ADMS 3530 Chapter Notes - Chapter 12: Risk-Free Interest Rate, Capital Structure, Yield Spread

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Adms 3530 ch 12 risk, return, & capital budgeting: measuring market risk, market portfolio portfolio of all assets in economy s&p/tsx or s&p 500. If market has annual sd of 19% - fully diversified portfolio with beta 1. 73 sd of 1. 73 * 19% = 32. 87: portfolio beta between 0 & 1. 0 move in same direction as market. P. 396: security"s expected return equation p. 396, ex. Bottom of p. 396: why the capm makes sense, beta cannot be diversified away. Investors only expect to be compensated for taking on (cid:862)beta(cid:863) risk: expected rate of return = risk free rate + investment"s beta * expected market risk premium. Investors only invest if offer same expected return as other equal risk securities: when securities properly priced return investors expect from investment return that they require, the security market line. Investing some proportion of money in market portfolio & lending the balance.

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