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Finance I - Summary III
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Summary for Finance I of year 2 International Business Administration Chapter 9 and 12 to 14
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Finance I – Summary IIIWeek 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
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