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Instructions

Discussion: Risky Business in Capital MarketsNo unread replies.No replies. Engage Case BackgroundAs firms age, managers may expand activities a firm engages in. As a firms scope of activities is widened, diversification may affect a firms overall level of risk. Risk is measured by the standard deviation of project returns. Chapter 9 (section 9.3) introduces the principle of diversification as a means of reducing or eliminating firm-specific risk. CAPM (see p. 340 of our required textbook) utilizes the principle of diversification to identify an efficient portfolio of assets maximizing investment returns for a given level of market risk. Beta, or a measure of the sensitivity of a stock or portfolio to market risk, is an element of CAPM especially helpful to a firms financial managers and investors. This discussion revolves around a firms use of these tools in determining how a new investment project may potentially affect the firm. The new project appears to have a different risk profile than other elements of the firm. In this case, financial managers must make decisions as to how the new project will be assessed from a financial standpoint. CaseText Transcript Case QuestionsInitial PostRemember that your Board consists of arts patrons without financial expertise or training. Based upon this modules required reading and the background information given, form an initial post covering the following three issues:Section 1Explain briefly how interest rate movements affect the valuation of any one debt or equity asset traded in financial markets. You may want to review pp. 202-204 of our textbook.Section 2Explain the principle of diversification and draw one parallel between NOH Live and a listed small-cap firm of your choosing in a different sector (see Resource to use below) illustrating how the principle of diversification may lower risk in relation to returns. Refer to pp. 311-317 and 340-346 for more information.For the principle of diversification to apply, you will want to choose a comparison firm that is dissimilar from NOH Live, such as a radio/media firm called E.W. Scripts (Links to an external site.), which is presented as having stable revenues and a lower Beta than the opera/ballet performance house.Section 3Comment on limitations of using historical returns to measure firm-specific risk. You may consult pp. 302-309 and 345-346 of our required text for information.Responsive PostsPlease reply to two people. As you respond to peers, consider:What surprises you about your peers observations?What surprises you about the tools used here to measure required rates of return?Your responses should cover both qualitative aspects as well as analytical statements regarding asset valuation and risk.

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