Introduction to Corporate Finance

7: Risk, Return and the Capital Asset Pricing Model

TABLE 7.1 THE S&P/ASX 200 INDEX AS A PROXY FOR THE AUSTRALIAN MARKET INDEX CHARACTERISTICS

(AS OF 30 SEPTEMBER 2015)

Number of constituents 200

Adjusted market capitalisation ($ billion) 1,368.49

Constituent market capitalisation (adjusted $ billion)

Average 6.84

Largest 123.50

Smallest 0.22

Median 1.91

% Weight largest constituent 9.5%

Top 10 holdings (% market capitalisation share) 50.8%

Source: S&P Dow Jones Indices, http://www.au.spdji.com/. Accessed 6 October 2015.

FIGURE 7.1 S&P/ASX 200 SECTOR BREAKDOWN

13.9%

7.9%

7.1%

6.4%

47.4%

Financials 47.4%

Materials 13.9%

Industrials 7.9%

Consumer staples 7.1%

Health care 6.4%

Telecommunication services 5.8%

Consumer discretionary 4.4%

Energy 4.0%

Utilities 2.3%

Information technology 0.8%

4.4%

4.0%

2.3%

0.8%

5.8%

*Based on GICS® sectors

Note: The weightings for each sector of the index are rounded to the nearest tenth of a per cent; therefore, the aggregate weights for the index may

not equal 100%.

Source: S&P Dow Jones Indices, McGraw Hill Financial. Used with permission.

When calculating equity returns, it is important to calculate total returns. This means we need to

adjust raw price data for share splits and dividend payments.

The S&P 500 Index is a market index consisting of 500 large US shares. It is one of the most widely

watched barometers of the overall US share market, and is usually used as a proxy for the US market. It

is also often used as a proxy for the entire global market. The MSCI World Index is a more representative

global proxy, which is also used as a proxy for the global market.

For a visual explanation of this idea, examine Figures 7.2a and 7.2b. The figures show scatter

plots of monthly share returns for two companies, OrotonGroup Limited (retailer and wholesaler

of luxury goods) and utility company AGL Energy Limited, versus the monthly return on the S&P/

ASX 200 Index. For example, each dot in Figure 7.2a shows the return on OrotonGroup shares