1、Principles of Corporate FinanceSeventh EditionRichard A. Brealey Stewart C. MyersSlides byMatthew WillChapter 8McGraw Hill/IrwinCopyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved Risk and ReturnTopics CoveredMarkowitz Portfolio TheoryRisk and Return RelationshipTesting the CAPMCAP

2、M AlternativesMarkowitz Portfolio TheoryCombining stocks into portfolios can reduce standard deviation, below the level obtained from a simple weighted average calculation.Correlation coefficients make this possible.The various weighted combinations of stocks that create this standard deviations con

3、stitute the set of efficient portfolios.Markowitz Portfolio TheoryPrice changes vs. Normal distributionMicrosoft - Daily % change 1990-2001 Proportion of DaysDaily % ChangeMarkowitz Portfolio TheoryStandard Deviation VS. Expected ReturnInvestment A % probability% returnMarkowitz Portfolio TheoryStan

4、dard Deviation VS. Expected ReturnInvestment B % probability% returnMarkowitz Portfolio TheoryStandard Deviation VS. Expected ReturnInvestment C % probability% returnMarkowitz Portfolio TheoryStandard Deviation VS. Expected ReturnInvestment D % probability% returnMarkowitz Portfolio TheoryCoca ColaR

5、eebokStandard DeviationExpected Return (%)35% in Reebok Expected Returns and Standard Deviations vary given different weighted combinations of the stocksEfficient FrontierStandard DeviationExpected Return (%)Each half egg shell represents the possible weighted combinations for two stocks.The composi

6、te of all stock sets constitutes the efficient frontierEfficient FrontierStandard DeviationExpected Return (%)Lending or Borrowing at the risk free rate (rf) allows us to exist outside the efficient frontier.rfLending BorrowingTSEfficient FrontierExample Correlation Coefficient = .4Stockss% of Portf

7、olioAvg ReturnABC Corp2860% 15%Big Corp42 40% 21%Standard Deviation = weighted avg = 33.6 Standard Deviation = Portfolio = 28.1 Return = weighted avg = Portfolio = 17.4%Efficient FrontierExample Correlation Coefficient = .4Stockss% of PortfolioAvg ReturnABC Corp2860% 15%Big Corp42 40% 21%Standard De

8、viation = weighted avg = 33.6 Standard Deviation = Portfolio = 28.1 Return = weighted avg = Portfolio = 17.4%Lets Add stock New Corp to the portfolioEfficient FrontierExample Correlation Coefficient = .3Stockss% of PortfolioAvg ReturnPortfolio28.150% 17.4%New Corp30 50% 19%NEW Standard Deviation = w

9、eighted avg = 31.80 NEW Standard Deviation = Portfolio = 23.43 NEW Return = weighted avg = Portfolio = 18.20%Efficient FrontierExample Correlation Coefficient = .3Stockss% of PortfolioAvg ReturnPortfolio28.150% 17.4%New Corp30 50% 19%NEW Standard Deviation = weighted avg = 31.80 NEW Standard Deviati

10、on = Portfolio = 23.43 NEW Return = weighted avg = Portfolio = 18.20%NOTE: Higher return & Lower risk How did we do that? DIVERSIFICATIONEfficient FrontierABReturnRisk (measured as s)Efficient FrontierABReturnRiskABEfficient FrontierABNReturnRiskABEfficient FrontierABNReturnRiskABABNEfficient Fronti

11、erABNReturnRiskABGoal is to move up and left. WHY?ABNEfficient FrontierReturnRiskLow RiskHigh ReturnHigh RiskHigh ReturnLow RiskLow ReturnHigh RiskLow ReturnEfficient FrontierReturnRiskLow RiskHigh ReturnHigh RiskHigh ReturnLow RiskLow ReturnHigh RiskLow ReturnEfficient FrontierReturnRiskABNABABNSec

12、urity Market LineReturnRisk.rfRisk Free Return =Efficient PortfolioMarket Return = rm Security Market LineReturn.rfRisk Free Return =Efficient PortfolioMarket Return = rm BETA1.0Security Market LineReturn.rfRisk Free Return =BETASecurity Market Line (SML)Security Market LineReturnBETArf1.0SMLSML Equ

13、ation = rf + B ( rm - rf )Capital Asset Pricing Model R = rf + B ( rm - rf )CAPMTesting the CAPMAvg Risk Premium 1931-65Portfolio Beta1.0SML3020100InvestorsMarket PortfolioBeta vs. Average Risk PremiumTesting the CAPMAvg Risk Premium 1966-91Portfolio Beta1.0SML3020100InvestorsMarket PortfolioBeta vs

14、. Average Risk PremiumTesting the CAPMHigh-minus low book-to-marketReturn vs. Book-to-MarketDollarsLow minus big/pages/faculty/ken.french/data_library.htmlConsumption Betas vs Market BetasStocks (and other risky assets)Wealth = marketportfolioMarket risk makes wealth uncertain.Stocks (and other risky assets)ConsumptionWealthWealth is uncertainConsumption is uncertainStandardCAPMConsumptionCAPMArbitrage Pricing Th