Chapter2: Portfolio Theory

Overview

Structure of the Lecture


Chapter 1: Introduction / Principles of Corporate Finance

Chapter 2: Portfolio Theory

2.1 Valuation Under Risk
2.2 Risk and Return: Statistical Foundations
2.3 Risk and Return of Portfolios
2.4 Optimal Portfolio Choice

Chapter 3: Capital Asset Pricing Model

Chapter 4: Cost of Capital and Capital Structure

Chapter 5: Company Valuation (DCF‐Methods)

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Corporate Finance ‐ Summer 2023

,Overview

Structure of this class


Investor Firm
Individual decision making Capital structure
Expected utility Choice of debt‐equity‐ratio 
Portfolio optimization
 Firm valuation
Markowitz portfolio selection Discounted Cash Flow 

Financial Market
Capital Asset Pricing Model 
expected return is dependent on systematic risk and market risk premium


expected returns of investors are cost of capital for firms

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Corporate Finance ‐ Summer 2023

,Chapter 2.1: Valuation Under Risk

Introduction
Let‘s look back:

Semester 1: (Mostly Valuation and Decision Making under Certainty)


Data from investment and Certain
financing projects (certain) objectives

‐ Stream of payments
‐ Periodic figures ‐Productivity (Max!)
‐ ... Valuation
‐Present value (Max!)
‐ Financing instruments Principle
‐Costs p.a. (Min!)
‐ Rates of return


Now: Uncertainty
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Corporate Finance ‐ Summer 2023

, Chapter 2.1: Valuation Under Risk

Introduction




Obtaining the data
(risk profile of the objective variable)




Processing the data
(valuation principles)




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Corporate Finance ‐ Summer 2023