ADMS 3530 Lecture Notes - Lecture 9: Capital Asset Pricing Model, United States Treasury Security, Risk Premium
13 Feb 2017
School
Department
Course
Professor
Document Summary
Risk, return and the cost of capital. Cost of capital - the rate of return that shareholders could expect to earn if they invested in equally risky securities. The third component is the most difficult to figure out. Market risk premium - the compensation for taking on the risk of common stock ownership, and can be shown as follows: Rate of return = rate of return on + market risk. From 1926 to 2014, the rate or return for common stocks was 8. 33% and for treasury bills, it was 4. 28%. The average market risk premium for canadian common stocks = 8. 33% - 4. 28% = 4. 05% (see. 9. 1 an overview of cost of capital. Using historical returns and historical market risk premiums to help calculate cost of capital for a project: If the project has no risk use the expected t-bill rate of return as our cost of capital.
