Measuring Risk and Return

Using the Past to Predict the Future: Computing the Average and Standard Deviation of Historic Returns Explicit Guessing: Calculating the Expected Return and Standard Deviation across Expected States of Nature Choosing Which Method to Use for Average and Standard Deviation Portfolio Averages and Standard Deviations Quiz

151 151 153

CHAPTER 12 Calculating Beta 157

Beta Estimation Methodology 158

Choosing and Gathering the Necessary Data 159

Calculating the Beta 160

Portfolio Betas 161

Quiz 161

CHAPTER 13 Analyzing the Security Market Line 165

The Relationship between the Security

Market Line and the CAPM Equation 166

Estimating the Intercept of the SML 166

Estimating the Slope of the SML 167

Estimating the/Variable, Beta 168

Bringing it All Together 169

Quiz 169

CHAPTER 14 The Weighted Average Cost of Capital 173

The WACC Formula 174

Calculating the Component Cost of Equity, RE 175 Calculating the Component Cost of

Preferred Stock, Rp 176

Calculating the Before-Tax Cost of Debt, RD 176

Calculating the WACC 177

A Note on Nominal vs. Effective Rates 177

Quiz 177


CHAPTER 15 Estimating Future Cash Flows 183

Sample Project 184

Calculating Total Cash Flow: The Formula 184 Guiding Principles for Calculating

Total Cash Flow 185

Calculating Depreciation 186

Operating Cash Flow (OCF) 187

Net Capital Spending 188

Changes in NWC 189

Bringing it All Together: Total Cash Flow Quiz

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