BUS 315 Lecture Notes - Lecture 7: Risk Measure, Sharpe Ratio, Standard Deviation

• School: Simon Fraser University
• Department: Business Administration
• Course: BUS 315
• Professor: Jacky Shen

Document Summary

If the covariance of the security doubles, then so will its beta and its risk premium. The current risk premium is 14 6 = 8 percent, so the new risk premium would be. 16 percent, and the new discount rate for the security would be 16 + 6 = 22 percent. If the stock pays a constant perpetual dividend, then we know from the original data that the dividend, d, must satisfy the equation for the present value of a perpetuity: At the new discount rate of 22 percent, the stock would be worth only /. 22 = The increase in stock risk has lowered its value by 36. 36 percent. The appropriate discount rate for the project is rf + [e(rm) rf ] = 8 + 1. 7(16 8) = 21. 6% Npv = 40m + 15m annuity factor (21. 6%, 10 years) The internal rate of return (irr) on the project is 35. 73 percent.