【正文】 h negative correlation is unusual.Calculate the expected rate of return on each alternative.r = expected rate of return.rHT = (22%) + (2%) + (20%) + (35%) + (50%) = %.^^n HT has the highest rate of return. n Does that make it best?rHT %Market USR Tbill Collections ^What is the standard deviationof returns for each alternative??Tbills = %.?HT = %.?Coll =%.?USR =%. ?M=%.HT:? = ((22 ) + (2 ) + (20 ) + (35 ) + (50 ))1/2 = %.Prob.Rate of Return (%)TbillUSR HT0 8 ? Standard deviation measures the standalone risk of an investment.? The larger the standard deviation, the higher the probability that returns will be far below the expected return.? Coefficient of variation is an alternative measure of standalone risk.Expected Return versus RiskExpectedSecurity return Risk, ?HT % %Market USR Tbills Collections Coefficient of Variation:CV = standard deviation/Expected return.CVTBILLS = %/% = .CVHIGH TECH = %/% = .CVCOLLECTIONS = %/% = .. RUBBER = %/% = .CVM = %/% = .Expected Return versus Coefficient of VariationExpected Risk: Risk:Security return ? CVHT % % Market USR Tbills Collections Return vs. Risk (Std. Dev.): Which investment is best?Portfolio Risk and ReturnAssume a twostock portfolio with $50,000 in HT and $50,000 in Collections.Calculate rp and ?p.^Portfolio Return, rprp is a weighted average:rp = (%) + (%) = %.rp is between rHT and rColl.^^^^^ ^^ ^rp = ?? wiri?ni = 1Alternative Methodrp = (%) + (%) + (%) + (%) + (%) = %.^Estimated Return(More...)Economy Prob. HT Coll. Port.Recession % % %Below avg. Average Above avg. Boom ? ?p = (( ) + ( ) + ( ) + ( ) + ( ))1/2 = %.? ?p is much lower than:– either stock (20% and %).– average of HT and Coll (%).? The portfolio provides average return but much lower risk. The key here is negative correlation.TwoStock Portfolios? Two stocks can be bined to form a riskless portfolio if r = .? Risk is not reduced at all if the two stocks have r = +. ? In general, stocks have r ? , so risk is lowered but not eliminated.? Investors typically hold many stocks.? What happens when r = 0?What would happen to therisk of an average 1stockpo。 Time 1 is the end of Period 1。CHAPTER 1Overview of Corporate Finance and the Financial Environment? Corporate finance– Forms of business anization– Objective of the firm: Maximize wealth– Determinants of stock pricing? The financial environment– Financial instruments, markets and institutions– Interest rates and yield curvesWhy is corporate finance important to all managers?? Corporate finance provides the skills managers need to:– Identify and select the corporate strategies and individual projects that add value to their firm.– Forecast the funding requirements of their pany, and devise strategies for acquiring those funds.? Sole proprietorship? Partnership? CorporationWhat are some forms ofbusiness anization?? Advantages:– Ease of formation– Subject to few regulations– No corporate ine taxes? Disadvantages:– Limited life– Unlimited liability– Difficult to raise capitalSole Proprietorship? A partnership has roughly the same advantages and disadvantages as a sole proprietorship.Partnership? Advantages:– Unlimited life– Easy transfer of ownership– Limited liability– Ease of raising capital? Disadvantages:– Double taxation– Cost of setup and report filingCorporation? The primary objective should be shareholder wealth maximization, which translates to maximizing stock price.– Should firms behave ethically? YES!– Do firms have any responsibilities to society at large? YES! Shareholders are also members of society.What should management’s primary objective be?Is maximizing stock price good for society, employees, and customers?? Employment growth is higher in firms that try to maximize stock price. On average, employment goes up in: – firms that make managers into owners (such as LBO firms)– firms that were owned by the government but that have been sold to private investors? Consumer welfare is higher in capitalist free market economies than in munist or socialist economies.? Fortune lists the most admired firms. In addition to high stock returns, these firms have:– high quality from customers’ view– employees who like working there? Amount of cash flows expected by shareholders? Timing of the cash flow stream? Risk of the cash flowsWhat three factors affect stock prices?? Sales revenues– Current level– Shortterm growth rate in sales– Longterm sustainable growth rate in sales? Operating expenses (., raw materials, labor, etc.)? Necessary investments in operating capital (., buildings, machines, inventory, etc.) What factors determine of cash flows?What factors affect the level and risk of cash flows?? Decisions made by financial managers:– Investment decisions (product lines, production processes, geographic market, use of technology, marketing strategy, etc.)– Financing decisions (choice of debt policy and dividend policy) ? The external environment (taxes, regulation, etc.)What are financial assets?? A financial asset is a contract that entitles the owner to some type of payoff.– Debt– Equity– Derivatives? In general, each financial asset involves two parties, a provider of cash (., capital) and a user of cash.What are some financial instruments?Instrument Rate (9/01). Tbills %Banker’s acceptances Commercial paper Negotiable CDs Eurodollar deposits Commercial loans Tied