Abstract This paper talks about dividend growth models, in particular the Gordon Growth model and the assumptions that one needs to take in the calculations. The paper includes the characteristics and limitations of dividend growth models and talks about CAPM, or the capital asset pricing model, which is based on three main parameters: the risk - free rate, the stock's beta coefficient and the expected rate of return for the market as a whole, used to calculate the market risk premium. The author compares the two models and explains why the modern portfolio theory is base on CAPM notions.
From the Paper "On the other hand, the CAPM is an easy to use and implement model, based on three main parameters: the risk - free rate, the stock's beta coefficient and the expected rate of return for the market as a whole, used to calculate the market risk premium. The model has a large applicability, mainly because it does not use dividend estimates for the future and thus works for organizations that do not pay regular dividends, but also because information on the three variables mentioned are usually public and thus one does not need to make additional estimates on the variables used. "
Tags: dividend growth models. growth rates, Modern Portfolio Theory
Abstract The paper examines this theory which helps analysts to identify appropriate measures of risk for an efficient portfolio and defines the relationship between risk and return for efficient portfolio. The paper shows how the CAPM theory also estimates the measure of risk for an individual security or an inefficient portfolio and defines the relationship between risk and return for an individual security or inefficient portfolio. A worked example is supplied towards the end of the paper.
From the Paper "The theory of CAPM (Capital Asset Pricing model) is based on several assumptions. The primary assumption while conducting the risk analysis of an investment portfolio is that the individuals are usually reluctant to take risk. It also assumes that the individuals search for ways to maximize the expected usefulness of their portfolios with a single planning period. Moreover, individuals have analogous expectations relating to the return on their investment portfolios. In other words, their subjective estimates regarding the means, variance and covariance of the investment returns are almost similar. Individuals can also freely borrow capital for investment and can lend capital as well. This borrowing can be made on a risk free rate of return. In addition to this, this theory also assumes that the market is operating under ideal conditions, no taxes are to be paid, transactions costs are almost negligible, securities are completely discernible and firms operate in an environment of perfect competition. Finally, quantity of risky securities can be easily determined."
Abstract This paper compares and contrasts the capital asset pricing model (CAPM) and the discounted cash flow (DCF) model in valuing common stock. The paper holds that, because of the complexity and importance of valuing common stock, the above techniques have been devised over time to accomplish this task. It points out that CAPM focuses on inputs to calculate stock prices that are external to the firm while the DCF model focuses on internal factors. Also, CAPM is concerned with growth rate, while DCF is concerned with estimated returns. The paper concludes that both models are important to investors and expanding companies.
From the Paper "For a firm that is expanding, it is difficult to establish a proper growth rate for the DCF. If past growth rates in earnings and dividends have been relatively stable, and if investors appear to be projecting a continuation of past trends, then the growth rate may be based on the firm's historic growth rate. However, if the company's past growth has been abnormally high or low, either because of its own unique situation or because of economic fluctuations, then the growth rate has to be estimated in some other manner."
Abstract This paper explains that the capital asset pricing model (CAPM) and the arbitrage pricing theory (APT) both depend on the identification and quantification of risk vis-a-vis a given financial device or product and thereby a financial product's volatility. The author points out that the primary assumption of the CAPM is that there exists a relationship between risk and the expected rate of return (ERR) and this relationship is then factored into the pricing structure of financial securities. The paper relates that APT is a model that relies on the integration of several factors at once rather than bundling all factors into a single beta. The paper concludes that the APT is the model of preference because the APT is the only valuation model, which can account for the full spectrum of market and asset-specific factors that can affect price and risk determination within the context of the global economy.
Table of Contents:
Overview
The Capital Asset Pricing Model
The Arbitrage Pricing Theory
From the Paper "There are several weaknesses with the CAPM, which has limited its effectiveness in the financial services industry. The most prominent of these weaknesses is that it is primarily a single-factor risk assessment method which relies on a single covariance to the overall financial market the security is traded in. This single covariance is the CAPM's beta which is effective in ideal market conditions but when extra-market factors affect change in the market or to the industry in which the security functions, this single-factor aspect becomes less accurate because it cannot accommodate such variance."
Tags: identification quantification risk, rate of return, integration
Abstract Examines valuation tools (techniques) and the decision-making process. The two phases of the valuation process: pricing & market evaluations. Market's response to company's initial public offering (IPO). Pricing of an IPO. Background information on IPOs. Various decision-making models; Capital Asset Pricing Model (CAPM). Effects of institutional investors.
From the Paper "VALUATION OF NEW PRIVATE COMPANIES
Introduction
The valuation of new private companies is examined. Valuation tools (techniques) and decision-making processes are addressed in the examination.
The valuation process for new private companies occurs in two phases. The first phase is the pricing evaluation. The objective of this phase is to determine the initial offering price for shares in the new company. The second phase is the market evaluation. The results of this phase reflect the actual worth of the new company based on the market's response to the company's initial public offering (IPO). IPOs are equity stock issues when a corporation first initiates public trading of its shares."
