Bài giảng MicroEconomics - Chapter 034 Financial Economics

Financial EconomicsChapter 34McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.Chapter ObjectivesPresent value and making financial decisionsStocks, bonds, and mutual fundsInvestment returns, patience, and riskPortfolio diversification: nondiversifiable risk and rates of returnBeating the market34-2Financial InvestmentEconomic investmentNew additions or replacements to the capital stockFinancial investmentBroader than economic investmentBuying or building an asset for financial gainNew or old assetFinancial or real asset34-3Present ValuePresent day value of future returns or costsCompound interestEarn interest on the interestX dollars today=(1+i)tX dollars in t years$100 today at 8% is worth:$108 in one year$116.64 in two years$125.97 in three years34-4Present Value ModelCalculate what you should pay for an asset todayAsset yields future paymentsAsset’s price should equal total present value of future paymentsThe formula:dollars today = X dollars in t yearsX( 1 + i)t34-5ApplicationsTake the money and runLottery jackpot paid over a number of yearsCalculating the lump sum valueSalary caps and deferred compensationCalculating the value of deferred salary payments34-6Popular InvestmentsThree featuresPay to acquireChance to receive future paymentSome riskStocksBankruptcyLimited liability ruleCapital gainsDividends34-7ApplicationsBondsMore predictable than stocksMutual fundsPortfolioIndex fundsActively or passively managedCalculating investment returnsAsset prices and rates of returnArbitrage34-8RiskFuture payments are uncertainDiversificationDiversifiable riskSpecific to a given investmentNondiversifiable riskBusiness cycle effectsComparing risky investmentsAverage expected rate of returnBeta34-9RiskRisk and average expected rates of returnPositively relatedThe risk-free rate of returnShort-term U.S. government bondsGreater than zeroTime preferenceRisk-free interest rate34-10Investment Risks NorwaySwitzerlandLuxembourgJapanChileChinaMexicoUnited StatesIndonesiaIndiaGhanaNigeriaIraqZimbabweSomalia0 20 40 60 80 100Source: The International Country Risk GuideComposite Risk Rating 2008, higher number is less risky34-11The Security Market LineAverage expectedrate of return=Rate that compensatesfor time preference+Rate that compensatesfor riskCompensate investors for:Time preferenceNondiversifiable riskAverage expectedrate of return=if+risk premium34-12The Security Market LineSecurity MarketLineMarketPortfolio ifAverage expected rate of returnRisk Level (beta)01.0CompensationFor Time PreferenceEquals ifRisk Premium forThe Market Portfolio’sRisk Level of beta=1.0A Risk-free Asset(i.e., a short-term U.S.Government bond)34-13The Security Market LineSecurity MarketLineifAverage expected rate of returnRisk Level (beta)0XCompensationFor Time-PreferenceEquals ifRisk Premium forThis Asset’s RiskLevel of beta = XRisk levels determine average expected rates of returnY34-14The Security Market LineSecurity MarketLineAverage expected rate of returnRisk Level (beta)0XArbitrage and the security marketYABC34-15The Security Market LineSML 1Average expected rate of returnRisk Level (beta)0XAn increase in the risk-free rateY2A Before IncreaseA After IncreaseSML 2Y134-16Index Funds Beat Actively Managed FundsChoice of actively or passively managed mutual fundsAfter costs, index funds outperform actively managed by 1% per yearRole of arbitrageManagement costs are significantIndex funds are boring34-17Key Termseconomic investmentfinancial investmentcompound interestpresent valuestocksbankruptlimited liability rulecapital gainsdividendsbondsdefaultmutual fundsportfoliosindex fundsactively managed fundspassively managed fundspercentage rate of returnarbitrageriskdiversificationdiversifiable risknondiversifiable riskaverage expected rate of returnprobability weighted averagebetamarket portfoliotime preferencerisk-free interest rateSecurity Market Linerisk premium34-18Next Chapter PreviewExtending the Analysis Of Aggregate Supply34-19