🎯 Key Takeaways for quick navigation: 00:04 *📊 Defining Risk in Corporate Finance* - Defining risk as a central measure in financial decision-making. - Exploring conventional definitions of risk and how financial theory measures it. - Introducing the concept of hurdle rates and their significance in project selection. 01:59 *🎯 Understanding Risk: Danger and Opportunity* - Explaining risk as a combination of danger and opportunity. - Highlighting the importance of balancing high returns with potential dangers. - Emphasizing the need to assess the level of risk in investments for appropriate compensation. 04:21 *📉 Measuring Risk in Financial Theory* - Defining risk by deviations of actual returns from expected returns. - Illustrating risk through examples of investments with varying levels of certainty. - Emphasizing that all risk lies in the future and the importance of forward-looking risk assessment. 07:13 *🔍 Distinguishing Market Risk from Firm-Specific Risk* - Explaining the distinction between market risk and firm-specific risk. - Emphasizing the role of diversification in mitigating firm-specific risks. - Focusing on market risk as the primary concern in financial decision-making. 12:58 *⚡️ Evaluating Risk and Return Models in Finance* - Discussing the flaws of the Capital Asset Pricing Model (CAPM) in predicting future returns. - Introducing alternative models like arbitrage pricing and multi-factor models. - Highlighting the challenges and limitations of these alternative models in practical application. Made with HARPA AI
Laney, You are right. If you hold for 10 years, your return would be based on the original price and the face value which are both known. If your time horizon is a year, though, you will have to sell the bond at the end of the year and if interest rates have changed, you will get a different price back than the one you paid.
I don't have economics background at all but the astonishing way you explain everything makes me want to learn more and more about Finance. Thank you very much for taking efforts and making such wonderful educational information available to general public. 🙌🏼
I'm coming into this as an 18 year old with no finance or economics experience, some of the terms require a bit of googling but it's fascinating all the different ways and models you can use to evaluate risk!
Hey! Can anybody tell me why it is important for the marginal investor to be diversified? Is it because the CAPM or any other model only estimates market risk and if the marginal investors were not diversified, the model would not work?
hey, diversification is one of the most important matters in having a good portfolio because otherwise your invesments could be fail due to the lack of diversification - lets for example assume that you're an investor in the automobile sector in germany and then the diesel scandal comes up - which means your stocks loose on worth in your portfolio - if you got no other stocks than german car manufactures you're going to be huge in loss - but if you're diversified with for example gold, google , amazon, alphabet your portfolio averages out the risks on the stock market. Best regards from southern germany my friend :-)
Yes because CAPM is built according to the modern portfolio theory and that theory has an inherited assumption that the marginal investor is diversified. In fact in the formula we use beta which is the risk of a portfolio of market. That means without considering the price of the stock you will buy each stock that diversify your portfolio so as to have the final portfolio of the entire market . And that is the flaw.
Buffet says diversification is for ppl not knowing what they do... And he says most of the legacy holdings must 15 to 20 stocks in whole lifetime... But most ppl preach diversification and there type of investors called concentraed investors in US who only hold 3 to 7 stocks.. but most ppl and fund managers hold 50 to 70 stocks. To averse the risk but the primary motto is not to loose money in volatility.. but for individual investors there isn't any benchmark or mostly not involved in other ppl money... So which one to choose modern portfolio or buffet
Im sorry, I didn't understand the example with the Bond risk for 1 year vs. 10 years. Why would the price change matter...if you've already purchased your T-Bond at a given price. Isn't the return based on purchase price, not current price? Or do I just have that point in regards to T-Bond wrong? Thank You!!
Hello Laney, to answer your question, because in 10 years inflation will have an impact of your money value, and your discout rate at 1 % for example will be less worth in 10 years compared to 1 year.
Hey guys, I wanted to get more exposure in understanding macro investing, corporate finance at an applied to advanced level. What are some sources you have used to understand these subjects better? Thank you.
said SOTTOU I’d argue that’s not the argument because we are talking in a 1 year time span for a 10 year bond and therefore inflation is no different to the one year bond
its because the present value of the cashflows of the bond will decrease as interest rates change -think about it. If interest rates go up in 2 yrs, the bond you bought 2 years ago in present value terms will decrease. why? because the market value of bonds has gone down - to meet supply vs demand obligations. If interest rates go up, the present value decreases - remember the time value of money concept. If you bought a $100 bond 2 yrs ago, its not still $100 in present value terms if interest rates go up is it? Everything has to be defined in present value terms. The coupon is locked in, but the coupon doesn't reflect present value.
You said you didn't want to carry the baggage of modern portfolio theory, Professor i think you should take look at mathematician benoit mandelbrot's fractal model in "misbehaviour of market" (book)
Diversified investors, in this case being large institutional investors, are also, as per your previous lecture, the most irrational. The first ones to pull out the cash in large volmes when they get wind of somehting, are the Institutional Investors. So how can you eliminate large institutional investors from the computation of the hurdle rate when irrationality is a risky feature? i didn't quite get this.
