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Summary Corporate Finance, Global Edition, Chapter 10 $9.21   Add to cart

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Summary Corporate Finance, Global Edition, Chapter 10

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Detailed summary for chapter 10 Corporate Finance 5ht edition

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  • Chapter 10
  • January 17, 2023
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  • 2021/2022
  • Summary
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Chapter 10: Capital Markets and the Pricing of Risk


10.1 Risk and Return: Insights from 92 Years of Investor History

- As the horizon lengthens, the realtor performance of the stock portfolios improves.



10.2 Common Measures of Risk and Return



● Probability Distributions

○ To make securities comparable their performance is explained in terms of their

returns.

■ The return indicates the percentage increase in the value of an investment

per dollar initially invested in the security.

○ A probability distribution assigns a probability to each possible return.

● Expected Return

○ The expected return is calculated as a weighted average of the possible returns

where the weights correspond to the probabilities.

○ The expected return is the return we would earn on average if we could repeat the

investment many times, drawing the return from the same distribution each time.




● Variance and Standard Deviation

○ Variance and standard deviation are measures of the risk of a probability

distribution.

■ Variance is the expected squared deviation from the mean

■ Standard deviation is the square root of the variance

○ If the return is risk-free and never deviates from its mean, the variance is zero.


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, ○ The standard deviation of a return is its volatility. The standard deviation is easier

to interpret because it is in the same units as the returns themselves.




10. 3 Historical Returns of Stocks and Bonds

● Computing Historical Returns

○ The realized return is the return that actually occurs over a particular time period

○ The realized return is the total return we earn from dividends and capital gains,

expressed as a percentage of the initial stock price.




● Calculating Realized Annual Returns

○ Dividends are immediately reinvested to buy more stocks from the same

company.




● Average Annual Returns


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