Abstract This paper studies how a hypothetical stock broker managing a diverse stock portfolio would evaluate the risks and return on his clients' various investments. The paper provides a valuation and analysis of individual securities and a valuation of CAPM and APT models to estimate the value of securities; discusses possible problems related to the models; explores diversification and selection of a portfolio of securities; and details the risks and returns of the portfolio.
Development of a Basic Model
Some Problems
Diversification
Portfolio Selection
Risks and Returns
From the Paper "What does a reliable fund manager have to do today to ensure that his clients will obtain a realistic picture of the risks and returns of investing in his portfolio? The first part of the investment decision process involves the valuation and analysis of individual securities, which is referred to as security analysis. The valuation of securities is a time consuming and a difficult job. First of all, it is necessary to understand the characteristics of the various securities ad the factors that affect them. Secondly a valuation model is applied to these securities to estimate their price or value. Value is a function of the expected future returns on a security and the risk attached. Both of these parameters must be estimated and brought together in a model. For bonds, the valuation process is relatively easy, because the returns are known and the risk can be approximated from currently available data. Interest rates are primary factor affecting bond prices, but no one can consistently forecast changes in these rates. The valuation process is much more difficult for common stocks than for bonds because the investor must deal with the overall economy, the industry, and the individual company; both the expected return and the risk of common stocks must be estimated. The secondary major component of decision process is portfolio management. After securities have been evaluated, a portfolio should be selected. Having built a portfolio, the astute investor must consider how and when revising it. If the investor pursues an active strategy, the issue of market efficiency must be considerated; if prices reflect information quickly and fully, investors should consider how this will affect their buy and sell decisions. Even if investors follow a passive strategy, questions to be considered include taxes, transaction costs,and maintenance of the desired risk level, and so on."
Abstract "This paper compares two methods of assessing the risk of investments, the Capital Asset Pricing Model and a competing approach for asset pricing called the Arbitrage Pricing Theory, which was developed to address some of the criticisms of the CAPM. The paper considers which is preferable and why this may be so, based on how each is used and how their validity is established.
From the Paper "The Capital Asset Pricing Model is not the only asset pricing model around. One of the competing approaches asset pricing is called the Arbitrage Pricing Theory, which was developed to address some of the criticisms of the CAPM. The issue is which of the two approaches is the best and why. The CAPM is a model that describes the relationship between risk and expected return, a model that is used in pricing risky securities. According to this model, the expected return of a security is equal to the rate on a risk-free security plus a risk premium, and the investment should only be made it the return meets or beats the required return (Capital Asset Pricing Model - CAPM, 2005, para. 1). Risk is demonstrated here according to how closely a stock's price follows the market as a whole."
This paper goes over several details of information from stock earnings to p/e ratios and the CAPM equation. It is very detailed as far as the equatio...
4,725 words (approx. 18.9 pages), 11 sources, 2005, $ 187.95
Abstract This paper goes over several details of information from stock earnings to p/e ratios and the CAPM equation. It is very detailed as far as the equations used and I have uploaded an excel file for reference to aid in the explanation.
From the Paper U.S. Bond Market Training Document Bonds tend to be one of the most stable investments in an unstable economy. In fact the trends of an economy can be determined by watching the sales of bonds. As bonds sales increase then it is probable that something might be going on to increase the instability of that economy and therefore make investors conservative in their investment practices. This is also true when the sales of bonds go down. Often this is a sign that things are going well and even though stocks are more fragile and contain higher risk factors that these factors have been forgone, to some degree, for a short period of time. Often this is all it takes for investors to gain short returns on stocks in which they might normally not have invested.
Abstract This paper explains that the beta in an investment scenario, which is a measure of the magnitude of the systematic risk involved in an investment, is either positive or negative depending on the positive or reverse movement of the return of the investment in relation to the market trends, taken on an average. The author points out that negative beta stocks are rarely found in the real world markets since they are seen to go against the trend of the market; however, one possible sector, which has negative beta stocks is the gold industry that normally goes against the trend shown by equity markets. The paper relates that, in consonance with the capital assets pricing model (CAPM), the market-driven price of a security would vary in accordance with the variation in its beta. The paper includes a formula and table.
From the Paper "But during the last few years, it is quite evident that amidst political uncertainty that has risen in the world that the price of gold has shown material gains when equity markets have indicated recorded sharp decline. Similarly, another commodity that has performed quite well is the oil. As with gold, the oil prices have suffered over most of the past two decades, while the equity prices evidenced a rapid growth. It is only during the recent years that the oil prices have indicated a recovery. The present political uncertainty has made the situation extremely problematic for investors."
Abstract This paper analyzes the Capital Asset Pricing Model, describing some of its numerous benefits. With the CAPM, traders can avoid much of the risk they incur through diversification. Therefore, only unavoidable risk should be compensated. Nevertheless, even after a trader diversifies his portfolio, some risk remains. Because some risk is associated with the market as a whole, this risk cannot be neutralized through diversification, and CAPM explains that.
