TAILIEUCHUNG - Lecture Essentials of corporate finance (2/e) – Chapter 11: Risk and return

Chapter 11 introduces you to risk and return. After completing this unit, you should be able to: Know how to calculate expected returns, understand the impact of diversification, understand the systematic risk principle, understand the security market line, understand the risk-return trade-off. | Risk and return Chapter 11 Key concepts and skills Know how to calculate expected returns Understand the impact of diversification Understand the systematic risk principle Understand the security market line Understand the risk–return trade-off 11- Copyright ©2011 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance 2e by Ross et al. Slides prepared by David E. Allen and Abhay K. Singh Chapter outline Expected returns and variances Portfolios Announcements, surprises and expected returns Risk: Systematic and unsystematic Diversification and portfolio risk Systematic risk and beta The security market line (SML) The SML and the cost of capital: A preview 11- Copyright ©2011 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance 2e by Ross et al. Slides prepared by David E. Allen and Abhay K. Singh Expected returns Expected returns are based on the probabilities of possible outcomes. In this context, ‘expected’ means average if the process is repeated many times. The ‘expected’ return does not even have to be a possible return. Where: pi = the probability of state ‘I’ occurring Ri = the expected return on an asset in state i 11- Copyright ©2011 McGraw-Hill Australia Pty Ltd PPTs t/a Essentials of Corporate Finance 2e by Ross et al. Slides prepared by David E. Allen and Abhay K. Singh Use the following example to illustrate the mathematical nature of expected returns: Consider a game where you toss a fair coin: If it is heads then student A pays student B $1. If it is tails then student B pays student A $1. Most students will remember from their statistics that the expected value is $0 (=.5(1) + .5(-1)). That means that if the game is played over and over, each student should expect to break even. However, if the game is only played once, one student will win $1 and one will lose $1. Expected returns—Example Suppose you have predicted the following returns for shares A and B in three possible states of .

• Tài chính doanh nghiệp
• Corporate finance
• Essentials of corporate finance
• Financial management
• Portfolio risk
• Systematic risk
• Security market line
• Intermediate corporate finance
• Lecture Intermediate corporate finance
• Tài chính doanh nghiệp
• Corporate valuation
• Value based management
• Fundamentals of corporate finance
• Business organization
• International corporate finance
• Capital market history
• Raising capital
• Financial leverage
• Financial reporting
• Social welfare
• Forward contracts
• The stock markets
• Basic return concepts
• Portfolio theory
• Bond valuation
• Basic stock valuation
• Accounting for financial management
• Analysis of financial statements
• Financial planning
• Forecasting financial statements
• Capital budgeting
• Decision criteria
• Estimating cash flows
• Real options
• Capital structure decisions
• The levered firm
• Cash management
• Financial distress
• Hedging risk
• Warrants and convertibles
• Principles of corporate finance
• Understanding options
• Valuing options
• Financial analysis
• Financial manager
• Financial institutions