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Fundamentals of Corporate Finance, 4/c/e

Fundamentals of Corporate Finance, 4/e

Stephen A. Ross, Massachusetts Institute of Technology
Randolph W. Westerfield, University of Southern California
Bradford D. Jordan, University of Kentucky
Gordon S. Roberts, York University

Return, Risk, and the Security Market Line

Internet Application Questions


1		If you thought the market was over-valued, think again. In a recent book, Jim Glassman and Kevin Hassett argue for a DOW valuation of 36,000. By comparison, the DOW was 10,675 on December 14, 2000. To get the current value of DOW, click on DJIA. Messrs. Glassman and Hassett have a website dedicated to their book titled DOW 36,0000. The crux of their argument is that stocks carry no more risk than bonds, and hence the historical risk premium on equity is an aberration waiting for correction. When this correction happens?and they claim it is already?stock valuation will rise sufficiently to wring out the excess risk premium. They believe this corresponds to a DOW of 36,000. Provide one argument against their valuation.



2		Ever been to the Nobel Foundation? Why not visit their 1990 awards in Economics? Click on press release, and go to Harry Markowitz and William Sharpe. You will find excellent summaries of their seminal contributions to the field of portfolio diversification and asset pricing



3		Professors Kenneth French and Eugene Fama at the University of Chicago have shown that stock returns are strongly influenced by size and book-to-price ratios in addition to betas. If this is so, does it mean the end of CAPM? Financial firms such as BARRA have long since argued for such a size effect, and the following link explains their interpretation of the F&F result. Is Beta Dead Again? Do you think these effects are related to a fundamental inability to measure risk properly?

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