market risk

Правильный расчет стоимости капитала

market risk

Наиболее распространенным подходом к расчету стоимости капитала компании или проекта в настоящее время является средневзвешенная стоимость капитала (WACC – weighted average cost of capital), привлечённого в данную экономическую единицу из двух источников:

  • собственные средства (cost of equity, CoE);
  • заёмные средства (cost of debt, CoD).

Общепринятая методика расчета стоимости собственного капитала, применяемая в настоящее время, базируется на модели САРМ (capital asset pricing model). Согласно ей, стоимость собственного капитала зависит от четырёх параметров:

  1. риска рынка, на котором действует тот или иной бизнес;
  2. чувствительности искомого бизнеса к данному рынку;
  3. безрискового уровня доходности, свойственного данной экономике;
  4. прочих рисков, напрямую не связанных с рынком (страновой риск, риск, связанный с размером компании и т.д.).

Формула САРМ относительно стоимости собственного капитала может быть представлена в следующем виде:

CoE = Rf  + β*(Rm – Rf) + C, где

Rf (risk-free rate) – безрисковая ставка доходности в данной экономике;

β (бета) – индикатор чувствительности стоимости компании/проекта к рынку;

Rm (market risk) – рыночный риск, распространяющийся на рынок в целом;

С – премии за прочие риски.

Разность Rm – Rf также часто называют рыночной премией за риск (equity risk premium).

В качестве безрисковой ставки при расчётах традиционно берётся ставка государственных облигаций той страны, на территории которой оперирует данный бизнес (в США – трежерис, в России – ОФЗ-ПД, и т.д.).

Коэффициент Бета

Коэффициент бета в математическом смысле представляет собой ковариацию двух переменных – рыночной капитализации искомого бизнеса и рыночного индекса. Чем более синхронно ведёт себя рыночная капитализация относительно рынка, тем ближе бета к единице. При меньшей чувствительности бета приближается к нулю, при большей – увеличивается.

Вместе с тем, в инвестиционном анализе (за исключением разве что департаментов equity research) самостоятельный расчет беты обычно не производится, так как этот процесс является достаточно трудоемким и неэффективным.

Как правило, большинство инвестиционных банкиров и аналитиков находит требуемую бету в специальных таблицах, расположенных на сайте профессора Асвата Дамодарана.

Данные таблицы содержат большие массивы регулярно обновляемой аналитической информации по оценке бизнеса, которыми пользуются миллионы аналитиков по всему миру.

Рыночная премия за риск

Из этих же таблиц, как правило, берется следующий компонент формулы – рыночная премия за риск. При этом в таблице Дамодарана данная премия включает в себя также страновой риск (который, естественно, уже не нужно добавлять далее в состав премий за прочие риски во избежание задвоения).

Прочие же премии, которые в рамках расчета WACC учитываются отдельно – это, к примеру, премия за малый размер компании, так как субъекты малого и среднего бизнеса в силу своего размера менее устойчивы перед негативными факторами внешней среды и менее стабильны с точки зрения прогнозирования деятельности.

Дискуссионным является вопрос о том, нужно ли включать прочие премии в периметр умножения на бету, или же более целесообразно прибавлять их к сумме безрисковой ставки и рыночной премии за риск.

Представляется, что более верен все же второй способ, так как прочие риски, премии на которые учитываются в рамках расчета WACC, не относятся напрямую к тому или иному рынку, а касаются иных факторов (размер бизнеса, и т.д.).

Пример расчета стоимости капитала

Рассчитаем стоимость собственного капитала компании, исходя из следующих вводных.

Организация осуществляет хозяйственную деятельность, связанную с производством алкогольных напитков. Компания ведет операционную деятельность на территории России, имеет организационно-правовую форму ООО и, как следствие, является непубличной. Исходя из оборотов и численности персонала предприятия, его можно отнести к числу субъектов малого и среднего предпринимательства.

Вооружившись перечисленными сведениями, произведем расчет стоимости собственного капитала нашего условного предприятия.

