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Progresso di Studio
Across all your exams
Taught in English
Questo esame si sostiene in inglese: le lezioni e le domande sono in inglese. L'interfaccia resta in italiano.
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Key formulas
Weighted average cost of capital
The blended required return across all funders.
Capital asset pricing model
Estimates the required return on equity based on systematic risk.
Part 1 of 1
Before calculating the cost of capital, you need to understand what type of risk investors are being compensated for.
Systematic (market) risk affects the entire economy — recessions, interest-rate shifts, inflation shocks, geopolitical crises. No matter how many stocks you hold, you cannot eliminate this risk through diversification because all assets move together when market-wide forces hit.
Unsystematic (firm-specific) risk is unique to one company or industry — a product recall, a CEO scandal, a factory fire. By holding a diversified portfolio across many companies and sectors, these firm-specific shocks cancel out (one company's bad news is uncorrelated with another's).
The key insight: rational investors will diversify away unsystematic risk for free. Therefore, the market only compensates investors for bearing systematic risk — there is no reward for holding undiversified, firm-specific risk. This is the foundation of CAPM.
Worked example
You hold only shares of one airline. A pilots' strike (unsystematic risk) destroys 30% of your portfolio. A holder of 50 diversified stocks loses far less — the airline's loss is offset by unaffected holdings. But when a global recession hits (systematic risk), all 50 stocks fall together. Diversification cannot protect you from that.
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