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Technology Stocks : JDS Uniphase (JDSU)
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To: Michael Dean who wrote (8868)4/15/2000 1:03:00 AM
From: Ed Weider  Read Replies (1) of 24042
 
Another method, obviously a little more complicated is estimating the present value of future cash flow to calculate the expected return. You could find that info in the analyst's reports, it won't be clear but the data is there. I use an estimate of the ROE and then I punch in these figures.

E(R)= ROE, Return on Equity
B = Systematic risk: Beta coefficient
Rf = RiskFree rate, [let's say 5.8%]

Asset A's Expected Return = 25%
Asset A's Beta = 1.65
Rf = 5.8%

Formula:
[E(R) - Rf]/B
[25% - 5.8%]/1.65 = 11.64% Slope

What this tells us is that Asset A offers a reward-to-risk ratio of 11.64%. In other words, Asset A has a risk premium of 11.64% per unit of systematic risk.

Now by making the comparisons with other similar risk level companies you like conclude that Asset B, let's say has a Risk premium of 8.2%, is less attractive than Asset A. Remember we are talking about similar risk, don't put Genomic securities with Retail.
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