• Unit 7: Risk, Return, and the CAPM

    This unit explains the relationship between risk and return. Every investment decision carries a certain amount of risk. Therefore, the role of the financial manager is to understand how to calculate the "riskiness" of an investment versus its reward so that they can make sound financial and business decisions. For example, suppose you are the financial manager for a large corporation, and your boss has asked you to choose between two investment proposals. Investment A is a textile plant in a remote part of a developing country. This plant can generate $50 million in yearly profits. Investment B is a textile plant located in the United States, near a small Virginia town with a rich textile industry tradition. However, investment B's capacity for profits is only $30 million due to higher start-up and operating costs. You are the financial manager. Which option do you choose? While investment A can yield significantly higher profits, there is a great deal of risk that you must consider. Investment B has a much lower profit capacity, but the risk is also lower. This unit explains the relationship between risk and return, and you will learn how to compute the level of risk by calculating expected values and the standard deviation. You will also learn about handling risk in a portfolio with different investments and how to measure a stock investment's expected performance when it is being affected by the overall performance of a stock market.

    Completing this unit should take you approximately 6 hours.

    • 7.1: Statistical Concepts in Finance

    • 7.2: Uncertainty in Capital Budgeting

    • 7.3: Portfolio Risk, Reward, and Diversification

    • 7.4: Risk of Stock Investments and Market Betas

    • 7.5: The Capital Asset Pricing Model (CAPM)

    • Unit 7 Practice and Assessment