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Principles of Corporate Finance Seventh Edition Richard A. Brealey Stewart C

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Topics CoveredMarkowitz Portfolio TheoryRisk and Return RelationshipTesting the CAPMCAPM Alternatives

Слайды и текст этой презентации

Слайд 1Principles of Corporate Finance

Seventh Edition
Richard A. Brealey
Stewart C. Myers
Slides

by
Matthew Will
Chapter 8
McGraw Hill/Irwin
Copyright © 2003 by The McGraw-Hill Companies,

Inc. All rights reserved

Risk and Return

Principles of Corporate FinanceSeventh EditionRichard A. Brealey Stewart C. MyersSlides byMatthew WillChapter 8McGraw Hill/IrwinCopyright © 2003 by

Слайд 2Topics Covered
Markowitz Portfolio Theory
Risk and Return Relationship
Testing the CAPM
CAPM Alternatives

Topics CoveredMarkowitz Portfolio TheoryRisk and Return RelationshipTesting the CAPMCAPM Alternatives

Слайд 3Markowitz Portfolio Theory
Combining stocks into portfolios can reduce standard deviation,

below the level obtained from a simple weighted average calculation.
Correlation

coefficients make this possible.
The various weighted combinations of stocks that create this standard deviations constitute the set of efficient portfolios.
Markowitz Portfolio TheoryCombining stocks into portfolios can reduce standard deviation, below the level obtained from a simple

Слайд 4Markowitz Portfolio Theory
Price changes vs. Normal distribution
Microsoft - Daily %

change 1990-2001
Proportion of Days
Daily % Change

Markowitz Portfolio TheoryPrice changes vs. Normal distributionMicrosoft - Daily % change 1990-2001 Proportion of DaysDaily %

Слайд 5Markowitz Portfolio Theory
Standard Deviation VS. Expected Return
Investment A
%

probability
% return

Markowitz Portfolio TheoryStandard Deviation VS. Expected ReturnInvestment A % probability% return

Слайд 6Markowitz Portfolio Theory
Standard Deviation VS. Expected Return
Investment B
%

probability
% return

Markowitz Portfolio TheoryStandard Deviation VS. Expected ReturnInvestment B % probability% return

Слайд 7Markowitz Portfolio Theory
Standard Deviation VS. Expected Return
Investment C
%

probability
% return

Markowitz Portfolio TheoryStandard Deviation VS. Expected ReturnInvestment C % probability% return

Слайд 8Markowitz Portfolio Theory
Standard Deviation VS. Expected Return
Investment D
%

probability
% return

Markowitz Portfolio TheoryStandard Deviation VS. Expected ReturnInvestment D % probability% return

Слайд 9Markowitz Portfolio Theory
Coca Cola
Reebok
Standard Deviation
Expected Return (%)
35% in Reebok

Expected Returns and Standard Deviations vary given different

weighted combinations of the stocks
Markowitz Portfolio TheoryCoca ColaReebokStandard DeviationExpected Return (%)35% in Reebok Expected Returns and Standard Deviations vary

Слайд 10Efficient Frontier
Standard Deviation
Expected Return (%)
Each half egg shell represents the

possible weighted combinations for two stocks.
The composite of all stock

sets constitutes the efficient frontier
Efficient FrontierStandard DeviationExpected Return (%)Each half egg shell represents the possible weighted combinations for two stocks.The composite

Слайд 11Efficient Frontier
Standard Deviation
Expected Return (%)
Lending or Borrowing at the risk

free rate (rf) allows us to exist outside the efficient

frontier.

rf

Lending Borrowing

T

S

Efficient FrontierStandard DeviationExpected Return (%)Lending or Borrowing at the risk free rate (rf) allows us to exist

Слайд 12Efficient Frontier
Example

Correlation Coefficient = .4
Stocks s % of Portfolio Avg

Return
ABC Corp 28 60% 15%
Big Corp 42 40% 21%


Standard Deviation = weighted avg = 33.6
Standard Deviation = Portfolio = 28.1
Return = weighted avg = Portfolio = 17.4%

Efficient FrontierExample Correlation Coefficient =

Слайд 13Efficient Frontier
Example

Correlation Coefficient = .4
Stocks s % of Portfolio Avg

Return
ABC Corp 28 60% 15%
Big Corp 42 40% 21%


Standard Deviation = weighted avg = 33.6
Standard Deviation = Portfolio = 28.1
Return = weighted avg = Portfolio = 17.4%

Let’s Add stock New Corp to the portfolio
Efficient FrontierExample Correlation Coefficient =

Слайд 14Efficient Frontier
Example

Correlation Coefficient = .3
Stocks s % of Portfolio Avg

Return
Portfolio 28.1 50% 17.4%
New Corp 30 50% 19%

NEW Standard Deviation = weighted avg = 31.80
NEW Standard Deviation = Portfolio = 23.43
NEW Return = weighted avg = Portfolio = 18.20%


