(Updating) Consulting Cases - Investment
Related Terms and Frameworks
NPV (Net Present Value)
Only investments with a positive NPV should be considered
CAPM (Capital Asset Pricing Model)
determine an appropriate rate when making NPV calculations.
r = rf + β(rm – rf)
r= Discount rate
rf= Risk-free rate of return - Return Rate that can be received with a risk-free investment like U.S Treasury Bills
rm= Market rate of return - Return Rate that can be received by investing in a diversified portfolio (S&P 500)
Beta of the Investment - a measurement of the risk of an investment compared to the risk of the market as a whole.
β>1: Investment has more risk than the market. Example: For an investment with a β = 1.29, a 1% increase in the market means a 1.29% increase in the investment value.
0<β<1: Investment will tend to move in the same direction as the market. The asset is not as sensitive to market movements. Example: For an investment with a β = .75, a 1% increase in the market means a .75% increase in the investment value.
β=0: The investment is not correlated with the market. “Risk-free” assets have β of 0.