Documenti di Didattica
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(FIN
306)
Chapter 8
Dr. Ishtiaq Ahmad
Department Of Banking and Finance
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Lecture Outline
Lets Start with Greeks
Beta
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Solution
Stock
X
Y
Z
K
Investment
$25,000
$30,000
$45,000
$50,000
Total $150,000
Weight of stock
25,000/150,000 = 0.1667
30,000/150,000 = 0.20
45,000/150,000 = 0.30
50,000/150,000 = 0.33
x
x
x
x
x
Beta
1.5
1.3
0.8
-0.6
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y=a+bx
Where, a is the intercept of the function;
b is the slope of the line,
x is the value of the random variable on the x-axis.
Substituting E(ri)as the y variable
rfas the intercept a
(E(rm)-rf)as the slope b,
as random variable on the x-axis,
We have the formal equation for the SML:
E(ri) = rf + (E(rm)-rf)
Note: the slope of the SML is the market risk premium,
(E(rm)-rf), and not beta.
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Beta is thePowerpoint
random variable.
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6%
Higher
Risk
Risk
Premium
Medium
Risk
Or
Systematic
2%
Risk
8%
E(ri)
E(rm)
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2%
Risk
Free
Rate
Govt.
Bank
rf
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Where;
Rf = 4%; E(rm) - rf = 7%; and = 1.2
Expected return = 4% + 7% x 1.2 = 4% + 8.4% =
12.4%
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