Для расчета первого параметра (Rf) нам, как было сказано выше, необходима ставка по облигациям федерального займа Минфина РФ с постоянной доходностью (ОФЗ-ПД), выпущенных максимально близко к текущей дате для большего соответствия рыночным условиям. Воспользовавшись данными сайта rusbonds.ru, можно обнаружить, что последняя эмиссия облигаций ОФЗ-ПД началась 03.06.2020, называется ОФЗ-26234-ПД и имеет купонную доходность в 4,5% годовых. Таким образом, зафиксируем:

Rf  = 4,5%

Величину рыночной премии за риск (equity risk premium) мы вычислим на основании таблицы Дамодарана, которая приведена ниже. Все таблицы Дамодарана, содержащие необходимые параметры для оценки бизнеса, находятся на сайте http://pages.stern.nyu.edu.

Для нахождения рыночной премии за риск необходимо воспользоваться сведениями, содержащимися в таблице Country and Equity Risk Premiums.

Из описанной таблицы нам интересен столбец Total Equity Risk Premium, соответствующей стране, в которой компания ведет свою операционную деятельность:

Так как по условиям основным государством, в котором организация осуществляет операционную деятельность, является Россия, воспользуемся значением данного столбца из соответствующей строки:

Equity risk premium = Rm – Rf = 10,04%

Обращаем внимание, что данная рыночная премия за риск включает в себя также страновой риск (то есть, повторно учитывать данный риск при расчете стоимости собственного капитала не нужно!).

Расчет коэффициента β

Для расчета коэффициента β (беты) применяем сведения, консолидированные в иной таблице Дамодарана, а именно Beta, Unlevered beta and other risk measures. В разрезе нашей задачи для нас представляют интерес два показателя из данной таблицы: Unlevered beta и D/E Ratio, соответствующие отрасли деятельности компании – производству алкогольных напитков (Beverage (Alcoholic).

Unlevered beta – это среднее значение беты для той или иной отрасли.

При этом, однако, данную бету нельзя в чистом виде использовать для оценки компании, так как она является unlevered, то есть не учитывает структуру капитала отдельно взятой организации (в русскоязычном сегменте иногда встречается такой термин, как «стерильная бета»).

Вместе с тем, структура капитала предприятия важна для расчета его беты, так как чувствительность стоимости компании к рынку напрямую зависит от доли акционерного капитала в его совокупной структуре.

Для корректировки беты на структуру капитала компании и получения levered beta (рабочей беты), которая и будет использоваться в итоговой формуле оценки cost of equity, применяется формула Хамады:

Levered beta = unlevered beta * (1 + (1 – T) * D/E), где

T – эффективная ставка налога на прибыль, актуальная для компании;

D/E (Debt/Equity) – это соотношение заемного и собственного капитала организации.

Несмотря на кажущуюся простоту расчета коэффициента D/E, он имеет в своей основе одно важное допущение, которое легко проигнорировать: за базу для расчета берутся рыночные объемы заемного и собственного капитала.

И если в случае с долгом рыночный объем капитала рассчитывается легко (это, собственно, тот объем долга, который был выдан компании финансовыми институтами), то в отношении собственного капитала ситуация является более сложной.

В случае, если компания является публичной и ее акции торгуются на фондовом рынке, то объемом ее собственного капитала можно считать ее рыночную капитализацию.

Если же компания, как в нашем случае, относится к разряду непубличных и установить размер ее рыночной капитализации не представляется возможным, то коэффициент D/E целесообразнее брать из той же таблицы Дамодарана, что и бету (эти коэффициенты также разбиты по отраслям и находятся в столбце D/E Ratio).

Что касается Т (эффективной ставки налога на прибыль), то она рассчитывается как отношение налога на прибыль, уплаченного компанией, к ее прибыли до налогообложения.

В общем случае она равна номинальной ставке налога на прибыль, установленной законодательством того или иного государства, но в ряде случаев может от нее отличаться (при применении специальных налоговых режимов, налоговых льгот и т.д.).

В рамках нашего кейса будем считать, что эффективная ставка налога на прибыль не отличается от номинальной и равна, соответственно, 20%.

