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1、Principles of Corporate FinanceSeventh EditionRichard A.Brealey Stewart C.MyersChapter 8McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies,Inc.All rights reserved Risk and Return8-2McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies,Inc.All rights reserved Topics CoveredwMarkowitz
2、 Portfolio TheorywRisk and Return RelationshipwTesting the CAPMwCAPM Alternatives8-3McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies,Inc.All rights reserved Markowitz Portfolio TheorywCombining stocks into portfolios can reduce standard deviation,below the level obtained from a simple we
3、ighted average calculation.wCorrelation coefficients make this possible.wThe various weighted combinations of stocks that create this standard deviations constitute the set of efficient portfolios.8-4McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies,Inc.All rights reserved Markowitz Portf
4、olio TheoryPrice changes vs.Normal distributionMicrosoft-Daily%changeProportion of DaysDaily%Change8-5McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies,Inc.All rights reserved Markowitz Portfolio TheoryStandard Deviation VS.Expected ReturnInvestment A%probability%return8-6McGraw Hill/Irwi
5、nCopyright 2003 by The McGraw-Hill Companies,Inc.All rights reserved Markowitz Portfolio TheoryStandard Deviation VS.Expected ReturnInvestment B%probability%return8-7McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies,Inc.All rights reserved Markowitz Portfolio TheoryStandard Deviation VS.E
6、xpected ReturnInvestment C%probability%return8-8McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies,Inc.All rights reserved Markowitz Portfolio TheoryStandard Deviation VS.Expected ReturnInvestment D%probability%return8-9McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies,Inc.All r
7、ights reserved Markowitz Portfolio TheoryCoca ColaReebokStandard DeviationExpected Return(%)35%in Reeboku Expected Returns and Standard Deviations vary given different weighted combinations of the stocks8-10McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies,Inc.All rights reserved Efficien
8、t FrontierStandard DeviationExpected Return(%)Each half egg shell represents the possible weighted combinations for two stocks.The composite of all stock sets constitutes the efficient frontier8-11McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies,Inc.All rights reserved Efficient Frontier
9、Standard DeviationExpected Return(%)Lending or Borrowing at the risk free rate(rf)allows us to exist outside the efficient frontier.rfLending BorrowingTS8-12McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies,Inc.All rights reserved Efficient FrontierExample Correlation Coefficient=.4Stocks
10、s%of PortfolioAvg ReturnABC Corp2860%15%Big Corp42 40%21%Standard Deviation=weighted avg=33.6 Standard Deviation=Portfolio =28.1 Return=weighted avg=Portfolio=17.4%8-13McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies,Inc.All rights reserved Efficient FrontierExample Correlation Coefficie
11、nt=.4Stockss%of PortfolioAvg ReturnABC Corp2860%15%Big Corp42 40%21%Standard Deviation=weighted avg=33.6 Standard Deviation=Portfolio =28.1 Return=weighted avg=Portfolio=17.4%Lets Add stock New Corp to the portfolio8-14McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies,Inc.All rights reser
12、ved Efficient FrontierExample Correlation Coefficient=.3Stockss%of PortfolioAvg ReturnPortfolio28.150%17.4%New CorpNew Corp3030 50%50%19%19%NEW Standard Deviation=weighted avg=31.80 NEW Standard Deviation=Portfolio =23.43 NEW Return=weighted avg=Portfolio=18.20%8-15McGraw Hill/IrwinCopyright 2003 by
13、 The McGraw-Hill Companies,Inc.All rights reserved Efficient FrontierExample Correlation Coefficient=.3Stockss%of PortfolioAvg ReturnPortfolio28.150%17.4%New Corp30 50%19%NEW Standard Deviation=weighted avg=31.80 NEW Standard Deviation=Portfolio =23.43 NEW Return=weighted avg=Portfolio=18.20%NOTE:Hi
14、gher return&Lower risk How did we do that?DIVERSIFICATION8-16McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies,Inc.All rights reserved Efficient FrontierABReturnRisk(measured as s s)8-17McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies,Inc.All rights reserved Efficient Frontier
15、ABReturnRiskAB8-18McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies,Inc.All rights reserved Efficient FrontierABNReturnRiskAB8-19McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies,Inc.All rights reserved Efficient FrontierABNReturnRiskABABN8-20McGraw Hill/IrwinCopyright 2003 by
16、The McGraw-Hill Companies,Inc.All rights reserved Efficient FrontierABNReturnRiskABGoal is to move up and left.WHY?ABN8-21McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies,Inc.All rights reserved Efficient FrontierReturnRiskLow RiskHigh ReturnHigh RiskHigh ReturnLow RiskLow ReturnHigh Ris
17、kLow Return8-22McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies,Inc.All rights reserved Efficient FrontierReturnRiskLow RiskHigh ReturnHigh RiskHigh ReturnLow RiskLow ReturnHigh RiskLow Return8-23McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies,Inc.All rights reserved Efficie
18、nt FrontierReturnRiskABNABABN8-24McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies,Inc.All rights reserved Security Market LineReturnRisk.rfRisk Free Return =Efficient PortfolioMarket Return=rm 8-25McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies,Inc.All rights reserved Securi
19、ty Market LineReturn.rfRisk Free Return =Efficient PortfolioMarket Return=rm BETA1.08-26McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies,Inc.All rights reserved Security Market LineReturn.rfRisk Free Return =BETASecurity Market Line (SML)8-27McGraw Hill/IrwinCopyright 2003 by The McGraw-
20、Hill Companies,Inc.All rights reserved Security Market LineReturnBETArf1.0SMLSML Equation=rf+B(rm-rf)8-28McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies,Inc.All rights reserved Capital Asset Pricing Model R=rf+B(rm-rf)CAPM8-29McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies,
21、Inc.All rights reserved Arbitrage Pricing TheoryAlternative to CAPMAlternative to CAPMExpected Risk Premium=r-rf =Bfactor1(rfactor1-rf)+Bf2(rf2-rf)+Return=a +bfactor1(rfactor1)+bf2(rf2)+8-30McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies,Inc.All rights reserved Arbitrage Pricing TheoryEstimated risk premiums for taking on risk factors(1978-1990)