“One of the benefits of CAPM is that it only considers logical risk. Secondly, it produces a theoretical derivative that links the logical risk to the required return. Thirdly, CPAM is normally seen as a better method of determining the cost of equity as opposed to dividend growth.”
Beta is an indirect measure which compares the systematic risk associated with a company’s shares with the systematic risk of the capital market as a whole. If the beta value of a company’s shares is 1, the systematic risk associated with the shares is the same as the systematic risk of the capital market as a whole.
The stock of ABC Corporation has a beta of 1.0. ABC Corporation earned an annual return of 14 percent during a period when the return on the market portfolio was 12.5 percent. If the risk-free rate was 7 percent, did ABC Corporation outperform the market on a risk-adjusted basis? (250 Words)
The capital asset pricing model: the cost of equity (n.d.). Retrieved from http://www.accaglobal.com/content/dam/acca/global/PDF-students/2012/sa_jan08_capm.pdf(Links to an external site.)
“There are several ways used by Amazon to cover it from the harmful effects of these risks. Operational risks are handled by realigning the internal operations of the company to minimize tailback and increase efficiency. Financial risks are prevented by approving adaptive strategy, which enables the company to manage their financial performance indicators.”
Some additional thoughts
“The Boeing Company employs risk management financial valuation tools in the evaluation of investments in new aircraft designs. The manufacture of new aircraft involves many critical stages. At each stage different risks are confronted and the development program is either scrapped, delayed, redesigned or continued. Throughout the process the company is receiving information, learning about the market and about the technology, so that the risk distribution it faces is changing.”
As top manager of a company, would you be interested in both total project risk and company portfolio risk? Why?
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