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1、CHAPTERCapitalMarketsand10thePricingofRiskNOTATIONVERTHEFIVE-YEARPERIOD2003THROUGH2007,investorsinGeneralMills,Inc.,earnedanaveragereturnof7%peryear.pRprobabilityofreturnROWithinthisperiod,therewassomevariation,withtheannualVar(R)varianceofreturnRreturnrangingfrom-1.2%in2003toalmost20%in2006.Overt
2、hesameSD(R)standarddeviationofperiod,investorsineBay,Inc.,earnedanaveragereturnof25%.ThesereturnRinvestors,however,gainedover90%in2003andlost30%in2006.Finally,E[R]expectationofreturnRinvestorsinthree-monthU.S.TreasurybillsearnedanaveragereturnofDivtdividendpaidondatet2.9%duringtheperiod,withalowre
3、turnof1.3%in2004andahighreturnPtpriceondatetof5%in2007.Clearly,thesethreeinvestmentsofferedreturnsthatwereverydifferentintermsoftheiraveragelevelandtheirvariability.WhatRtrealizedortotalreturnofasecurityfromdateaccountsforthesedifferences?t-1totInthischapter,wewillconsiderwhythesedifferencesexist.
4、OurgoalRaveragereturnistodevelopatheorythatexplainstherelationshipbetweenaveragebbetaofsecuritysreturnsandthevariabilityofreturnsandtherebyderivetheriskpremiumsthatinvestorsrequiretoholddifferentsecuritiesandinvestments.Wercostofcapitalofaninvestmentopportunitythenusethistheorytoexplainhowtodeterm
5、inethecostofcapitalforaninvestmentopportunity.Webeginourinvestigationoftherelationshipbetweenriskandreturnbyexamininghistoricaldataforpubliclytradedsecurities.Wewillsee,forexample,thatwhilestocksareriskierinvestmentsthanbonds,theyhavealsoearnedhigheraveragereturns.Wecaninterpretthehigheraverageret
6、urnonstocksascompensationtoinvestorsforthegreaterrisktheyaretaking.Butwewillalsofindthatnotallriskneedstobecompensated.Byholdingaportfoliocontainingmanydifferentinvestments,investorscaneliminaterisksthatarespecifictoindividualsecurities.Onlythoserisksthatcannotbeeliminatedbyholdingalargeportfoliod
7、eterminetheriskpremiumrequiredbyinvestors.Theseobservationswillallowustorefineourdefinitionofwhatriskis,howwecanmeasureit,andthus,howto312determinethecostofcapital.10.1RiskandReturn:Insightsfrom86YearsofInvestorH