Таким образом, рабочая бета (levered beta) нашей компании равна:

β = 0,91 * (1 + (1 – 0,2) * 0,3128) = 1,14

В качестве премии за прочие риски уместно будет обозначить премию за риск малого размера компании (так называемый size risk premium), который обычно начисляется в размере 2-3%.

Рассчитав все промежуточные показатели, вычислим стоимость собственного капитала компании:

CoE = 4,5% + 1,14 * 10,04% + 2% = 17,95%

Расчет стоимости долга

В свою очередь, механика расчета стоимости долга интуитивно более понятна, чем расчет стоимости капитала. Как правило, в инвестиционно-аналитической практике стоимость долга обычно рассчитывается по средневзвешенной процентной ставке кредитного портфеля компании. Допустим, что наша организация имеет на текущую дату следующие кредиты:

БанкФинансовый долгПроцентная ставка
Penkoff20017%
Gamma Bank30015%
Power Bank50012%

Таким образом, стоимость заемного капитала организации будет равна:

CoD = 200/1000 * 17% + 300/1000 * 15% + 500/1000 * 12% = 13,9%

Рассчитав стоимости собственного и заемного капитала предприятия, нам остался завершающий маневр – расчет совокупной средневзвешенной стоимости капитала. Для этого воспользуемся следующей формулой:

WACC = CoE * E / (D + E) + CoD * D / (D + E) * (1 – T), где

 E – equity, собственный капитал компании;

D – debt, заемный капитал компании;

CoE, CoD – стоимость собственного и заемного капитала компании соответственно;

Т – эффективная ставка налога на прибыль компании.

Необходимо обратить внимание, что стоимость долга в рамках расчета WACC умножается на параметр (1 – Т). Этот параметр называется эффектом налогового щита.

Его наличие связано с тем, что проценты по кредитам, уплачиваемые организацией (фактический доход кредиторов), не подлежат обложению налогом на прибыль (которым облагается доход акционеров), что удешевляет заемный капитал компании по сравнению с собственным.

В свою очередь, для расчета параметров E / (D + E) и D / (D + E) необязательно знать непосредственно величины D и Е, так как нам известно отношение D/E, из которого можно вывести данные соотношения.

С учетом вышеперечисленного, стоимость капитала нашей компании рассчитывается следующим образом:

WACC = 17,95% * 76,17% + 13,9% * 23,83% * (1 – 20%) = 16,32%

Полученное значение можно использовать в качестве ставки дисконтирования при оценке компании, ее тех или иных инвестиционных проектов, а также в качестве требуемой доходности от данного бизнеса.

Научитесь управлению капиталом фирмы, финансированию и бюджетированию на курсе «Управление финансами фирмы» от SF Education!

Малиновский Ярослав, эксперт SF Education

Источник: https://blog.sf.education/finance-stoimost-kapitala/

US

market risk

The value of a company is equal to the discounted value of the dividend payments («Dividend Discount Model»). Using three years of explicit dividend forecasts and a constant-growth assumption from year 4 on, the market value MV0 can be written as:

(1)

where k is the implied cost of capital and

  • MV0: Current market value
  • D1, D2, D3: 1-/2-/3-year ahead dividend forecasts
  • g: Long-term growth rate

All we need to estimate implied cost of capital are estimates for these three input parameters: The current market value, dividend forecasts and a long-term growth rate.

2. Long-term growth rate – The very basics

A lot of discussions on implied cost of capital centers around the long-term growth rate. Naively applied, it can have a huge impact on implied cost of capital estimates.

For example, if the current market value is MV0=100 and dividend forecasts are D1=4, D2=4, D3=4 then a growth rate of 0% results in an implied cost of capital of 4%, if the growth rate assumption is 5%, the implied cost of capital is 8.6%.

However, growth cannot come from nothing, in particular not in the long-run. Let us assume the earnings forecast for year 3 is E3=4. In this case, the dividend forecast assumes a payout ratio of 100%.

It seems unreasonable that the company can grow by 4% and, at the same time, pay out 100% of its earnings. Such a company would very quickly end up having an extremely high profitability.

If the company started with a book value of BV0=40 so that the return on equity is 10%. After 10 years, return on equity would grow to 16%, after 50 years to 115% and after 100 years return on equity would be above 1,000%.