Abstract This paper explores many concepts found in finance, such as present value and capital asset pricing model (CAPM). The paper examines three business models in order to better understand present value and discount rates. The paper also looks at the security of equity future and, more specifically, Wal-Mart's performance. The relationship between CAPM versus APT (Arbitrage Pricing Theory) is described, and the method used when determining a rate of return and capital budgeting purposes is explained.
From the Paper "One type of security is called an equity future. This is a contract guaranteeing your shares of a company to be delivered to you not today, but sometime in the future. What you would pay for such a contract? It depends on what price you expect the shares to be at in the future, and how volatile the stock is at the time of purchase or in other words what discount rate you should value this future payment of stocks). By looking at Yahoo Finance.com and at the five-year chart for Johnson and Johnson, the reference company I chose, one can learn a lot about the company. In comparison with Johnson and Johnson, what would you pay for 100 shares of Wal-Mart to be delivered to you in one year? Is it like comparing apples to orange or do the two companies have more in common than thought?"
Abstract This paper details the background to the "Overreaction Hypothesis" and places it in the context of studies in cognitive psychology. The paper also examines the extensive and disputed evidence as to the existence of an "overreaction effect" and whether the evidence is consistent with investor irrationality or can be explained by other factors. This methodology is primarily based on the original work of De Bondt and Thaler (1985).
From the Paper "The ability of financial markets to interpret information quickly and accurately has been the subject of considerable academic and professional debate for over thirty years. Initially, the Efficient Market Hypothesis (EMH) was widely accepted and any dissenting opinion was considered heretical. General acceptance of the hypothesis lead to a fundamental change in professional investor behaviour away from active investment management and towards passive investment management."
Abstract This paper explains how Arbitrage Pricing Theory and Capital Asset Pricing Model Theory work and then, in order to determine which theory seems to work better for an investor, the paper makes a comparison and analysis of the two theories.
From the Paper "Any Asset Pricing Theory forms the basic foundation of finance theory, in that it deals with the value of any asset under unknown or uncertain circumstances. The relationship between an asset and its price is the mainstay of the asset pricing theory: the lower the price, the poorer the expected performance. The Arbitrage Pricing Theory derives from this theory. The basic idea in the APT theory is that any sort of risk in asset returns must not affect the pricing of the asset in any way; it must depend on the covariance of assets with the risk factors. (Bayesian Approach of the Arbitrage Pricing Theory) The APT originated from Stephen Ross, 1976-1978. Ross had used a statistical procedure for assets returns, with the belief that there are in existence no arbitrage probabilities. The APT must of necessity involve a lot of risk taking processes, (Definition of Arbitrage Pricing Theory.)
Abstract This paper provides an overview of Abbott Laboratories, a research-based, global pharmaceutical company that discovers, develops, manufactures and markets leading prescription medicines as well as many of the world's best known consumer healthcare products. The paper discusses the company's position in the industry, and the extent of it's global operations. It also analyzes the company's stock, with a risk and return and valuation analysis.
Table of Contents:
Introduction
Background of Abbott Laboratories & Operations
Competition Affecting Abbott's Stock Value
Risk & Return Analysis on Abbott Laboratories Stock
Summary of Financial Data
Du Pont Analysis of Abbott Laboratories
Valuation & CAPM Analysis
Summary of Analysis
Conclusion
From the Paper "Abbott's business practices and goals have set the pace for the company's extraordinary portfolio management practices, security of the day to day management of resources, research, and development. Abbott has successfully overcome the uncertainty in drug development and competitive pressures. Abbott's business practices continue to make Abbott a unique company and has assisted the company to maintain its' global stance in the world of pharmaceutical companies.
"Everything done at Abbott Laboratories is a reflection of the company's mission, a commitment to serving the total health-care continuum. Abbott's stock analysis concludes with the fact that competitive pressures call for an unprecedented in-depth analysis monitoring of the company stock's general risk exposure."
Tags: performance, resources, research, development
Abstract This paper explains that behavioral asset pricing models, based on real life behavior, are becoming more relevant and important. The author identifies the salient features of this model and compares traditional, capital (CAPM), arbitrage-pricing (APT), consumption capital (CCAPM), Fama-French 3 factor, fundamentalist and chartist and behavioral asset pricing models. The paper concludes that the behavioral asset pricing model appears to provide one of the better approaches to addressing confounding issues particularly when compared to traditional models. The paper includes detailed summary charts.
Table of Contents:
Introduction
Review and Discussion
Evolution of Asset Pricing Theories
Table: Comparison of Asset Pricing Models
Summary and Conclusion
From the Paper "These new concepts concerning how "real people" make decisions have fueled the rapidly growing fields of behavioral finance. This emphasis on developing a better understanding of real-world decisions made by real people, then, is the essence of behavioral finance. Therefore, from a behavioral finance perspective, economic theory should not necessarily result in the expectation that financial markets are efficient; to the contrary, significant and systematic fluctuations from efficiency can be reasonably expected to endure for lengthy periods of time."
