Lo Basico Del Riesgo

Damodaran

c03.tex

V1 - 12/04/2009

1:31 P.M. Page 58

CHAPTER 3 THE BASICS OF RISK
Risk, in traditional terms, is viewed as a negative and something to be avoided. Webster’s dictionary, for instance, defines risk as ‘‘exposing to danger or hazard’’. The Chinese symbols for risk, reproduced below, give a much better description of risk:

The first symbol is the symbol for ‘‘danger’’,while the second is the symbol for ‘‘opportunity,’’ making risk a mix of danger and opportunity. It illustrates very clearly the tradeoff that every investor and business has to make—between the ‘‘higher rewards’’

MAXIMIZE THE VALUE OF THE BUSINESS (FIRM)

The Investment Decision Invest in assets that earn a return greater than the minimum acceptable hurdle rate

The Financing Decision Findthe right kind of debt for your firm and the right mix of debt and equity to fund your operations

The Dividend Decision If you cannot find investments that make your minimum acceptable rate, return the cash to owners of your business

The hurdle rate should reflect the riskiness of the investment and the mix of debt and equity used to fund it

The return should reflect the magnitude and thetiming of the cash flows as well as all side effects

The optimal mix of debt and equity maximizes firm value

The right kind of debt matches the tenor of your assets

How much cash you can return depends on current and potential investment opportunities

How you choose to return cash to the owners will depend on whether they prefer dividends or buybacks

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Damodaran

c03.texV1 - 12/04/2009

1:31 P.M. Page 59

Motivation and Perspective in Analyzing Risk

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that potentially come with the opportunity and the ‘‘higher risk’’ that has to be borne as a consequence of the danger. The key test in finance is to ensure that when an investor is exposed to risk, he or she is ‘‘appropriately’’ rewarded for taking this risk. In this chapter, we will lay the foundationsfor analyzing risk in corporate finance and present alternative models for measuring risk and converting these risk measures into ‘‘acceptable’’ hurdle rates.

MOTIVATION AND PERSPECTIVE IN ANALYZING RISK
Why do we need a model that measures risk and estimates expected return? A good model for risk and return provides us with the tools to measure the risk in any investment and uses that riskmeasure to come up with the appropriate expected return on that investment; this expected return provides us with the hurdle rate in project analysis. What makes the measurement of risk and expected return so challenging is that it can vary depending upon whose perspective we adopt. When analyzing Disney’s risk, for instance, we can measure it from the viewpoint of Disney’s managers. Alternatively, wecan argue that Disney’s equity is owned by its stockholders, and that it is their perspective on risk that should matter. Disney’s stockholders, many of whom hold the stock as one investment in a larger portfolio, might perceive the risk in Disney very differently from Disney’s managers, who might have the bulk of their capital, human and financial, invested in the firm. In this chapter, we willargue that risk in an equity investment has to be perceived through the eyes of investors in the firm. Since firms like Disney have thousands of investors, often with very different perspectives, we will go further. We will assert that risk has to be measured from the perspective of not just any investor in the stock, but of the marginal investor, defined to be the investor most likely to be trading onthe stock at any given point in time. The objective in corporate finance is the maximization of firm value and stock price. If we want to stay true to this objective, we have to consider the viewpoint of those who set the stock prices, and they are the marginal investors. Finally, the risk in a company can be viewed very differently by investors in its stock (equity investors) and by lenders to...