Efficient FrontierExample Correlation Coefficient =

Слайд 15Efficient Frontier
Example

Correlation Coefficient = .3
Stocks s % of Portfolio Avg

Return
Portfolio 28.1 50% 17.4%
New Corp 30 50% 19%

NEW Standard Deviation = weighted avg = 31.80
NEW Standard Deviation = Portfolio = 23.43
NEW Return = weighted avg = Portfolio = 18.20%

NOTE: Higher return & Lower risk
How did we do that? DIVERSIFICATION
Efficient FrontierExample Correlation Coefficient =

Слайд 16Efficient Frontier
A
B
Return
Risk (measured as s)

Efficient FrontierABReturnRisk (measured as s)

Слайд 17Efficient Frontier
A
B
Return
Risk
AB

Efficient FrontierABReturnRiskAB

Слайд 18Efficient Frontier
A
B
N
Return
Risk
AB

Efficient FrontierABNReturnRiskAB

Слайд 19Efficient Frontier
A
B
N
Return
Risk
AB
ABN

Efficient FrontierABNReturnRiskABABN

Слайд 20Efficient Frontier
A
B
N
Return
Risk
AB
Goal is to move up and left.

WHY?
ABN

Efficient FrontierABNReturnRiskABGoal is to move up and left. WHY?ABN

Слайд 21Efficient Frontier
Return
Risk
Low Risk
High Return
High Risk
High Return
Low Risk
Low Return
High Risk
Low Return

Efficient FrontierReturnRiskLow RiskHigh ReturnHigh RiskHigh ReturnLow RiskLow ReturnHigh RiskLow Return

Слайд 22Efficient Frontier
Return
Risk
Low Risk
High Return
High Risk
High Return
Low Risk
Low Return
High Risk
Low Return

Efficient FrontierReturnRiskLow RiskHigh ReturnHigh RiskHigh ReturnLow RiskLow ReturnHigh RiskLow Return

Слайд 23Efficient Frontier
Return
Risk
A
B
N
AB
ABN

Efficient FrontierReturnRiskABNABABN

Слайд 24Security Market Line
Return
Risk
.
rf
Risk Free
Return =
Efficient Portfolio

Security Market LineReturnRisk.rfRisk Free Return =Efficient Portfolio

Слайд 25Security Market Line
Return
.
rf
Risk Free
Return =
Efficient Portfolio
BETA
1.0

Security Market LineReturn.rfRisk Free Return =Efficient PortfolioBETA1.0

Слайд 26Security Market Line
Return
.
rf
Risk Free
Return =
BETA
Security Market Line

(SML)

Security Market LineReturn.rfRisk Free Return =BETASecurity Market Line (SML)

Слайд 27Security Market Line
Return
BETA
rf
1.0
SML
SML Equation = rf + B ( rm

- rf )

Security Market LineReturnBETArf1.0SMLSML Equation = rf + B ( rm - rf )

Слайд 28Capital Asset Pricing Model
R = rf + B (

rm - rf )
CAPM

Capital Asset Pricing Model R = rf + B ( rm - rf )CAPM

Слайд 29Testing the CAPM
Avg Risk Premium 1931-65
Portfolio Beta
1.0
SML
30

20

10

0
Investors
Market Portfolio
Beta vs. Average

Risk Premium

Testing the CAPMAvg Risk Premium 1931-65Portfolio Beta1.0SML3020100InvestorsMarket PortfolioBeta vs. Average Risk Premium

Слайд 30Testing the CAPM
Avg Risk Premium 1966-91
Portfolio Beta
1.0
SML
30

20

10

0
Investors
Market Portfolio
Beta vs. Average

Risk Premium

Testing the CAPMAvg Risk Premium 1966-91Portfolio Beta1.0SML3020100InvestorsMarket PortfolioBeta vs. Average Risk Premium

Слайд 31Testing the CAPM
High-minus low book-to-market
Return vs. Book-to-Market
Dollars
Low minus big
http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html

Testing the CAPMHigh-minus low book-to-marketReturn vs. Book-to-MarketDollarsLow minus bighttp://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html

Слайд 32Consumption Betas vs Market Betas
Stocks
(and other risky assets)
Wealth =

market
portfolio

Consumption Betas vs Market BetasStocks (and other risky assets)Wealth = marketportfolio

Слайд 33Arbitrage Pricing Theory
Alternative to CAPM

Expected Risk

Premium = r - rf
= Bfactor1(rfactor1

- rf) + Bf2(rf2 - rf) + …

Return = a + bfactor1(rfactor1) + bf2(rf2) + …
Arbitrage Pricing Theory Alternative to CAPMExpected Risk Premium = r - rf

Слайд 34Arbitrage Pricing Theory
Estimated risk premiums for taking on risk factors
(1978-1990)

Arbitrage Pricing TheoryEstimated risk premiums for taking on risk factors(1978-1990)

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