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Walter Maxim,the CEO of Digital Storage Devices has been granted options on 300,000 shares. The stock is currently trading at $27 a share and the options are at the money. The volatility of the stock has been about .15 on an annual basis over the last several years. The options mature in 5 years,become exercisable in 3 years,and the risk free rate is 4%.
If Mr. Maxim earned $500,000 in regular annual salary why might he prefer to have $1,500,000 in straight salary versus salary and options?
Asset Beta
A measure of the risk of an asset isolated from the firm's financial risk, particularly useful in capital asset pricing models (CAPM).
Risk-Free Asset
An investment with a guaranteed return, without any risk of financial loss.
Positive Rate
An interest rate or yield that is above zero, reflecting a positive return on investment.
Risk-Free Rate
The theoretical return on investment with no risk of financial loss, typically represented by the yield on government securities.
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