This is unly to happen as competition would certainly erode these high returns. We will make a very simple assumption: Payout ratios and growth rates from year 3 on must be consistent:

(2)

The left-hand side of equation (2) is the retention in percent of year-2 book value of equity. Our assumption means that earnings and dividends cannot grow faster than book values over the long-run. This assumes that return on equity will stay at the level it reached reached directly before the terminal value period started. Equation (1) then simplifies to

(3)

We describe and discuss equation (2) in more detail in the separate document «Long-run growth rates».

3. Implied cost of capital on the market level

How can we apply equation (1) to estimate implied cost of capital for whole markets? There are two possibilities, one that is frequently applied in the academic literature, and one that we prefer

    1. Determine implied cost of capital for each company using (1), and then take a weighted average of these estimates.2. Aggregate the input parameters across all companies, i.e. determine the total $-amount of dividends and the total market capitalization of all companies. Apply equation (1) to these aggregate values.

We use the latter approach for two reasons: First, estimates are better. It can be shown that the first approach inhibits a bias in the estimation of the market wide implied cost of capital. Second, results using the latter approach are much easier to interpret. The following table provides an overview of aggregate statistics for the German market as of March, 31st, 2013:1

MV0 BV0 BV2 D1 D2 E3
€ 776 bn€ 484 bn€ 568 bn€ 25 bn€ 27 bn€ 79 bn

Applying equation (3) using g=0% results in implied cost of capital of 9.14%. The 10-year German government bond yield was 1.28% as of end-of-March 2013, resulting in an implied equity risk premium of 7.86%.

Investors who are more skeptical might also want to apply the most pessimistic dividend and earnings forecast across all analysts.

If we do that, dividends forecast reduce to D1 = € 21bn and D2 = € 22bn, the three-year ahead earnings forecast reduces to € 63bn, the two-year ahead book value forecast to € 549bn. This results in an implied cost of capital estimate of 7.37% and an equity premium of 6.09%.

1 These numbers are free-float adjusted and are all companies for which sufficient analyst forecast data is available. The total market capitalization (€ 776bn) is therefore somehow lower than the total market capitalization of all stocks traded in the German market.

4. Documents

This document has provided an overview on our philosophy of how to estimate implied cost of capital. The following documents describe each of the important topics in more detail

  • Methodology: Dividend discount model versus residual income model
  • Methodology: Long-run growth rates
  • Sample selection (Criteria for inclusion/exclusion of companies, Free float adjustment, Treatment of different stock classes)
  • Market value and dividend, earnings and book value forecasts

Источник: http://www.market-risk-premia.com/us.html

Market Risk (Definition, Examples) | Top 4 Types of Market Risk

market risk

Market risk is the risk that an investor faces due to the decrease in the market value of a financial product arising the factors that affect the whole market and is not limited to a particular economic commodity.

Often called systematic risk, the market risk arises because of uncertainties in the economy, political environment, natural or human-made disasters, or recession.

It can only be hedged, however, cannot eliminate by diversification.

Types of Market Risk

There are four significant types of market risk.

#1 – Interest Rate Risk

Interest rate risk arises when the value of security might fall because of the increase and a decrease in the prevailing and long-term interest rates. It is a broader term and comprises multiple components basis risk, yield curve risk, options risk, and repricing risk.

#2 – Foreign Exchange Risk

Foreign exchange risk arises because of the fluctuations in the exchange rates between the domestic currency and the foreign currency. The most affected by this risk is the MNCs that operate across geographies and have their payments in different currencies.

#3 – Commodity Price Risk

foreign exchange risk, commodity price risk arises because of fluctuations in commodities crude, gold, silver, etc. However, un foreign exchange risk, commodity risks affect not only the multinational companies but also ordinary people farmers, small business enterprises, commercial traders, exporters, and governments.

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#4 – Equity Price Risk

The last component of market risk is the equity price risk, which refers to the change in the stock prices in the financial products. As equity is most sensitive to any change in the economy, equity price risk is one of the most significant parts of the market risk.

