look at investor preferences. Statistics: A Quick Review A random variable takes on a numerical value that depends on chance. A random return could be denoted ri. It is assumed that it will take on one of n specific values, A distribution assigns a probability to each possible value that a random variable can take on. Probability must be non negative and must sum to one. A very general description of risk. Statistics: A Quick Review The mean, expected value, or expectation of a random variable is a weighted sum of the possible outcomes. This is a measure of how big, on average, the random variable is. Statistics: A Quick Review The variance, of a random variable is the expectation of the squared deviation from the mean. A measure of how dispersed the distribution is. Example: A constant is always equal to its expected value. It has a variance of zero. The standard deviation (s(r)) is the square root of the variance. An Illustration Expected Return = .1(50) + .2(30) + .4(10) + .2(-10) + .1(-30) =10% Varia