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1、The McGraw-Hill Companies, Inc.,200110- 1Irwin/McGraw-HillIrwin/McGraw-HillChapter 10Fundamentals of Corporate FinanceThird EditionRisk, Return, and Capital BudgetingBrealey Myers Marcusslides by Matthew WillIrwin/McGraw-HillThe McGraw-Hill Companies, Inc.,2001The McGraw-Hill Companies, Inc.,200110-
2、 2Irwin/McGraw-HillTopics CoveredMeasuring BetaPortfolio BetasCAPM and Expected ReturnSecurity Market LineCapital Budgeting and Project RiskThe McGraw-Hill Companies, Inc.,200110- 3Irwin/McGraw-HillMeasuring Market RiskMarket Portfolio - Portfolio of all assets in the economy. In practice a broad st
3、ock 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.,200110- 4Irwin/McGraw-HillMeasuring Market RiskExample - Turbo Charged Seafood has the following % returns on its s
4、tock, 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.,200110- 5Irwin/McGraw-HillMeasuring Market RiskMonthMarket Return %Turbo Return %1+ 1+ 0.82+ 1+ 1.83+ 1- 0.24- 1- 1.85-
5、 1+ 0.26- 1- 0.8Example - continuedThe McGraw-Hill Companies, Inc.,200110- 6Irwin/McGraw-HillMeasuring Market RiskWhen 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 of 1.6 % (-0.8 to 0.8) divided by the 2% (-1.0
6、 to 1.0) change in the market produces a beta of 0.8.Example - continuedThe McGraw-Hill Companies, Inc.,200110- 7Irwin/McGraw-HillMeasuring Market RiskB = 0.81.62When 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 chang
7、e 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 - continuedThe McGraw-Hill Companies, Inc.,200110- 8Irwin/McGraw-HillMeasuring Market RiskExample - continued-0.8-0.6-0.4-0.200.20.40.60.81-0.8 -0.6 -0.4 -0.200.20.40.60.81Market Return %Turb
8、o return %The McGraw-Hill Companies, Inc.,200110- 9Irwin/McGraw-HillPortfolio BetasDiversification decreases variability from unique risk, but not from market risk.The beta of your portfolio will be an average of the betas of the securities in the portfolio.If you owned all of the S&P Composite Inde
9、x stocks, you would have an average beta of 1.0 The McGraw-Hill Companies, Inc.,200110- 10Irwin/McGraw-HillMeasuring Market RiskMarket Risk Premium - Risk premium of market portfolio. Difference between market return and return on risk-free Treasury bills. 0246810121400.20.40.60.81BetaExpected Retur
10、n (%) . Market PortfolioThe McGraw-Hill Companies, Inc.,200110- 11Irwin/McGraw-HillMeasuring Market RiskCAPM - Theory of the relationship between risk and return which states that the expected risk premium on any security equals its beta times the market risk premium.Market risk premium = r- rRisk p
11、remium on any asset = r - rExpected Return = r+ B(r- r )mfffmfThe McGraw-Hill Companies, Inc.,200110- 12Irwin/McGraw-HillMeasuring Market RiskSecurity Market Line - The graphic representation of the CAPM.01Beta02040Expected Return (%) . RfRmSecurity Market LineThe McGraw-Hill Companies, Inc.,200110-
12、 13Irwin/McGraw-HillCapital Budgeting & Project RiskThe project cost of capital depends on the use to which the capital is being put. Therefore, it depends on the risk of the project and not the risk of the company. The McGraw-Hill Companies, Inc.,200110- 14Irwin/McGraw-HillCapital Budgeting & Proje
13、ct RiskExample - 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?1/3 Nuclear Parts Mfr. B=2.01/3 Computer Hard Drive
14、Mfr. B=1.31/3 Dog Food Production B=0.6AVG. B of assets = 1.3 The McGraw-Hill Companies, Inc.,200110- 15Irwin/McGraw-HillCapital Budgeting & Project RiskExample - 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 belo
15、w. 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 capital on an investment given the unique risk of the project.The McGraw-Hill Companies, Inc.,200110- 16Irwin/McGraw-HillDerivation of CAPM C
16、apital Market LineIndividuals Efficient Frontier with Risk Free AssetE(R)RfMThe McGraw-Hill Companies, Inc.,200110- 17Irwin/McGraw-HillDerivation of CAPMHomogeneous Expectation-One Market Efficienf Frontier:Capital market Line (CML)The Slope of Capital Market Line is: E(R)RfMCMLE(Rm)-RfmE(Rm)mMfMRRE
17、)(The McGraw-Hill Companies, Inc.,200110- 18Irwin/McGraw-HillDerivation of CAPMSeurity Market Line (CAPM)If a portfolio is consisted of A and market portfolio M with asset A, W%, and M, (1-W%), thenE(R)RfMACML),()1 ()()(MAPREWRWERE)21()1 (2)1 ()(222EXPWWWWRiMMAPThe McGraw-Hill Companies, Inc.,200110
18、- 19Irwin/McGraw-HillDerivation of CAPM對 W 取一階導數:When in equilibrium, W=0 and .)()(MAPREREdWdRPMAAMMMAAMMAPWdWd222)2()()(|0MAWPREREdWdRMMAMPMAAMMWPdWd220|MPThe McGraw-Hill Companies, Inc.,200110- 20Irwin/McGraw-HillDerivation of CAPMThe slope of the portfolio in equilibrium then is:Since in equilibr
19、ium, the portfolio is equal the market portfolio, the slope of the portfolio in CML must equal to that of the market portfolio, the equation can constructed as follows:MMAMMAWPPREREddR/)()()(|20MfMRRE)(MMAMMARERE/)()()(2The McGraw-Hill Companies, Inc.,200110- 21Irwin/McGraw-HillDerivation of CAPM簡化上式：In market model:SML2)()(MAMfMfARRERREAMAAARR2MAMAAfMfARRERRE)()(The McGraw-Hill Companies, Inc.,200110- 22Irwin/McGraw-HillDerivation of CAPME(R)RfMSML1E(Rm)1)()(fMAfARRERRE