Market Risk Premium Formula

One factor used to calculate the gauge market risk is the calculation of market risk premium. Put market risk premium is the difference between the expected rate of return and the prevailing risk-free rate of return.

Mathematically market risk premium formula is as follows:

Market Risk Premium = Expected Return–Risk-Free Rate.

The market risk premium has two significant aspects–required marked risk premium and historical premium. It is the expectations that the investor community has in the future or historical patterns.

The risk-free rate is defined as the expected return without taking any risk. Most often US treasury rate as US sovereign risk is almost zero is referred to as risk-free rate.

Example of Market Risk

Let’s take an example.

Let’s consider the example of an IT major firm–HP. An investor wants to calculate the market risk premium associated with the stock price, currently quoting at $1000. Let’s assume the investor expects the stock price to be hot $1100 because of expected growth. The following is the calculation in Excel.

Calculation of Risk Premium will be –

Market Risk Premium = 11%

Advantages

Some advantages are as follows.

  • Most often than not, financial products are sold to the investor community by aggressive marketing and by presenting only the growth part while completely ignoring the risks and downfalls. This is why we see such products being bought more in the economic expansion cycles while in the recession, investors, especially the retail ones, are trapped. Had the investor known of the concept of market risk and its calculations, they can understand the financial products in a much better way and decide if it suits them for such volatilities.
  • The market risk premium, as explained in the example above, helps an investor to calculate the real rate of return. Even though the financial product might enjoy presenting a lucrative return, the investor should gauge the investment in terms of the actual rate it provides. This can be calculated by taking into account the prevailing risk-free interest rate and inflation rate.

Disadvantages

Some disadvantages are as follows.

  • We cannot completely ignore them. It can only be hedged, which comes with a cost and intensive calculations. An investor must be apt to understand what data to analyze and what data it should filter out.
  • It is very prone to recession or cyclic changes in the economy. Ans since it affects the whole market simultaneously, it is even more challenging to manage as diversification will not help. Un credit risk, which is very much counterparty specific, it affects all asset classes.
  • It is an integral part of risk management. As it affects the whole market simultaneously, it can be lethal for an investor to ignore market risk while building a portfolio.
  • They help in measuring the maximum potential loss for a portfolio. There are two significant components here–time frame and the confidence level. The time frame is the duration for which the market risk premium has to be calculated while it bases the confidence level on the investor’s comfort level. We express it in % terms 95% or 99%. Put confidence level determines how much of a risk an investor or portfolio manager can take.
  • It is a statistical concept, and hence its calculations are cumbersome in numbers. The various tools/mechanisms used for calculation are – Value at risk expected shortfall, variance-covariance, historical simulation, and monte Carlo simulation.
  • Since market risk impacts the whole investor community irrespective of their credibility or the asset class they operate on, it is closely watched by regulators worldwide. In fact, in the last 25 years, we have witnessed four major regulations and many more minor enhancements. Basel Committee is the main regulatory body that comes up with these rules or advisories. The member nations are free to adapt or add more scrutiny to these regulations to make their banking systems much more robust.

Conclusion

It is an integral part of any portfolio. It arises because of the additional return that an investor expects to generate from an investment. If hedge, it can lead to better results and safeguard your losses when the market experiences downward cycles.

This has been a guide to what is market risk and its definition. Here we discuss the top 4 types of market risk, including interest rate, forex, commodities, and equity, along with examples, advantages, and disadvantages. You can learn more about financing from the following articles –

  • Types of Systematic Risk
  • Markdown
  • Credit Risk Types
  • Calculate Residual Risk

Источник: https://www.wallstreetmojo.com/market-risk/

Market Risk — Overview, Types, and How To Mitigate

market risk

The term market risk, also known as systematic risk, refers to the uncertainty associated with any investment decision. Price volatility often arises due to unanticipated fluctuations in factors that commonly affect the entire financial market.

Systematic risk is not specifically associated with the company or the industry one is invested in; instead, it is dependent on the performance of the entire market.

Thus, it is necessary for an investor to keep an eye on various macro variables associated with the financial market, such as inflationInflationInflation is an economic concept that refers to increases in the price level of goods over a set period of time.

