Chapter Brealey, Myers, and Allen Principles of Corporate Finance 11th Edition PORTFOLIO THEORY AND THE CAPITAL ASSET PRICING MODEL 8 Copyright © 2014.

Presentación del tema: "Chapter Brealey, Myers, and Allen Principles of Corporate Finance 11th Edition PORTFOLIO THEORY AND THE CAPITAL ASSET PRICING MODEL 8 Copyright © 2014."— Transcripción de la presentación:

1 Chapter Brealey, Myers, and Allen Principles of Corporate Finance 11th Edition PORTFOLIO THEORY AND THE CAPITAL ASSET PRICING MODEL 8 Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

2 8-2 8-1 HARRY MARKOWITZ AND THE BIRTH OF PORTFOLIO THEORY Combining stocks into portfolios can reduce standard deviation below simple weighted- average calculation Correlation coefficients make possible Various weighted combinations of stocks that create specific standard deviation constitute set of efficient portfolios

3 8-3 FIGURE 8.1 DAILY PRICE CHANGES, IBM

4 8-4 FIGURE 8.2A STANDARD DEVIATION VERSUS EXPECTED RETURN

5 8-5 FIGURE 8.2B STANDARD DEVIATION VERSUS EXPECTED RETURN

6 8-6 FIGURE 8.2C STANDARD DEVIATION VERSUS EXPECTED RETURN

7 8-7 FIGURE 8.3 EXPECTED RETURN AND STANDARD DEVIATION, HEINZ, AND EXXON MOBIL

8 8-8 TABLE 8.1 EXAMPLES OF EFFICIENT PORTFOLIOS Efficient Portfolios—Percentages Allocated to Each Stock Stock Expected Return Standard Deviation A B C Dow Chemical 16.4% 40.2% 100 6 Bank of America 14.3 30.9 10 Ford 15.0 40.4 8 Heinz 6.0 14.6 11 35 IBM 9.1 19.8 18 12 Newmont Mining 8.9 29.2 6 1 Pfizer 8.0 20.8 10 8 Starbucks 10.4 26.2 12 Walmart 6.3 13.8 9 42 ExxonMobil 10.0 21.9 8 Expected portfolio return16.410.06.7 Portfolio standard deviation40.218.411.8

9 8-9 FIGURE 8.4 FOUR EFFICIENT PORTFOLIOS FROM TEN STOCKS

10 8-10 8-1 HARRY MARKOWITZ AND THE BIRTH OF PORTFOLIO THEORY Efficient Frontier Each half-ellipse represents possible weighted combinations for two stocks Composite of all stock sets constitutes efficient frontier Expected return (%) Standard deviation

11 8-11 FIGURE 8.5 LENDING AND BORROWING

12 8-12 8-1 HARRY MARKOWITZ AND THE BIRTH OF PORTFOLIO THEORY Example Correlation Coefficient =.18 Stocks  % of Portfolio Average Return Heinz14.660% 6.0% ExxonMobil21.9 40% 10.0% Standard deviation = weighted average = 17.52 Standard deviation = portfolio = 15.1 Return = weighted average = portfolio = 7.6% Higher return, lower risk through diversification

13 8-13 8-1 HARRY MARKOWITZ AND THE BIRTH OF PORTFOLIO THEORY Example Correlation Coefficient =.4 Stocks  % of Portfolio Average Return ABC Corp2860% 15% Big Corp42 40% 21% Standard deviation = weighted average = 33.6 Standard deviation = portfolio = 28.1 Return = weighted average = portfolio = 17.4%

14 8-14 8-1 HARRY MARKOWITZ AND THE BIRTH OF PORTFOLIO THEORY Example, continued Correlation Coefficient =.3 Add new stock to portfolio Stocks  % of PortfolioAverage Return Portfolio28.150% 17.4% New Corp30 50% 19% Standard deviation = weighted average = 31.80 Standard deviation = portfolio = 23.43 Return = weighted average = portfolio = 18.20%

15 8-15 8-1 HARRY MARKOWITZ AND THE BIRTH OF PORTFOLIO THEORY A B Return Risk (measured as  )

16 8-16 8-1 HARRY MARKOWITZ AND THE BIRTH OF PORTFOLIO THEORY A Return Risk B AB

17 8-17 8-1 HARRY MARKOWITZ AND THE BIRTH OF PORTFOLIO THEORY A B N Return Risk AB

18 8-18 8-1 HARRY MARKOWITZ AND THE BIRTH OF PORTFOLIO THEORY A B N Return Risk AB ABN

19 8-19 8-1 HARRY MARKOWITZ AND THE BIRTH OF PORTFOLIO THEORY A B N Return Risk AB ABN Goal is to move up and left—less risk, more return

20 8-20 8-1 HARRY MARKOWITZ AND THE BIRTH OF PORTFOLIO THEORY Sharpe Ratio Ratio of risk premium to standard deviation

21 8-21 8-1 HARRY MARKOWITZ AND THE BIRTH OF PORTFOLIO THEORY Return Risk Low Risk High Return High Risk High Return Low Risk Low Return High Risk Low Return

22 8-22 8-1 HARRY MARKOWITZ AND THE BIRTH OF PORTFOLIO THEORY Return Risk Low Risk High Return High Risk High Return Low Risk Low Return High Risk Low Return

23 8-23 8-1 HARRY MARKOWITZ AND THE BIRTH OF PORTFOLIO THEORY Return Risk A B N AB ABN

24 8-24 8-2 THE RELATIONSHIP BETWEEN RISK AND RETURN Return Risk. rfrf Market portfolio Market return = r m

25 8-25 FIGURE 8.6 SECURITY MARKET LINE Return. rfrf Market portfolio Market return = r m BETA1.0 Security market line (SML)

26 8-26 8-2 THE RELATIONSHIP BETWEEN RISK AND RETURN SML Equation: r f + β(r m − r f ) Return BETA rfrf 1.0 SML

27 8-27 8-2 THE RELATIONSHIP BETWEEN RISK AND RETURN Capital Asset Pricing Model (CAPM)

28 8-28 TABLE 8.2 ESTIMATES OF RETURNS Returns estimates in January 2012 based on capital asset pricing model. Assume 2% for interest rate r f and 7% for expected risk premium r m − r f. StockBetaExpected Return Dow Chemical1.7814.50 Bank of America1.5412.80 Ford1.5312.70 ExxonMobil0.988.86 Starbucks0.958.68 IBM0.807.62 Newmont Mining0.757.26 Pfizer0.666.63 Walmart0.424.92 Heinz0.404.78

29 8-29 FIGURE 8.7 SECURITY MARKET LINE EQUILIBRIUM In equilibrium, no stock can lie below the security market line

30 8-30 FIGURE 8.8 CAPITAL ASSET PRICING MODEL

31 8-31 FIGURE 8.9B BETA VERSUS AVERAGE RETURN

32 8-32 FIGURE 8.10 RETURN VERSUS BOOK-TO-MARKET

33 8-33 8-4 ALTERNATIVE THEORIES Alternative to CAPM

34 8-34 8-4 ALTERNATIVE THEORIES Estimated risk premiums (1978-1990)

35 8-35 8-4 ALTERNATIVE THEORIES Three-Factor Model Identify macroeconomic factors that could affect stock returns Estimate expected risk premium on each factor ( r factor1 − r f, etc.) Measure sensitivity of each stock to factors ( b 1, b 2, etc.)

36 8-36 TABLE 8.3 EXPECTED EQUITY RETURNS