FIN 302 Lecture Notes - Lecture 20: S&P 500 Index, Systematic Risk, Capital Asset Pricing Model

• School: U of M
• Department: Finance
• Course: FIN 302
• Professor: Denis Sosyura

Document Summary

Investor"s perspective - expected annual return on a stock. Firm"s perspective: cost of equity capital per year. Practical use: key input in the discount rate for firm"s cfs. How much return to expect on an annual basis considering the prevailing risk for the given stock. Sset risk = systematic risk (priced) + non-systematic risk (not priced) Pricing the systematic or market risk - exposure to the economic risk involved. Today: capm - a model that calculates the annual return we can expect on a stock, given the stock"s systematic risk. Beta measures a stock"s sensitivity to market risk and depends on the stock"s correlation with the market and the volatility of the stock relative to that of the market. We"ll be immune to the market fluctuations. Ytm on the 3-month treasury bill (for accuracy, state as an ear) Mean annual return on the s&p 500. If the estimation period is not specified, use the long-term average 11. 0%