研一下四高高金课件lecture

1、Advanced Financial EconomicsLecture 8by Yinggang ZhouOutlineRemark on risk aversion measuresAll describe investors preference over risky prospectsDo not represent differences in risk (payoff distribution) How to relate risk (payoff distribution) to preference?State-by-state dominance, mean-variance

2、dominanceStochastic dominanceMean-preserving spreadApplications of stochastic dominance3Motivating exampleFirst-order stochastic dominance (FSD)FSD on the graphTheorem on the FSDPreferences associated with FSDExample of FSDExample of FSDRemark on FSDSecond order stochastic dominance (SSD)12SSD on th

3、e graphSSD on the graphSSD in the table15SSD in mathTheorem on the SSDExample of SSDRemark on SSDMean Preserving spreads Mean preserving spread and SSDExampleApplicationsLeverage effects on return distributions Borrow some money to invest in assetsLeveraged return is higher (lower) than unlevered re

4、turn if asset return is greater (less) than borrowing costLeveraged return distribution FSD its unlevered counterpart in the favorable stateMore highly leveraged return distribution FSD less highly leveraged ones in the favorable stateUnlevered return distribution FSD its levered counterpart in the

5、unfavorable statePoverty and inequality Lecture 523Financial Leverage (FL)Use debt (loan or other borrowing) to finance a portion of a house, business, project, or financial productMeasures of financial leverageDebt-to-equity ratio: D/EDebt-to-value ratio: D/V, where V is asset value = Debt + equity

6、24ExampleProjected Rate of Asset Return: 5%Investment: $1 million equity +borrowingCost of Debt: 4% Leverage: Debt-to-Equity ratio is 1:1Return of Investment: (1+1) * 5% = $100 thousand Interest: $1 million * 4% = $40 thousand Return on Equity?$100,000-$40,000= $60,000 = $1 million * 6%Lecture 525Th

7、e benefit of positive leveragingIf the firms rate of return on assets (ROA) is higher than the cost of debt, then its return on equity (ROE) will be higher than if it did not borrow because asset value = equity + debtWhy is the cost of debt smaller?Debt payments are typically less riskyLenders are g

8、iven preference before equity holders to receive cash flows 26Example (continued)Projected Rate of Asset Return: 5%Investment: $1 million equity +borrowingCost of Debt: 4% Leverage: Debt-to-Equity ratio is 8:1Return of Investment: $(8+1)million * 5% = $450 thousand Interest: $8 million * 4% = $320 t

9、housand Return on Equity?$450,000-$320,000= $130,000= $1million * 13% 27FL is a double-edged swordLeverage amplifies the potential gain, but also increases the potential lossToo much debt raises its cost, reducing or eliminating the benefits of positive leveragingNegative leveraging is even worse: Interest and principal payments (usually certain ex-ante) may be higher than the investment returns (which are uncertain ex-ante)28Example (continued)With th