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    FM

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    Jayceelyn Olavario
    Changes in inflationary expectations or Federal Reserve policy can shift the security market line in parallel. A steeper security market line slope indicates greater risk aversion among investors. The capital asset pricing model is based on an efficient market with rational, risk-averse investors who have similar information and do not face restrictions or costs. Shifts in risk preferences over time can change the security market line due to economic, political, and social events.

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    FM

    Uploaded by

    Jayceelyn Olavario
    39 views1 page
    Changes in inflationary expectations or Federal Reserve policy can shift the security market line in parallel. A steeper security market line slope indicates greater risk aversion among investors. The capital asset pricing model is based on an efficient market with rational, risk-averse investors who have similar information and do not face restrictions or costs. Shifts in risk preferences over time can change the security market line due to economic, political, and social events.

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    Changes in inflationary expectations or Federal Reserve policy can shift the security market line in parallel. A steeper security market line slope indicates greater risk aversion among investors. The capital asset pricing model is based on an efficient market with rational, risk-averse investors who have similar information and do not face restrictions or costs. Shifts in risk preferences over time can change the security market line due to economic, political, and social events.

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    39 views1 page

    FM

    Uploaded by

    Jayceelyn Olavario
    Changes in inflationary expectations or Federal Reserve policy can shift the security market line in parallel. A steeper security market line slope indicates greater risk aversion among investors. The capital asset pricing model is based on an efficient market with rational, risk-averse investors who have similar information and do not face restrictions or costs. Shifts in risk preferences over time can change the security market line due to economic, political, and social events.

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    Financial Management

     a change in inflationary expectation resulting from events such as international


    trade embargoes or major changes in Federal Reserve policy will result in the SML
     A given change in inflationary expectation will be fully reflected in a corresponding
    change in the returns of all assets and will be reflected graphically in a parallel shift
    of the SML
     The slope of the SML reflects the degree of risk aversion, the steeper its slope, the
    greater the degree of risk aversion.
     The CAPM is based on an assumed efficient market in which there are many small
    investors, each having the same information and expectations with respect to
    securities, there are no restrictions on investments, o taxes, and no transactions
    costs, and all investors are rational, view securities similarly, and are risk-averse,
    preferring higher returns and lower risk.
     Changes in risk aversion, and therefore shifts in the SML, result from changing tastes
    and preferences of investors, which generally result from various economic,
    political, and social events.
     On average, during the 75 years, the return on small company stocks has exceeded
    the return on large company stocks.
     On average, during the 75 years, the return on long- term corporate bonds has
    exceeded the return on long-term government bonds.
     On average, during the 75 years, the return on U.S Treasury bills has exceeded the
    inflation rate.
     On average, during the 75 years, the return on large company has exceeded on long-
    term corporate bonds
     Coefficient of variation is a measure of relative depends that is useful in comparing
    the risks of assets with different expected returns.
     Business risk is the chance that the firm will be unable to cover its operating costs
    and is affected by a firm’s revenue stability and the structure of its operating costs
    (fixed vs. variable)
     Interest rate risk is the chance that changes in interest rate will adversely affect the
    value of an investment, most investments decline in value when the interest rates
    rise and increase in value when interest rates fall.
     Market risk is the chance that the value of an investment will decline because of
    market factors (such as economic, political, and social events) that are independent
    of the investment.
     Event risk is the chance that a totally unexpected event will have a significant effect
    on the value of the firm or a specific investment.
     The standard deviation of a portfolio is a function of the standard deviation of the
    individual securities in the portfolio, the proportion of the portfolio invested in
    those securities, and the correlation between the returns of those securities.
     The risk of a portfolio containing international stocks generally contains less
    nondiversifiable risk than one that contains only American stocks.
     Total securities risk is the sum of a security’s nondiversifiable risk.
     The empirical measurement of beta can be approached by using least-square
    regression analysis to find the regression coefficient (bi) in the equation for the
    slope of the “characteristic line”
     Investors should recognize that betas are calculated using historical data and that
    past performance relative to the market average may not accurately predict future
    performance.

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