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Present Value and the Risk/Return Trade-Off SLP

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Module 1 – SLP

Present Value and the Risk/Return Trade-Off

For the SLP this session, you will be taking a close look at a company of your choice. You are free to choose any company you want as long as it is publicly traded on one of the major stock market exchanges such as NYSE or NASDAQ. This could be a company that you personally are interested in investing in, or a company whose product you buy, or one that you’ve read about in the news recently and would like to know more about. Do some research on this company, including recent articles. Also, look up the company on Google Finance. This will give you a wealth of information including stock prices over the last month, year, five years, etc., along with other information such as the beta or whether or not the company is profitable.

Once you have chosen a company and have done some initial research on it, write a 2- to 3-page paper discussing the following items:

  1. Give a brief description of the company and why you find it interesting.
  2. What is the beta of this company’s stock? Based on the magnitude of the beta, do you think it is low risk, high risk, or somewhere in between?
  3. Now look at recent stock price movements. What is the highest price the stock has been over the last year? The lowest price over the last year? Look at the five-year pattern as well. Based on what you see, what does this tell you about the riskiness of the stock?
  4. Look at some other companies in the same industry as your chosen company. How do they compare in terms of beta and other measures of riskiness? Would you prefer to invest in your chosen company, or do some of its competitors seem like a better bet?

SLP Assignment Expectations

  • Answer the assignment questions directly.
  • Stay focused on the precise assignment questions. Do not go off on tangents or devote a lot of space to summarizing general background materials.
  • For computational problems, make sure to show your work and explain your steps.
  • For short answer/short essay questions, make sure to reference your sources of information with both a bibliography and in-text citations. See the Student Guide to Writing a High-Quality Academic Paper, including pages 11-14 on in-text citations. Another resource is the “Writing Style Guide,” which is found under “My Resources” in the TLC Portal.

Module 1 – Background

Present Value and the Risk/Return Trade-Off

To begin the module, start off with these two videos to give yourself an overview of the main concepts covered in this module. The first video is from Professor Holthausen of the Wharton School of Business at the University of Pennsylvania. He explains the concept of the time value of money and also goes through some calculations using Microsoft Excel. The second video is from Professor Pinder of the University of Melbourne and covers some basic concepts of risk and return.

University of PennsylvaniaHolthausen, R. (2015). Time value of money. Coursera. Retrieved from: https://www.coursera.org/learn/wharton-decision-making-scenarios/lecture/ZE2tE/1-2-time-value-of-money

Unversity of Melbourne

Pinder, S. (2017) Unsystematic versus systematic risk. Coursera. Retrieved from: https://www.coursera.org/learn/valuation/lecture/LLtZP/2-1-unsystematic-versus-systematic-risk-getting-rid-of-unrewarded-risk

A second video from Dr. Pinder on the capital asset pricing model is highly recommended but not required. A link to Dr. Pinder’s video is included under the optional reading list below.

Once you have finished viewing the videos, take a closer look at the concepts covered in the videos by reading through these book chapters. In addition to reading about the basic concepts, make sure to work through some of the numerical examples as these will help you with your assignments:

time and money scale

Vishwanath, S. (2007). Chapter 2: Time value of money. Corporate finance: Theory and practice. SAGE Publications India. Available in the Trident Online Library.

risk and reward tightwire

Vishwanath, S. (2007). Chapter 3: Risk and return. Corporate finance: Theory and practice. SAGE Publications India. Available in the Trident Online Library.

If you have any difficulty with the material above, it is highly recommended that you take a look at some of the optional readings below. The materials below cover the same material but sometimes concepts can be absorbed better if you see some explained in a different manner or see additional examples.

Finally, if you don’t have much experience with Microsoft Excel then please take a look at the following videos:

Davis, J. (2013). Present value of a single amount in Excel. Retrieved from: https://www.youtube.com/watch?v=ruIfnNoe1Co&t=85s

Moy, R. (2014). Present value of multiple cash flows in Excel. Retrieved from: https://www.youtube.com/watch?v=kDOIuJbHpLc

Codible. (2012). Future value for a series of annual deposits. Retrieved from: https://www.youtube.com/watch?v=EcfmEVVHDsw

Optional Reading

Pinder, S. (2017). Capital asset pricing model (It’s all about the discount rate). Coursera. Retrieved from: https://www.coursera.org/learn/valuation/lecture/6Oh5F/2-2-capital-asset-pricing-model-its-all-about-the-discount-rate

Clifford, J. (2014). Time value of money. ACDC Leadership. Retrieved from: https://www.youtube.com/watch?v=nfkqCv3Rd_g

Ross, S., Westerfield, R., & Jordan, B. (2007). Chapter 4: Introduction to valuation: The time value of money. Essentials of Corporate Finance. McGraw Hill. Retrieved from: http://novellaqalive2.mheducation.com/sites/dl/free/007000000x/484691/Part3_Chap4.pdf

Ross, S., Westerfield, R., & Jordan, B. (2007). Chapter 11: Risk and return. Essentials of Corporate Finance. McGraw Hill. Retrieved from: http://novellaqalive2.mheducation.com/sites/dl/free/007000000x/484691/Chap11_RiskReturn.pdf

Understanding return in Boundless finance. (n.d.) See licenses and attributions at bottom of landing page.