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To refine the selection of the discount rate, it’s important to draw on inputs from credible sources regarding economic, industry and company specificrisk factors. Capital Asset Pricing Model (CAPM): According to CAPM, the expected return on a stock has two main components: the risk-free rate and a riskpremium.
If an investor moves money from the risk-free asset into the stock market, they should expect to earn a return in excess of the risk-free rate, what is called an equity riskpremium. Investments are exposed to two types of risk: systematic and unsystematic. E(r) = Rf + ??(Rm
If you put all your money in one or the other of these companies, you are exposed to all these risks, but if you spread your bets across a dozen or more companies, you will find that company-specificrisk gets averaged out. as mature markets. But what if the company is looking at a project in Nigeria or Bangladesh?
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