Part 2 book “Fundamentals of corporate finance” has contents: Some lessons from capital market history, options and corporate finance, raising capital, financial leverage and capital structure policy, dividends and dividend policy, cash and liquidity management, credit and inventory management, and other contents. | Risk and Return PA RT 5 12 SOME LESSONS FROM CAPITAL MARKET HISTORY In 2005, the S&P 500 index was up about 3 percent, the 333 percent gain of that stock. Of course, not all which is well below average. But even with market stocks increased in value during the year. Video game returns below historical norms, some investors were manufacturer Majesco Entertainment fell 92 percent pleased. In fact, it was a great year for investors in during the year, and stock in Aphton, a biotechnol- pharmaceutical manufacturer ViroPharma, Inc., which ogy company, dropped 89 percent. These examples shot up a whopping 469 percent! And investors in show that there were tremendous potential profits to Visit us at DIGITAL STUDY TOOLS • Self-Study Software • Multiple-Choice Quizzes • Flashcards for Testing and Key Terms Hansen Natu- be made during 2005, but there was also the risk of ral, makers of losing money—lots of it. So what should you, as a Monster energy stock market investor, expect when you invest your drinks, had to own money? In this chapter, we study eight decades be energized by of market history to find out. Thus far, we haven’t had much to say about what determines the required return on an investment. In one sense, the answer is simple: The required return depends on the risk of the investment. The greater the risk, the greater is the required return. Having said this, we are left with a somewhat more difficult problem. How can we measure the amount of risk present in an investment? Put another way, what does it mean to say that one investment is riskier than another? Obviously, we need to define what we mean by risk if we are going to answer these questions. This is our task in the next two chapters. From the last several chapters, we know that one of the responsibilities of the financial manager is to assess the value of proposed real asset investments. In doing this, it is important that we first look at what financial .
