CAPM and MM Combined (part b)

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  1. Avatar of Yando Yando says:
    May 3, 2013 at 9:01 am

    Simply made simple. I just wonder why we must do the Asset beta calculations when we can tell just by looking at the two beta of shares which have been given that P plc has a higher beta thus more risky.

    • Avatar of johnmoffat johnmoffat says:
      May 3, 2013 at 10:41 am

      The share with the higher beta is certainly the more risky share.

      However, shares are risky for two reasons – partly because of the riskiness of the business and partly because of the way the business is financed (the level of gearing).

      The equity beta measures the riskiness of the share, but the asset beta takes out the effect of the gearing and measures the riskiness of the actual business. The question in the lecture asks for two things – which share is the more risky, and secondly which is the more risky business. The only way you can answer the second question it to remove the gearing effect by calculating the asset beta, and then comparing the two. Since the level of gearing in the two companies is different, there is no way of finding out which is the more risky business without calculating the asset beta.

      • Avatar of Yando Yando says:
        May 3, 2013 at 12:46 pm

        Thanks, i think i did not realize how different the two questions are. so simple how we fail exams!!!
        Then i get the conclusion that a company would have more risky shares yet lessor risky business activity right? just that coincidentally P plc happens to be the more risky share as well as having the more risky business activity.

  2. Avatar of jeweltrinidad jeweltrinidad says:
    November 25, 2012 at 9:56 pm

    Thanks John, really brought a simple understanding. Great Lecture.

  3. Avatar of manvilles manvilles says:
    June 7, 2012 at 5:29 pm

    thank you totally get it

  4. Avatar of mahongo mahongo says:
    May 6, 2012 at 5:07 pm

    The lecture is really good .. thanks John and OT!!!!

  5. Avatar of temi temi says:
    April 14, 2012 at 11:39 am

    you are simply the best John, is it only f9 you take

  6. Avatar of tatipast tatipast says:
    April 6, 2012 at 6:22 pm

    this is the best teacher I have ever, ever listen, thank you so much 10+

  7. Avatar of Saad Bin Aziz Saad Bin Aziz says:
    December 5, 2011 at 2:57 pm

    wow . that was one hell of a lecture! thanks john! you should write a book you know!

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