MS&E 147 Lecture 11: MS&E 147 2-13-17
14 Feb 2017
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Risk is return per dollar - magnified on upside and downside. House needs to increase in value by 4% because that" s how much she is needs to. If house stays the same, losing borrow (interest rate is 4% to borrow) Cannot lost more than 100% (can walk away) Investors risk averse, require higher expected return to bear more risk. Appropriate discount rate for risky cash flows reflect risk including risk premium. More equity in mix: reduces roe in good times. Reduces risk per equity of dollar invested. Many people forget about the downside (need to consider both downside and upside) Corporate executives and employees make decision in what to invest and how to fund. Accountants and auditors disclose information and report. Compensation depends on various financial measures, profits attributable to employees and groups, corporate profits, return on equity. Corporate governance depends on flaw and corporate charter.
