RISK & CAPITAL ASSET PRICING MODEL | |
|Every financial investment contains some | |To see how the risk matrix (see below) described in this tutorial is used, please | |level of financial risk. This risk is | |take a look at FinanceIsland's ROI analysis tool. You can try it out |usually expressed through the discount rate | |by subscribing for a free trial. |used in the financial analysis. Since the | | |risk varies from investment to investment, | |[pic] |the discount rate needs to vary as well. | | | | | |FinanceIsland's ROI analysis tool with Monte| | |Carlo simulation enhances your typical net | | |present value (NPV) analysis not only by | | |embedding Monte Carlo simulation, but also | | |by helping you to choose a project-specific | | |discount rate. This project-specific | | |discount rate allows for "apples-to-apples" | | |comparison of independent investments | | |competing for the same resources. | | | | | |The framework to calculate a | | |project-specific discount rate is based on | | |the Capital Asset Pricing Model. To simplify| | |the use of this framework, FinanceIsland's | | |ROI analysis provides a risk matrix to | | |determine an appropriate project-specific | | |discount rate. | | |Capital Asset Pricing Model (CAPM) | |The financial risk is usually translated into a project-specific, risk-adjusted discount rate using the Capital Asset Pricing | |Model, a cornerstone of modern financial theory. Although this model has been developed by economists to help with investment | |decisions in the stock market, it is also used for investment analysis in the business world, including research & development | |(R&D) or marketing investments. |...
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