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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-Hill本资料来源本资料来源The McGraw-Hill Companies, Inc.,200110- 5Irwin/McGraw-HillMeasuring Market Risk
4、Example - Turbo Charged Seafood has the 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.,200110- 6Irwin/McGraw-HillMeasuring Market RiskMont
5、hMarket Return %Turbo Return %1+ 1+ 0.82+ 1+ 1.83+ 1- 0.24- 1- 1.85- 1+ 0.26- 1- 0.8Example - continuedThe McGraw-Hill Companies, Inc.,200110- 7Irwin/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.
6、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 - continuedThe McGraw-Hill Companies, Inc.,200110- 8Irwin/McGraw-HillMeasuring Market RiskB = 0.81.62When the market was up 1%, Turbo average % change was +0.8%When the ma
7、rket 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 to 1.0) change in the market produces a beta of 0.8.Example - continuedThe McGraw-Hill Companies, Inc.,200110- 9Irwin/McGraw-HillMeasuring Market RiskExample - continued-0.8-0.6-0.4-0
8、.200.20.40.60.81-0.8 -0.6 -0.4 -0.200.20.40.60.81Market Return %Turbo return %The McGraw-Hill Companies, Inc.,200110- 10Irwin/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 s
9、ecurities 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.,200110- 11Irwin/McGraw-HillMeasuring Market RiskMarket Risk Premium - Risk premium of market portfolio. Difference between market return and return on
10、risk-free Treasury bills. 0246810121400.20.40.60.81BetaExpected Return (%) . Market PortfolioThe McGraw-Hill Companies, Inc.,200110- 12Irwin/McGraw-HillMeasuring Market RiskCAPM - Theory of the relationship between risk and return which states that the expected risk premium on any security equals it
11、s beta times the market risk premium.Market risk premium = r- rRisk premium on any asset = r - rExpected Return = r+ B(r- r )mfffmfThe McGraw-Hill Companies, Inc.,200110- 13Irwin/McGraw-HillMeasuring Market RiskSecurity Market Line - The graphic representation of the CAPM.01Beta02040Expected Return
12、(%) . RfRmSecurity Market LineThe McGraw-Hill Companies, Inc.,200110- 14Irwin/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
13、 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 below. When evaluating a new dog food production investment, which cost of capita
14、l should be used?1/3 Nuclear Parts Mfr. B=2.01/3 Computer Hard Drive Mfr. B=1.31/3 Dog Food Production B=0.6AVG. B of assets = 1.3 The McGraw-Hill Companies, Inc.,200110- 16Irwin/McGraw-HillCapital Budgeting & Project RiskExample - Based on the CAPM, ABC Company has a cost of capital of 17%. (4 + 1.
15、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 capital on an investment given the unique risk of the project.The McGraw
16、-Hill Companies, Inc.,200110- 17Irwin/McGraw-HillDerivation of CAPM Capital Market LineIndividuals Efficient Frontier with Risk Free AssetE(R)RfMThe McGraw-Hill Companies, Inc.,200110- 18Irwin/McGraw-HillDerivation of CAPMHomogeneous Expectation-One Market Efficienf Frontier:Capital market Line (CML
17、)The Slope of Capital Market Line is: E(R)RfMCMLE(Rm)-RfmE(Rm)mMfMRRE)(The McGraw-Hill Companies, Inc.,200110- 19Irwin/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
18、)21()1 (2)1 ()(222EXPWWWWRiMMAPThe McGraw-Hill Companies, Inc.,200110- 20Irwin/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- 21Irwin/McGraw-HillDerivation of CA
19、PMThe slope of the portfolio in equilibrium then is:Since in equilibrium, 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- 22Irwin/McGraw-HillDerivation of CAPM簡化上式：In market model:SML2)()(MAMfMfARRERREAMAAARR2MAMAAfMfARRERRE)()(