tailieunhanh - Lecture Equity asset valuation - Chapter 2: Return concepts

This chapter discusses the various forms of return encountered in investment management. Among the return types discussed are required returns, which will be used later in the text for equity valuation. The required return is what the investor expects to earn on an investment, given the investment’s risk. To determine the required return, we will use several different models, such as the capital asset pricing model (CAPM). | Return Concepts Presenter Venue Date 1 This chapter discusses the various forms of return encountered in investment management. Among the return types discussed are required returns, which will be used later in the text for equity valuation. The required return is what the investor expects to earn on an investment, given the investment’s risk. To determine the required return, we will use several different models, such as the capital asset pricing model (CAPM). The topics discussed in this chapter are an overview of return concepts; methods of calculating the equity risk premium; models for determining the required return on equity; international considerations for the required return on equity; the weighted average cost of capital for valuing an entire firm; and which required returns are appropriate for different situations. DISCLAIMER: This presentation is NOT a substitute for the CFA Program curriculum. Candidates should not view this material as reflecting what will be required . | Return Concepts Presenter Venue Date 1 This chapter discusses the various forms of return encountered in investment management. Among the return types discussed are required returns, which will be used later in the text for equity valuation. The required return is what the investor expects to earn on an investment, given the investment’s risk. To determine the required return, we will use several different models, such as the capital asset pricing model (CAPM). The topics discussed in this chapter are an overview of return concepts; methods of calculating the equity risk premium; models for determining the required return on equity; international considerations for the required return on equity; the weighted average cost of capital for valuing an entire firm; and which required returns are appropriate for different situations. DISCLAIMER: This presentation is NOT a substitute for the CFA Program curriculum. Candidates should not view this material as reflecting what will be required of them on the CFA exam. Why Focus on Return Concepts? Measuring return is the foundation on which valuation models are built. Returns are the primary metric one uses to evaluate expected and past performance. And because risk and return go hand in hand, focusing on return concepts allows us to create a framework to understand risk premiums. Ultimately, estimates of expected and required returns are foundational for estimating discount rates in our valuation models. 2 Holding Period Return LOS: Distinguish among the following concepts: holding period return, realized return and expected return, required return, discount rate, the return from convergence of price to intrinsic value (given that price does not equal intrinsic value), and the internal rate of return. Pages 38 – 39 The holding period return is return earned over a specified time period. The second formula decomposes the first formula. The 2nd formula says that the holding period return for an equity investment is composed of