Session 1/8

Corporate Finance
Capital markets and portfolio theory

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Figure 10.1 Value of $100 Invested at
the End of 1925

Source: Chicago Center for Research in Security Prices (CRSP) for U.S. stocks and CPI,
Global Finance Data for the World Index, Treasury bills and corporate bonds.
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Figure 10.4 The Empirical Distribution of Annual
Returns for U.S. Large Stocks (S&P 500), Small
Stocks, Corporate Bonds, and Treasury Bills, 1926–
2008

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Figure 10.5 The Historical Tradeoff Between
Risk and Return in Large Portfolios, 1926–
2005

Source: CRSP, Morgan Stanley Capital International

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Figure 10.6 Historical Volatility and Return
for 500 Individual Stocks, by Size, Updated
Quarterly, 1926–2005

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Figure 10.7 Volatility of Portfolios
of Type S and I Stocks

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Table 10.6 Betas with
Respect to the S&P 500
for Individual Stocks
(based on monthly data
for 2004–2008)

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11.2 The Volatility of a Two-Stock
Portfolio
Combining Risks
Table 11.1 Returns for Three Stocks, and
Portfolios of Pairs of Stocks

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Figure 11.1 Correlation

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Table 11.3 Historical Annual Volatilities
and Correlations for Selected Stocks

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Figure 11.2 Volatility of an Equally Weighted
Portfolio Versus the Number of Stocks

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Figure 11.3 Volatility Versus Expected Return
for Portfolios of Intel and Coca-Cola Stock

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Figure 11.4 Effect on Volatility and Expected Return
of Changing the Correlation between Intel and Coca-
Cola Stock

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Figure 11.5 Portfolios of Intel
and Coca-Cola Allowing for Short Sales

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Figure 11.7 The Volatility and Expected
Return for All Portfolios of Intel, Coca-Cola,
and Bore Stock

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Figure 11.8 Efficient Frontier with Ten
Stocks Versus Three Stocks

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Figure 11.10 The Tangent or Efficient
Portfolio

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Figure 11.11 The Capital Market Line

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Figure 11.12 The Capital Market Line
and the Security Market Line

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 Figure 11.12 The Capital Market Line
and the Security Market Line, panel (a)

(a) The CML depicts

portfolios combining
the risk-free
investment and the
efficient portfolio, and
shows the highest
expected return that
we can attain for
each level of
volatility. According to
the CAPM, the
market portfolio is on
the CML and all other
stocks and portfolios
contain diversifiable
risk and lie to the
right of the CML, as
illustrated for Exxon
Mobil (XOM).

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Figure 11.12 The Capital Market Line
and the Security Market Line, panel (b)

(b) The SML shows the

expected return for each
security as a function of
its beta with the market.
According to the CAPM,
the market portfolio is
efficient, so all stocks
and portfolios should lie
on the SML.

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