The rise in the price level signifies that the currency in a given economy loses purchasing power (i.e., less can be bought with the same amount of money)., interest rates, the balance of payments situation, fiscal deficits, geopolitical factors, etc.

Summary

  • The term market risk, also known as systematic risk, refers to the uncertainty associated with any investment decision.
  • The different types of market risks include interest rate risk, commodity risk, currency risk, country risk.
  • Professional analysts use methods Value at Risk (VaR) modeling, and the beta coefficient to identify potential losses via statistical risk management.

1. Interest Rate Risk

Interest rate risk arises from unanticipated fluctuations in the interest rates due to monetary policy measures undertaken by the central bankFederal Reserve (The Fed)The Federal Reserve is the central bank of the United States and is the financial authority behind the world’s largest free market economy.. The yields offered on securities across all markets must get equalized in the long run by adjustment of market demand and supply of the instrument. Hence, an increase in the rates would cause a fall in the security price. It is primarily associated with fixed-income securities.

For example: Consider a situation where a sovereign bond offers a fixed coupon payment of 6% p.a. on the principal value.

Now, if the market interest rate rises to 8%, the demand for the 6% bond will decline after a fall in the prices, causing the Yield (Fixed – Coupon Payment / Market Price of Bond) to rise until it is equal to 8%.

Similarly, a decline in the market interest rate will lead to an unanticipated gain in the security’s price.

2. Commodity Risk

Certain commodities, such as oil or food grain, are necessities for any economy and compliment the production process of many goods due to their utilization as indirect inputs. Any volatility in the prices of the commodities trickles down to affect the performance of the entire market, often causing a supply-side crisis.

Such shocks result in a decline in not only stock prices and performance-based dividends, but also reduce a company’s ability to honor the value of the principal itself.

3. Currency Risk

Currency risk is also known as exchange rate risk. It refers to the possibility of a decline in the value of the return accruing to an investor owing to the depreciation of the value of the domestic currency. The risk is usually taken into consideration when an international investment is being made.

In order to mitigate the risk of losing out on foreign investment, many emerging market economiesEmerging Markets»Emerging markets» is a term that refers to an economy that experiences considerable economic growth and possesses some, but not all, characteristics of a maintain high foreign exchange reserves in order to ensure that any possible depreciation can be negated by selling the reserves.

4. Country Risk

Many macro variables that are outside the control of a financial market can impact the level of return due to an investment.

They include the degree of political stability, level of fiscal deficit, proneness to natural disasters, regulatory environment, ease of doing business, etc.

The degree of risk associated with such factors must be taken into consideration while making an international investment decision.

How to Mitigate Market Risk

Because the risk affects the entire market, it cannot be diversified in order to be mitigated but can be hedged for minimal exposure. As a result, investors may fail to earn expected returns despite the rigorous application of fundamental and technical analysis on the particular investment option.

Volatility, or the absolute/percentage dispersion in prices, is often considered a good measure for market risk.

Professional analysts also tend to use methods Value at Risk (VaR)Value at Risk (VaR)Value at Risk (VaR) estimates the risk of an investment.

VaR measures the potential loss that could happen in an investment portfolio over a period of time. modeling to identify potential losses via statistical risk management.

The VaR method is a standard method for the evaluation of market risk. VaR technique is a risk management method that involves the use of statistics that quantifies a stock or portfolio’s prospective loss, as well as the probability of that loss occurring. Although it is widely utilized, the VaR method requires some assumptions that limit its accuracy.

The beta coefficient enables an investor to measure how volatile the nature or market risk of a portfolio or security is, in comparison to the rest of the market.

It also uses the capital asset pricing model (CAPM)Capital Asset Pricing Model (CAPM)The Capital Asset Pricing Model (CAPM) is a model that describes the relationship between expected return and risk of a security.

CAPM formula shows the return of a security is equal to the risk-free return plus a risk premium, the beta of that security to calculate the anticipated return of an asset.

Additional Resources

CFI is the official provider of the Certified Banking & Credit Analyst (CBCA)™CBCA™ CertificationThe Certified Banking & Credit Analyst (CBCA)™ accreditation is a global standard for credit analysts that covers finance, accounting, credit analysis, cash flow analysis, covenant modeling, loan repayments, and more. certification program, designed to transform anyone into a world-class financial analyst.

