Participation 5 – Financial Management 1

Concordia University Chicago

MBA Program

Student: Kim Nghia Hoang

Crf_hoangk@cuchicago.edu
Crf_hoangk@cuchicago.edu

Day Telephone: +1 858 329 9588

Evening Telephone: +1 858 329 9588

Assignment Title: Participation 5

Date of Submission: 07/22/2018
Assignment Due Date: 07/23/2018

Course: Financial Management

Section Number: MBAC – 6450 – 9J1
Semester: Summer 2018
Course Instructor
Brian Gilligan

Certification of Authorship: I certify that I am the author of this paper and that any assistance I
received in its preparation is fully acknowledged and disclosed in the paper. I also have cited any
sources from which I used data, ideas, or words, either quoted directly or paraphrased. I certify
that this paper was prepared by me specifically for the purpose of this assignment, as directed.

Student’s Signature: Kim Nghia Hoang

[Digital signature]
Participation 5 – Financial Management 2

Participation 5 – Financial Management

Kim Nghia Hoang

Concordia University Chicago

Course: Financial Management

Brian Gilligan

Participation 4
Participation 5 – Financial Management 3

CHAPTER 9

RISK AND RETURN

• Describe the SML in words. What is it saying about how investors form required rates of

return? Thoroughly evaluate the implications of the SML’s message.

The security market line (SML) is a line drawn on the chart that serves as a graphic

representation of capital asset pricing model (CAPM), which show different levels of systematic,

or market, risk of marketable securities, plotted against the expected return of the entire market

at a given point in time. (Investopedia, n.d.). To be simply, Security market line basically shows

the tradeoff between systematic risk and return for an individual asset or portfolio.

The security market line is described the way in which investors form required return for

individual stocks. It’s saying that the required return is the risk free rate plus a risk premium. In

addition, the risk premium is all about the average market risk premium multiplied by the stock’s

beta, which is going along with the market risk.

The investors should keep an eye on the relationship between the required rate of return

and the market risk as measured by beta. It plays a crucial role to evaluate the stock’s price. It

means that the firms can influence the market price of its stock by doing things that affect its

stability and beta.

CHAPTER 10

CAPITAL BUDGETING

• Explain the rationale behind the NPV method in your own words. Why is a higher NPV

conceptually better than a lower one?

Participation 5 – Financial Management 4

The Net Present Value is defined as investment measure that tells an investor whether the

investment is achieving a target yield at a given initial investment. NPV also quantifies the

adjustment to the initial investment needed to achieve the target yield assuming everything else

remains the same (Schmidt, 2015). In other words, net present value is the present value of the

cash flows at the required rate of return on the project compared to the initial investment. The

concept of NPV usually regards to the project in the long term. Based on the number of NPV, the

investor can identify whether the project is profitable or not.

The higher NPV means the higher receiving of the money in the future. Therefore, the

more NPV project has, the bigger is its wealth contribution. It means that the project is worth

more in term of higher NPV.

References:

Investopedia. (n.d.). Security Market Line - SML. Retrieved from

https://www.investopedia.com/terms/s/sml.asp

Schmidt, R. (2015, June 15). What is NPV and How Does It Work? Retrieved from

https://www.propertymetrics.com/blog/2015/06/11/what-is-npv/