Another thing about the assumption about the marginal investor, in case most marginal investors are institutions, doesn't that reduce the corporate governance score of the company? Therefore, isn't it true that for the fundamental assumption of the CAPM to hold true, the corporate governance of the company must, in most cases, be flawed?
CAPM requires the stockholders to trade. Institutional investors don't necessarily hold on to their stocks and are diversified. Their actions do affect the price of the stock. Corporate governance and stock holding patterns may seem to be correlated, but they do not inherently justify stock price movements. Hope this helps.
I don't understand how low price to book companies can be riskier than high price to book companies. In the case of low price to book companies, we have a higher degree of assurance that if the company liquidates, there is a higher probability that we'll be able to recover a larger share of our initial investment (if P/BV ratio > 1) and we might even make more than our initial investment upon liquidation (if P/BV ratio < 1). In contrast, isn't there a greater risk in investing in high P/BV ratio companies? Isn't one essentially overpaying for the assets in place of these companies? For example, if the P/BV ratio of a company is 12, I would be very uncomfortable in investing in that company because if my assumptions about the cash generating capacity of the company go wrong and the company liquidates, I'll only receive a dollar back for every 12 dollars that I invested. Compared to that, if the P/BV ratio of a company is 1.5, I can be much more comfortable investing in the company knowing that even if the company liquidates, I'll get back 66.67% of my initial investment. Assuming that the assets aren't overvalued by the company's books, of course.
What he meant by saying that a low PB is riskier relates to his previous statement. It was merely an example. Although your argument is does make sense to a certain degree, you have missed an important assumption which is the efficient market theory. EMT states that market values fully reflect the intrinsic value of a company. Thus, a High PB stock would mean that the stock is properly valued and that the intrinsic value is indeed that much higher than its liquidating value.
I cannot believe this stuff is available online for free! Thank you Sir, the way you explain is so thoughtful and clearly structured.
Haven't heard Risk being explained so beautifully ! Thank you Prof ! Top notch sessions accessible to the entire world !
🎯 Key Takeaways for quick navigation:
00:04 *📊 Defining Risk in Corporate Finance*
- Defining risk as a central measure in financial decision-making.
- Exploring conventional definitions of risk and how financial theory measures it.
- Introducing the concept of hurdle rates and their significance in project selection.
01:59 *🎯 Understanding Risk: Danger and Opportunity*
- Explaining risk as a combination of danger and opportunity.
- Highlighting the importance of balancing high returns with potential dangers.
- Emphasizing the need to assess the level of risk in investments for appropriate compensation.
04:21 *📉 Measuring Risk in Financial Theory*
- Defining risk by deviations of actual returns from expected returns.
- Illustrating risk through examples of investments with varying levels of certainty.
- Emphasizing that all risk lies in the future and the importance of forward-looking risk assessment.
07:13 *🔍 Distinguishing Market Risk from Firm-Specific Risk*
- Explaining the distinction between market risk and firm-specific risk.
- Emphasizing the role of diversification in mitigating firm-specific risks.
- Focusing on market risk as the primary concern in financial decision-making.
12:58 *⚡️ Evaluating Risk and Return Models in Finance*
- Discussing the flaws of the Capital Asset Pricing Model (CAPM) in predicting future returns.
- Introducing alternative models like arbitrage pricing and multi-factor models.
- Highlighting the challenges and limitations of these alternative models in practical application.
Made with HARPA AI
Laney,
You are right. If you hold for 10 years, your return would be based on the original price and the face value which are both known. If your time horizon is a year, though, you will have to sell the bond at the end of the year and if interest rates have changed, you will get a different price back than the one you paid.
+Aswath Damodaran reinvestment risk
I don't have economics background at all but the astonishing way you explain everything makes me want to learn more and more about Finance. Thank you very much for taking efforts and making such wonderful educational information available to general public. 🙌🏼
I'm coming into this as an 18 year old with no finance or economics experience, some of the terms require a bit of googling but it's fascinating all the different ways and models you can use to evaluate risk!
4:03 ; Risk = the deviation of actual return around an expected return
What a god!
Larry Ellison now hold 43% stake in Oracle , 20% in 10 years , Legend !
Dr. Damodaran, What software do you use on slide 9 for market analysis and showing who owns stock in Disney?
Bloomberg. Don't bother checking it. You can't afford it.
Hey! Can anybody tell me why it is important for the marginal investor to be diversified? Is it because the CAPM or any other model only estimates market risk and if the marginal investors were not diversified, the model would not work?
hey, diversification is one of the most important matters in having a good portfolio because otherwise your invesments could be fail due to the lack of diversification - lets for example assume that you're an investor in the automobile sector in germany and then the diesel scandal comes up - which means your stocks loose on worth in your portfolio - if you got no other stocks than german car manufactures you're going to be huge in loss - but if you're diversified with for example gold, google , amazon, alphabet your portfolio averages out the risks on the stock market. Best regards from southern germany my friend :-)
Yes because CAPM is built according to the modern portfolio theory and that theory has an inherited assumption that the marginal investor is diversified. In fact in the formula we use beta which is the risk of a portfolio of market. That means without considering the price of the stock you will buy each stock that diversify your portfolio so as to have the final portfolio of the entire market . And that is the flaw.
