Finance I - Summary III

Finance I – Summary III
Week 5 & 6

Chapter 9
σ ( r P ) =|x M|× σ (r M )
 σ ( r P ) =¿ Standard Deviation of the expected portfolio return
 |x M|=¿ Fraction of the portfolio that is the market portfolio, an absolute value

σ ( r R ) =β R × σ ( r M ) +QR
 β R =¿ proxy for systematic risk of investment R
 Q R=¿ Unsystematic risk/unique risk/avoidable risk
 If two investments have the same expected return but one has a higher risk, it’s
because of unique risk

E ( r p ) =r f + β p × [ E ( r M )−r f ]
 E ( r p ) =¿ required rate of return
 r f =¿ risk free rate
 β p=¿ proxy for systematic risk
 [ E ( r M )−r f ]=¿ MRP = Market Risk Premium

σ (r R)
βR= × ρ (r R , r M )
σ (r M )
 σ ( r M ) =¿ standard deviation of expected return of the market portfolio

CAPM
 Capital Asset Pricing Model
 CML = Capital market line = E(r) vs total risk σ
 SML = Security market line = E(r) vs β


Chapter 13
β A =x D × β D + x E × β E
 β A =¿ Proxy for risk of assets
 x D =¿ Fraction of a company that is Debt financed
 x E =¿ Fraction of a company that is Equity financed

r E=r A + D/ E(r A−r D )
 If D=0 ,r E =r A
 If D>0 , r E >r A
 Same for β A and β E