In order to help you become a world-class financial analyst and advance your career to your fullest potential, these additional resources will be very helpful:

  • Bond PricingBond PricingBond pricing is the science of calculating a bond's issue price the coupon, par value, yield and term to maturity. Bond pricing allows investors
  • Idiosyncratic RiskIdiosyncratic RiskIdiosyncratic risk, also sometimes referred to as unsystematic risk, is the inherent risk involved in investing in a specific asset – such as a stock –  the
  • Aggregate Supply and DemandAggregate Supply and DemandAggregate supply and demand refers to the concept of supply and demand but applied at a macroeconomic scale. Aggregate supply and aggregate demand are both plotted against the aggregate price level in a nation and the aggregate quantity of goods and services exchanged
  • Systemic RiskSystemic RiskSystemic risk can be defined as the risk associated with the collapse or failure of a company, industry, financial institution or an entire economy. It is the risk of a major failure of a financial system, whereby a crisis occurs when providers of capital lose trust in the users of capital

Источник: https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/market-risk/

Fundamentals Used To Estimate Market Risk Premium(Valuable)

market risk

In our last tutorial, we have understood how to find beta for private company.In this article we will see market risk premium(MRP) in detail.

Market Risk Premium Definition

The Market Risk Premium (MRP) is a measure of the return that equity investors demand over a risk-free rate in order to compensate them for the volatility/risk of an investment which matches the volatility of the entire equity market. Such MRPs vary by country.

Historical

Utilizing historical equity results to arrive at a risk premium assumes that past market returns are the best indication of the premium investors will demand over the risk-free rate for prospective investments.

By calculating an arithmetic or geometric average of past risk premia, this method is often considered objective because of its easily observable results.

However, choosing the correct historical time horizon is quite subjective as it is difficult to know what past period gives the best estimate of future premia. For instance, data is available since at least 1970s, but is today’s market are very different.

In seeking the premium over the risk-free rate for a long-term investment, most often a long-term (eg 10-year gilt) instrument is used as a proxy for the risk-free rate

Treasury Bill (short term bonds)

  • Short term rates change significantly over time. The long term average of the 3-months Treasury Bill would better approximately the real risk-free rate.

Treasury Bond

  • In a DCF, you forecast five to ten years into the future. Long bonds represent a better match with the maturity of the cash flows in your DCF.
  • A long bond’s yield includes long term forecast of inflation. A historical average of 3-months Treasury yields does not include an inflation forecast.
  • It is inconsistent to use the Treasury bill to help calculate the Equity Risk Premium if you use the Treasury bond as the risk free rate in CAPM.

What is practically used?

Most analyst use ten year government bond.

Arithmetic average or Geometric average?

Arithmetic Average

  • When you discount cash flows in your DCF, you use an arithmetic calculations

Geometric Average

  • As from the above table, arithmetic average can be biased if you change the measurement period.
  • The geometric average is a better predictor of the average premium over the long term.

What is practically used?

Arithmetic mean is used.

What is done by Analysts?

  • Most analyst use the arithmetic mean of the difference between the Treasury Bond Rate and the return on the Stock Market to estimate the equity risk premium for the CAPM equation.

 Forecast

Rather than assume that yesterday’s equity markets will resemble those of tomorrow, forecast market premia can be calculated in an effort to account for structural changes in equity markets. The goal of calculating such a premium is to modify or replace historical data to factor in present knowledge and future expectations.

Step 3: Current risk-free rates are normally assumed to be an indication of future risk free rates, as treasury yield curve factors in such expectations

Preferred method

Analyst’s  has regard to both methods, but has a bias towards the forecast method of estimating the market risk premium (in line with market practice). ‘s Equity Research department should be able to provide you with estimates of the appropriate forecast market risk premium in the appropriate country.

Forecast premia allow a better match between a future market view and the forward-looking nature of relevant investment decisions analysed in a DCF. Moreover, forward estimates better take into account changes between historical and future markets.