Buffet says diversification is for ppl not knowing what they do... And he says most of the legacy holdings must 15 to 20 stocks in whole lifetime... But most ppl preach diversification and there type of investors called concentraed investors in US who only hold 3 to 7 stocks.. but most ppl and fund managers hold 50 to 70 stocks. To averse the risk but the primary motto is not to loose money in volatility.. but for individual investors there isn't any benchmark or mostly not involved in other ppl money... So which one to choose modern portfolio or buffet
Are these classes same as the other corporate finance classes which are uploaded in 2017
Im sorry, I didn't understand the example with the Bond risk for 1 year vs. 10 years. Why would the price change matter...if you've already purchased your T-Bond at a given price. Isn't the return based on purchase price, not current price? Or do I just have that point in regards to T-Bond wrong?
Thank You!!
Hello Laney, to answer your question, because in 10 years inflation will have an impact of your money value, and your discout rate at 1 % for example will be less worth in 10 years compared to 1 year.
Hey guys,
I wanted to get more exposure in understanding macro investing, corporate finance at an applied to advanced level. What are some sources you have used to understand these subjects better?
Thank you.
said SOTTOU I’d argue that’s not the argument because we are talking in a 1 year time span for a 10 year bond and therefore inflation is no different to the one year bond
It’s the idea that the bond is redeemable in a year where as for the 10 year bond it is not
its because the present value of the cashflows of the bond will decrease as interest rates change -think about it. If interest rates go up in 2 yrs, the bond you bought 2 years ago in present value terms will decrease. why? because the market value of bonds has gone down - to meet supply vs demand obligations.
If interest rates go up, the present value decreases - remember the time value of money concept. If you bought a $100 bond 2 yrs ago, its not still $100 in present value terms if interest rates go up is it? Everything has to be defined in present value terms.
The coupon is locked in, but the coupon doesn't reflect present value.
You said you didn't want to carry the baggage of modern portfolio theory,
Professor i think you should take look at mathematician benoit mandelbrot's fractal model in "misbehaviour of market" (book)
Diversified investors, in this case being large institutional investors, are also, as per your previous lecture, the most irrational. The first ones to pull out the cash in large volmes when they get wind of somehting, are the Institutional Investors. So how can you eliminate large institutional investors from the computation of the hurdle rate when irrationality is a risky feature? i didn't quite get this.
There is a gold mine here and still not so popular, the world is definitely moving in the wrong direction surfing for wrong content.
Thx for the lecture
Sir can please make this video in Hindi.. i can't. Understand the video becoz of the English
Another thing about the assumption about the marginal investor, in case most marginal investors are institutions, doesn't that reduce the corporate governance score of the company? Therefore, isn't it true that for the fundamental assumption of the CAPM to hold true, the corporate governance of the company must, in most cases, be flawed?
CAPM requires the stockholders to trade.
Institutional investors don't necessarily hold on to their stocks and are diversified. Their actions do affect the price of the stock.
Corporate governance and stock holding patterns may seem to be correlated, but they do not inherently justify stock price movements.
Hope this helps.
You said CAPM model should be used, but did not tell us what is CAPM model in detail?
Mañana no la cuento 😞
a que horas abre mesa?
Can you please share us the PPT
5:48
I don't understand how low price to book companies can be riskier than high price to book companies. In the case of low price to book companies, we have a higher degree of assurance that if the company liquidates, there is a higher probability that we'll be able to recover a larger share of our initial investment (if P/BV ratio > 1) and we might even make more than our initial investment upon liquidation (if P/BV ratio < 1). In contrast, isn't there a greater risk in investing in high P/BV ratio companies? Isn't one essentially overpaying for the assets in place of these companies? For example, if the P/BV ratio of a company is 12, I would be very uncomfortable in investing in that company because if my assumptions about the cash generating capacity of the company go wrong and the company liquidates, I'll only receive a dollar back for every 12 dollars that I invested. Compared to that, if the P/BV ratio of a company is 1.5, I can be much more comfortable investing in the company knowing that even if the company liquidates, I'll get back 66.67% of my initial investment. Assuming that the assets aren't overvalued by the company's books, of course.
What he meant by saying that a low PB is riskier relates to his previous statement. It was merely an example. Although your argument is does make sense to a certain degree, you have missed an important assumption which is the efficient market theory. EMT states that market values fully reflect the intrinsic value of a company. Thus, a High PB stock would mean that the stock is properly valued and that the intrinsic value is indeed that much higher than its liquidating value.