FIN 3104 Lecture Notes - Lecture 18: Weighted Arithmetic Mean, Inverse Relation, S&P 500 Index

• School: Virginia Tech
• Department: Finance, Insurance, Business Law
• Course: FIN 3104
• Professor: Keown

Document Summary

Assumption that doesn"t hold : bankruptcy costs are 0. Systematic risk is the only priced risk bc you cant eliminate it for free. Do we care if firm has unsystematic risk: no. If unsystematic risk can cause bankruptcy then we don"t want it. Bankruptcy costs include: lawyer fees, lost sales due to replacement/warranties, lost sales from reputation damage, lemonds problem. Good workers leave and bad ones are stuck. Required rate of return = risk free rate + return to compensate for taking on added risk. Capm says beta is appropriate measure of risk. Measuring beta for an individual security is difficult :( Bankruptcy costs also mean unsystematic risk is priced. Valuation principles: value = pv of benefits, net value = pv benefits - pv costs. Bonds-valuation: bond value = pv interest + pv par value, principles. Inverse relationship btw market interest rates & bond prices.