if securities markets are efficient, what is the NPV of any security, regardless of risk?

Answer 1

zero. meaning that you can't make profit by buying a stock of share. this is because in an efficient security market, share price fully and correctly reflects all available public information. in other words, there is no mispricing of stocks (except in the case of inside information). so what you pay is what you get. e.g. you buy $10 of stock, the stock is really worth $10. so NPV = $10 - $10 = 0.

Answer 2

If you are disregarding risk, then a security has a positive NPV. To calculate it, discount the expected future cash flows at the risk-free rate and add them up. Since the stock is priced to represent a risk-adjusted rate, the NPV you calculate will always be higher than the stock price. That's why people invest in stocks - they are willing to assume the risk in return for the higher returns.

BTW, the reason for diversifying, particularly reducing the beta of a portfolio to less than 1, is to reduce that risk.

Best of success.

Answer 3

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