How high will Microsoft fly? Message Board

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Technology Stocks : How high will Microsoft fly?

MSFT 493.80

-2.7%

3:59 PM EST

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To: DavidD who wrote (12610)	11/25/1998 5:30:00 PM
From: Gerald Walls	Read Replies (1) of 74651

Ever heard the term "risk adjusted return?" No? Yes, it's a quantifiable number calculated using the risk of certain events occurring and their effects if they do occur. Projected earnings are adjusted by the weighted consequences of the effects on earnings and the results used to calculate a risk-adjusted fair market value. Another interpretation uses the fluctuation in the price of a security (usually a mutual fund in this case or perhaps bonds) to adjust the return so that securities with different risk profiles can be more fairly compared. An example would be a bond with a 10% probability of being defaulted on would have to have a total return to maturity of 111% of that of a bond with 0% probability of default (Return/(1-0.10)). Well adjusting for the risk that MSFT could have it's 1/3 it equity wiped out, no matter how much cash or shares they have on hand, it would seem the current p/e is very high. OK, what is your risk-adjusted PE for MSFT? What probability are you assigning the possibility that the price of MSFT will drop 40% and they'll have all the warrants put to them over a period of 2-1/2 years? 0%? 5%? 50%? 95%? Why? If you can't answer this then how are you "adjusting for the risk?" Quantify.

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