Risk and Capital Budgeting

Loading...

Flash Player 9 (or above) is needed to view presentations.
We have detected that you do not have it on your computer. To install it, go here.

0 comments

Post a comment

    Post a comment
    Embed Video
    Edit your comment Cancel

    6 Favorites

    Risk and Capital Budgeting - Presentation Transcript

    1. Risk and Capital Budgeting
    2. You can download this presentation at: www.greatlesson.com Please visit www.greatlesson.com for more presentations on marketing, strategy, accounting, finance, and case solution
    3. FIGURE 1-1 Variability and risk
    4. FIGURE 1-3 Probability distribution with differing degrees of risk
    5. TABLE 1-2 Betas for five-year period (ending January 2003)
    6. FIGURE 1-5 Relationship of risk to discount rate
    7. TABLE 1-3 Risk categories and associated discount rates
    8. TABLE 1-4 Capital budgeting analysis
    9. TABLE 13-5 Capital budgeting decision adjusted for risk
    10. FIGURE 1-7 Simulation flow chart
    11. FIGURE 1-8 Decision trees
    12. TABLE 1-7 Rates of return for Conglomerate, Inc., and two merger candidates
    13. FIGURE 1-11 Risk-return trade-offs
    14. Outline
      • What is Risk?
      • Statistical Measurements of Risk
      • Beta
      • Coefficient of Correlation
      • The Efficient Frontier
    15. What is Risk?
      • Risk means uncertainty about a future outcome
      • Risk varies greatly depending on the investment:
        • – A T-Bill has zero or no risk
        • – A gold-mining expedition in Africa has high risk
      • Most investors and financial managers are risk averse , meaning they don’t like risk
    16. Statistical Measurements of Risk
      • Expected Value:
        • – equal to weighted average of outcomes x probabilities
      • Standard Deviation:
        • – measure of dispersion or variability around the expected value
        • – the larger the standard deviation  the greater the risk
      • Coefficient of Variation:
        • – equal to standard deviation / expected value
        • – the larger the coefficient of variation  the greater the risk
    17. Beta
      • Beta is a statistical measure of volatility
      • It measures how responsive or sensitive a stock is to market movements in general
      • An individual stock’s beta shows how it compares to the market as a whole:
        • beta = 1 means equal risk with the market
        • beta > 1 means more risky than the market
        • beta < 1 means less risky than the market
    18. Coefficient of Correlation
      • Shows the extent of correlation among projects
      • Has a numerical value of between -1 and +1
      • Its value shows the risk reduction between projects:
        • Negative correlation (-1)  Large risk reduction
        • No correlation (0)  Some risk reduction
        • Positive correlation (+1)  No risk reduction
      • Coefficient of Correlation  Coefficient of Variation
    19. The Efficient Frontier
      • Firm chooses combinations of projects with the best trade-off between risk and return
      • 2 objectives of management:
        • – Achieve the highest possible return at a given risk level
        • – Provide the lowest possible risk at a given return level
        • The Efficient Frontier is the best risk-return line or combination of possibilities
      • Firm must decide where to be on the line (there is no “right” answer)
    20. Thank You

    + Adhirock Adhirock , 3 years ago

    custom

    6333 views, 6 favs, 3 embeds more stats

    This presentation explores lesson about Risk and Ca more

    More info about this document

    © All Rights Reserved

    Go to text version

    • Total Views 6333
      • 6305 on SlideShare
      • 28 from embeds
    • Comments 0
    • Favorites 6
    • Downloads 0
    Most viewed embeds
    • 19 views on http://www.greatlesson.com
    • 8 views on http://redcollege.wordpress.com
    • 1 views on http://asktwitr.com

    more

    All embeds
    • 19 views on http://www.greatlesson.com
    • 8 views on http://redcollege.wordpress.com
    • 1 views on http://asktwitr.com

    less

    Flagged as inappropriate Flag as inappropriate
    Flag as inappropriate

    Select your reason for flagging this presentation as inappropriate. If needed, use the feedback form to let us know more details.

    Cancel
    File a copyright complaint
    Having problems? Go to our helpdesk?

    Categories