#+title: Section 8 | Lesson 45 - Risk & Return, Business Statistics, Security Law
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* Links
- [[./../mba-main.org][TOC | Business]]
- [[https://www.udemy.com/course/an-entire-mba-in-1-courseaward-winning-business-school-prof/learn/lecture/4283486#overview][S08:L45 Risk & Return, Business Statistics, Security Law]]

* Notes

** debt
- senior debt: debt secured via access to assets upon default
  - they have the first claim on company if you go belly up
- subordinate debt: less rights

** risk and return
*** expected return

** equity return
- profit or loss generated on an investment in equity (owneship interest in a company) over a specific period
- expressed as a percentage of the original investment amount

*** components of equity return
- capital gains: increase in stock price
- dividends: payments made to shareholders
  - cash
  - additional shares

*** formula for equity return
\[
\text{Equity Return} = \frac{(\text{Ending Price} - \text{Initial Price}) + \text{Dividends}}{\text{Initial Price}} \times 100
\]

*** formula for public equity return
\[
\text{Equity Return} = \text{Risk Free Rate} + \text{Volatility} x \text{Outperformance}
\]

- returns from publicly traded stocks

**** Risk Free Rate includes inflation
  - This is the return on an investment with zero risk, typically represented by government bonds like U.S. Treasury bills.
  - It accounts for inflation and is considered the baseline rate of return.
  - Example: If the current inflation rate is 2% and Treasury bonds yield 3%, then the Risk-Free Rate is 3%.

**** Volatility: The volatility of the company versus the market
  - measures how much the stock price fluctuates relative to the overall market.
  - It's often represented by beta (β) in the Capital Asset Pricing Model (CAPM), where β > 1 means the stock is more volatile than the market.
  - For example, a volatility of 1.2 indicates the stock is 20% more volatile than the market.

**** Outperformance: how much we expect stocks to outperform government bonds
  - This is the expected premium that equity holders expect stocks to generate over government bonds.
  - It reflects the idea that since stocks are riskier than government bonds, investors expect higher returns.
  - This value could be determined from historical stock market returns minus bond returns. For example, if stocks historically outperform bonds by 4%, the Outperformance might be set to 4%.

** cost of capital if we use equity and debt
*** WACC: Weighted Average Cost Of Capital

** securities law and ventures financing
- serious jail sentences
- ignorance is no excuse

*** basic laws
- potential investors must receive all relevant information before investing
  - all risks
  - this is called an S1
- if you have been defrauded you should receive compensation
  - class action lawsuits
- insider information for publicly traded stocks is illegal and results in prison (no excuses)
