FNCE 2P91 Lecture 12: FNCE 2P91 CH 12
25 Jan 2016
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Fnce 2p91: corporate finance-notes-chapter 12: lessons from capital. We can examine returns in the financial markets to help us determine the appropriate returns on non-financial assets. Lesson from capital market history: there is greater reward for bearing risk, the greater the potential reward, the greater the risk, this is called the risk-return trade-off. The extra return earned for taking on risk. Treasury bills are considered to be risk-free. The risk premium is the return over and above the risk-free rate. For this class government issued treasury bonds (t-bills) are considered risk-free. Variance and standard deviation measure the volatility of asset returns. The greater the volatility, the greater the uncertainty. Historically variance = sum of squared deviations from the mean / . Table 12. 4 historical returns and standard deviations 1957-2008. Figure 12. 6 normal distribution and a portfolio of large common stocks. Stock prices are in equilibrium or are fairly priced.
