What is Market Risk?
The only widely accepted theoretically derived measure of risk is market risk. Firm’s market risk or more commonly known as “beta” follows directly from the Capital Asset Pricing Model Simply put, market risk measures the degree to which stock’s returns co vary with the returns of the portfolio of all the assets in the economy. This is a systemic risk which is priced because it can’t be diversified away. A stock with lower beta should have lower cost of capital and larger firm value. However, CAPM remains a popular tool among practitioners when it comes to estimating cost of equity capital
How is Market Risk Measured?
CAPM involves expected stock and economic returns. But for the estimation of beta, we use historical stock returns data. The economic returns are proxied by the returns of value-weighted portfolio of all the stocks traded in the economy (market returns).
Apart from stock returns, we need the data on risk free return which is generally proxied by the Treasury bond returns. We estimated the following linear model using
OLS rit =α + β Mktt
Where, rit is excess stock return over risk free rate, Mktt is excess market return over risk free rate, and β is the estimate of market risk.
Most often CAPM is estimated using monthly returns. For reliable estimation of beta, you will need a sufficiently long time-series of betas: 36-60 months. If you don’t have observations available on this long series, or if you want to estimate beta yearly, you can use weekly returns. In some cases, researcher use daily data as well. But daily stock returns series exhibits serial correlation which should be taken into account while estimating CAPM.
Social cost benefits analysis
The main objective of an individual, a firm or a company in investing on a project is to earn the maximum possible returns for the investment. Hence the project promoters tend to evaluate only the commercial profitability of a project. There are some projects that may not offer attractive returns as far as commercial profitability is concerned, but still such projects are undertaken since they have social implication. Such projects are public project like road, railway, and power projects e.tc. such project is analyzed for their net socio-economic benefits and the profit ability analysis of such projects is known as national profitability analysis, which is nothing but the socio-economic cost benefit analysis done at the national level.
Scope of SCBA
- Public Investment: SCBA is important especially for the developing countries where govt. plays a significant role in the economic development.
- Private Investment: Here, SCBA is also important as the private investments are to be approved by various governmental & quasi-governmental agencies.
Objectives of SCBA
The main focus of Social Cost Benefit Analysis is to determine:
- Economic benefits of the project in terms of shadow prices;
- The impact of the project on the level of savings and investments in the society;
- The impact of the project on the distribution of income in the society;
- The contribution of the project towards the fulfillment of certain merit wants (self- sufficiency, employment etc).
Role of SCBA
- Improve transparency in decision making.
- Communicates and explain why results are as presented.
- Provide a frame work to weigh effects with each other.
- Provide insight in individual and aggregate effects.
- Open discussion among stakeholders and decision makers.
Approaches to SCBA
There are two principal approaches for Social Cost Benefit Analysis.
- UNIDO Approach,
- L-M Approach.
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