CORPORATE FINANCIAL STRATEGIES AND MARKET MEASURES OF RISK AND RETURN

CORPORATE FINANCIAL STRATEGIES AND MARKET MEASURES OF RISK AND RETURN rlt (Xi + ~iRI,t + 'Ilt,t (1) where r., represents the total return of a company's security; at measures the return arising from specific company effects; RI.t represents the return of a broadly based pool of assets characteristic of general business, and 'll,t is a random variable with zero mean and zero intertemporal and intercompany covariance. When the assumptions of the capital asset pricing model are fulfilled a company's risk premium, i.e. its expected return less the pure rate of interest, is proportional to the risk premium of the market as a whole. ~ is the factor of proportionality for it can be shown that: 2 (2) where E is the expectations operator and the R's represent returns. The subscript i denotes the ith company; I, the general index of business conditions; and f, a "safe" security so that R, represents the pure rate of interest." If a firm changes its financial and operating decisions and the market estimates that these actions will affect the corporation's return and risk characteristics, ~ can be expected to change. ~ therefore provides a link between corporate behavior and the market for corporate shares. It follows that an understanding of the determinants http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Finance Wiley

CORPORATE FINANCIAL STRATEGIES AND MARKET MEASURES OF RISK AND RETURN

Loading next page...
 
/lp/wiley/corporate-financial-strategies-and-market-measures-of-risk-and-return-1bFCUL3tuT
Publisher
Wiley
Copyright
1973 The American Finance Association
ISSN
0022-1082
eISSN
1540-6261
DOI
10.1111/j.1540-6261.1973.tb01777.x
Publisher site
See Article on Publisher Site

Abstract

rlt (Xi + ~iRI,t + 'Ilt,t (1) where r., represents the total return of a company's security; at measures the return arising from specific company effects; RI.t represents the return of a broadly based pool of assets characteristic of general business, and 'll,t is a random variable with zero mean and zero intertemporal and intercompany covariance. When the assumptions of the capital asset pricing model are fulfilled a company's risk premium, i.e. its expected return less the pure rate of interest, is proportional to the risk premium of the market as a whole. ~ is the factor of proportionality for it can be shown that: 2 (2) where E is the expectations operator and the R's represent returns. The subscript i denotes the ith company; I, the general index of business conditions; and f, a "safe" security so that R, represents the pure rate of interest." If a firm changes its financial and operating decisions and the market estimates that these actions will affect the corporation's return and risk characteristics, ~ can be expected to change. ~ therefore provides a link between corporate behavior and the market for corporate shares. It follows that an understanding of the determinants

Journal

The Journal of FinanceWiley

Published: May 1, 1973

References

You’re reading a free preview. Subscribe to read the entire article.


DeepDyve is your
personal research library

It’s your single place to instantly
discover and read the research
that matters to you.

Enjoy affordable access to
over 18 million articles from more than
15,000 peer-reviewed journals.

All for just $49/month

Explore the DeepDyve Library

Search

Query the DeepDyve database, plus search all of PubMed and Google Scholar seamlessly

Organize

Save any article or search result from DeepDyve, PubMed, and Google Scholar... all in one place.

Access

Get unlimited, online access to over 18 million full-text articles from more than 15,000 scientific journals.

Your journals are on DeepDyve

Read from thousands of the leading scholarly journals from SpringerNature, Elsevier, Wiley-Blackwell, Oxford University Press and more.

All the latest content is available, no embargo periods.

See the journals in your area

DeepDyve

Freelancer

DeepDyve

Pro

Price

FREE

$49/month
$360/year

Save searches from
Google Scholar,
PubMed

Create folders to
organize your research

Export folders, citations

Read DeepDyve articles

Abstract access only

Unlimited access to over
18 million full-text articles

Print

20 pages / month

PDF Discount

20% off