For instance, today’s equity markets are characterised by better information, faster and broad dissemination of relevant facts, larger and more sophisticated investors, and are bigger and more liquid than in the past.

Furthermore, in today’s low inflation environment, it is widely perceived that the risks associated with holding equity have ceteris paribus lessened. Thus, historical premia are less useful as indicators of future performance than future premia projections.

Step 11 – Calculate Cost of Equity & WACC

Step 1: Identify the listed comparables and their Beta. Also, find the Unlevered Beta for comparables

What Next

In this article we have understood market risk premium (MRP), we will see enterprise value calculation. Till then, Happy Learning!

What is market risk? Definition and meaning

market risk

Market risk refers to the risk that an investment may face due to fluctuations in the market. The risk is that the investment’s value will decrease. Also known as systematic risk, the term may also refer to a specific currency or commodity.

Market risk is generally expressed in annualized terms, either as a fraction of the initial value (e.g. 6%) or an absolute number (e.g. $6).

Market risk contrasts with specific risk, also known as business risk or unsystematic risk, which is tied directly with a market sector or the performance of a particular company. In other words, market risk refers to the overall economy or securities markets, while specific risk involves only a part.

Market risk consists of several events or situations over which we have no control.

There are several standard market risk factors, including:

  • Equity Risk: the risk that share prices will change.
  • Commodity Risk: the lihood that a commodity price, such as that of a metal or grain, will change.
  • Currency Risk: the probability that foreign exchange rates will change.
  • Interest Rate Risk: the risk that interest rates will go up or down.
  • Inflation Risk: the risk that overall rises in prices of goods and services will undermine the value of money, and probably adversely impact the value of investments.

According to the Bank of England, the relevant variables are “primarily interest rates, exchange rates, and the spreads between the yields of securities issued by sovereigns and by other types of issuer.”

Diversification and market risk

Risk can be reduced to some extent if you diversify your investments, i.e. widen your portfolio. However, it is impossible to eliminate all risks.

Some market risks are not possible to prevent or foresee. Natural disasters, such as hurricanes, volcanic eruptions and earthquakes can strike at any time and may affect the value of your investments.

Other sources of market risk include terrorist attacks, political instability, recessions, and trade embargoes.

According to the Board of Governors of the Federal Reserve System (America’s central bank):

“Market risk encompasses the risk of financial loss resulting from movements in market prices.”

The European Banking Authority (EBA) defines market risk as the risk of losses on-and-off balance sheet positions that occur as a result of adverse movements in market prices. “From a regulatory perspective, market risk stems from all the positions included in banks’ trading book as well as from commodity and foreign exchange risk positions in the whole balance sheet,” the EBA adds.

The majority of investors know that investing comes with risks as well as rewards, and that , overall, the greater the risk, the bigger the potential reward.

While it is vital to consider the risks in the context of a specific market or investment class, it is also just as important to consider market risk.

Several economic factors contribute to market risk.

Example of market risk concept

Imagine you wish to buy a car. You can purchase a new one under full warranty, or a second-hand vehicle with no warranty. Which one you choose depends on how much you can afford, which features are important for you, your knowledge of mechanics, and your risk tolerance.

As you check out different cars, you find that some makes and models perform better than others, and have superior repair histories.

However, regardless of which vehicle you eventually decide upon, there are several risk on the road which have nothing to do with your chosen car, but which can impact your driving experience considerably.

Examples include animals crossing the road, being hit by lightning, weather conditions, icy roads, traffic lights working incorrectly, being mugged by a street gang while you’re waiting at a red light, to mention just a few. While these factors might be beyond your control, you need to be aware of them.

The Financial Industry Regulatory Authority, a private corporation in the US that acts as a self-regulatory organization, has the following advice for investors:

“Investments involve varying levels and types of risks. These risks can be associated with the specific investment, or with the marketplace as a whole. As you build and maintain your portfolio, remember that global events and other factors you cannot control can impact the value of your investments. And be sure to take both business risks and market risks into account.”

Video – Measuring market risk

In this video, analyst Peter Dag explains how we can measure market risk.

Источник: https://marketbusinessnews.com/financial-glossary/market-risk/

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