security market line

Examples of security market line in the following topics:

• Defining the Security Market Line

  • The security market line displays the expected rate of return of a security as a function of systematic, non-diversifiable risk.
  • The security market line, also known as the "characteristic line", is the graphical representation of the capital asset pricing model.
  • The security market line graphs the systematic, non-diversifiable risk (stated in terms of beta) versus the return of the whole market at a particular time, and shows all risky marketable securities.
  • The security market line is defined by the equation:
  • This is an example of a security market line graphed.

• Impact of the SML on the Cost of Capital

  • The security market line is a graphical representation of the capital asset pricing model that illustrates the idea that investments are priced efficiently based on the expected return and beta-value (risk).
  • Companies often turn to capital markets in order to generate funds -- using the issuance of either debt or equity.
  • An instrument plotted above the line has a high expected return and a low price.
  • This would not be an attractive market situation for a company looking to raise capital.
  • The location of a financial instrument above, below, or on the security market line will lead to consequences for a company's cost of capital.

• Impact of Diversification on Risk and Return: Systematic Risk

  • Systematic risk is intrinsic to the market, and thusly diversification has no effect on its presence in investments.
  • Recall that previously we talked about the security market line and the implication that investors require more compensation for extra risk.
  • This is the principle behind the security market line .
  • Now, imagine that these 50 corporations are all given a lesser credit rating because of the risk of their overall market segment.
  • This is the portion of risk that pays the risk premium, because the risk associated with this particular segment of the market is more tightly linked to the risk of the market as a whole.

• The SML Approach

  • The market is expected to return 12% next year.
  • The beta of the security is 1.9.
  • The Security Market Line (SML) is the graphical representation of the capital asset pricing model (CAPM), with the x-axis representing the risk (beta), and the y-axis representing the expected return.
  • Another way to think about real market applications of the SML would be in terms of buying and selling securities.
  • The Security Market Line for the Dow Jones Industrial Average over a 3 year period, with the x-axis representing beta and the y-axis representing expected return.

• Managing Marketable Securities

  • This is a broad term that encompasses investments a business may make within the securities market.
  • The most common types of debt securities are corporate bonds, government bonds, and money market instruments.
  • Perhaps the most interesting marketable securities (and often the highest risk) are derivatives.
  • This image depicts a balance sheet from Proctor & Gamble, where the cash and cash equivalents, short term investments, and long term investments underline the various line items that may depict marketable securities.
  • Understand the various forms of marketable securities, and their value in corporate finance

• Securities Acts Amendments of 1975

  • The 1975 amendments are to establish a national market system for the nationwide clearance and settlement of securities transactions.
  • In the United States, national market systems are governed by section 11A of the Securities Exchange Act of 1934.
  • It also owns communication lines and hardware that provide real-time quotes and transaction information to all market participants from the Consolidated Tape/Ticker System (CTS), Consolidated Quotation System (CQS), and Options Price Reporting Authority (OPRA).
  • In 1972, before the SEC began its pursuit of a national market system, the market for securities was quite fragmented.
  • Define how the Securities Act Amendments of 1975 regulate U.S. stock markets

• Types of Financial Markets

  • A financial market is an aggregate of possible buyers and sellers of financial securities, commodities, and other fungible items, as well as the transactions between them.
  • Examples of financial markets include capital markets, derivative markets, money markets, and currency markets.
  • There are many different ways to divide and classify financial markets: for example, into general markets and specialized markets, capital markets and money markets, and primary and secondary markets.
  • Newly formed (issued) securities are bought or sold in primary markets, such as during initial public offerings.
  • Secondary markets are for the secondary trade of securities, providing a continuous and regular market for the buying and selling of securities.

• Answers to Chapter 2 Questions

  • Dealers usually operate in the primary market, while the secondary market is an exchange.
  • Thus, investors can sell their securities easily if they do not want to hold them anymore.
  • Money market instruments include: U.S.
  • Money market is for securities with a maturity less than one year, while the capital market includes securities with maturities over one year.
  • First, a bank acquires stock in another bank, allowing it to cross a state line.

• Securities Exchange Act of 1934

  • The Securities Exchange Act of 1934 is a law governing the secondary trading of securities, financial markets and their participants.
  • Companies raise billions of dollars by issuing securities in what is known as the primary market.
  • ATS acts as a niche market, a private pool of liquidity.
  • The '34 Act extends this requirement to securities traded in the secondary market.
  • Define how the Securities Exchange Act of 1934 regulates the US securities markets

• Types of Market Organizations

  • There are three main types of market organization that facilitate trading of securities: auction market, brokered market, and dealer market.
  • The securities market is an economic institute where sale and purchase transactions of securities between subjects of economy take place according to demand and supply.
  • The primary market is the part of the capital markets that deals with the issue of new securities.
  • There are three main types of market organization that facilitate the trading of securities: an auction market, a brokered market, and a dealer market.
  • Dealer markets, also called quote-driven markets, centers on market-makers (or dealers) who provide the service of continuously bidding for securities that investors want to sell and offering securities that investors want to buy.