Check this out, for companies that are publicly traded on stock market,

we're really asking when we evaluate the desireability of a new capital investment,

is whether the proposed investment will increase or

decrease the stock price of the company.

Let me repeat that, for companies that are publicly traded on stock markets,

what we're really asking when we evaluate the desirability of a new

capital investment, whether the proposed investment will increase or

decrease the stock price of the company.

Question number four then is, how does the stock market go about evaluating

individual stock and setting stock prices?

Based on risks presented by investing in those companies.

At least one answer, provided by strategic corporate command,

the capital asset pricing model, illustrated in this video.

[MUSIC]

The capital asset pricing or CAPM model provides a formula that calculates

the expected return on a security based on it's level of risk.

In practice, the model can be used to determine

what the required rate of return on a company stock must be.

And therefore the stock price for

an investor to add that stock to a well diversified portfolio.