Finance Fundamentals

What is the risk and return trade-off, and why is it important when considering investments?
Introduction to risk and return and how the trade-off can be captured in the mean-variance criterion, how risk can be measured with variance and standard deviation, the components of risk (systematic and unsystematic risk), and how certain types of risk can be diversified away in a portfolio of investments.

Introduction to the Capital Asset Pricing Model (CAPM), and how it predicts the expected returns on stocks based on the market risk premium (or the equity risk premium) and beta.
Learn about what the Security Market Line (SML) is, how it plots the predicted expected return (based on CAPM) for each possible value of beta, and how it can be used to find mispriced assets along with the concept of Jensen’s Alpha.

Introduction to the Capital Market Line (CML): what is it and how can we interpret it?
Learn about what the efficient frontier is, and how it can be built. Also learn about where the minimum variance portfolio (MVP) sits on the efficient frontier, and the significance of its role in investment portfolios.

After learning about the Capital Asset Pricing Model (CAPM) and how it uses the market risk premium (or equity risk premium) and Beta to calculate the expected return on a stock, we will now dive deeper into what Beta is, how it can be calculated, and how we can interpret it to better understand how risky or sensitive a stock’s return is relative to the market return.

In finance, we know to use “r” as the appropriate rate to discount cashflows to account for risk and the time value of money. This “r” is also known as the cost of capital, opportunity cost, discount rate, interest rate, required rate of return, market rate, or the yield to maturity. But where does this “r” come from?
Learn about what WACC (the weighted average cost of capital) is, how its components can be calculated, and how it can be used to discount cashflows.

This is the second video in the two-part series on WACC (the weighted average cost of capital). Please watch the first part before watching this video.
Continue to learn about how the components of WACC can be calculated, and how WACC can be used as the appropriate discount rate, “r”, when discounting cashflows and valuing a firm.