(BQ) Part 2 book "Fundamentals of corporate finance" has contents: Return, risk, and the security market line; cost of capital, raising capital; financial leverage and capital structure policy; dividends and payout policy; cash and liquidity management; cash and liquidity management, international corporate finance,.and other contents. | 13 RETURN, RISK, AND THE SECURITY MARKET LINE IN FEBRUARY 2011, Home Depot, Campbell Soup Co., and car rental company Avis Budget Group joined a host of other companies in announcing earnings. Home Depot said its fourth quarter profit increased 72 percent from the previous year. The company’s EPS was 36 cents per share, easily beating analysts’ estimates of 31 cents. For Campbell Soup, the earnings per share were 71 cents, exactly what analysts were predicting. For Avis Budget, analysts had estimated a loss of 7 cents per share, but the company actually lost 36 cents per share. You would expect that these three cases represent good news, no news, and bad news, and usually you would be right. Even so, Home Depot’s stock price dropped just over 1 percent, Campbell Soup’s stock price dropped by about percent, and Avis Budget’s stock price increased just under 1 percent. The stock price reactions do not seem to match what the news for these companies led you to expect. So when is good news really good news? The answer is fundamental to understanding risk and return, and—the good news LEARNING OBJECTIVES is—this chapter explores it in some detail. After studying this chapter, you should understand: LO1 How to calculate expected returns. LO2 The impact of diversification. LO3 The systematic risk principle. LO4 The security market line and the risk-return trade-off. In our last chapter, we learned some important lessons from capital market history. Most important, we learned that there is a reward, on average, for bearing risk. We called this reward a risk premium. The second lesson is that this risk premium is larger for riskier investments. This chapter explores the economic and managerial implications of this basic idea. Thus far, we have concentrated mainly on the return behavior of a few large portfolios. We need to expand our consideration to include individual assets. Specifically, we have two tasks to accomplish. First, we .
