In real world, there are more risks involved than just one of type of risk. Market sensitivity is an important risk but that cannot alone be used in order to compute the intrinsic value of stocks and hence by relying on only this type of risk, we are actually making the things more simple than they really are and not accounting for important risk elements which lead to faulty analysis and intrinsic value determination of stocks. This can lead to poor decision making and by relying just on Capital Asset Pricing model, investors stand a chance of losing their hard earned money because they are not account for all types of risk that should be included in their investment. All of this debate shows that investors should not just pick the blue chip stock but also first try to classify stocks into value or growth stocks and then create a portfolio on the basis of a strategy called “Dogs of the Dow” and keep on making structural changes to their portfolios based on the results announce. This way they are not only diversifying, but also upgrading the return on their investments. 2) There are several factors that account for Risk and Returns according French and Fama. Risks are basically of three types. The first type of risk is beta or market volatility. The second type of risk is investing in small versus big stocks, and the final type of risk is investing in growth versus value stocks. The reason why these factors are considered is because these are three main alternatives investment strategies that an investor can choose. Investor can invest either in stocks which have high beta or low beta. However, this decision will be made according to the expectation of the investor. If the investor is expecting the market to fall then negative correlation with market in a stock would be preferred. However, if the investor thinks that the market is going to climb upwards then it is better for the investor to invest in stock having a positive correlation with the market. In either case, the investor is speculating market to perform either way. If the investor chooses to invest in large company, then there are chances that the growth of these stocks would be much less than a new aggressive company. Hence, the investor would not be able to make quick capital gain in these stocks, but stream of income in the form of dividends would be quite high if the investor chooses to invest in a stock of a large company. Similarly, if the investor chooses to invest in the value stock there are chances that the investor would earn high returns, but there are also chances that the investor would not be able to earn any return on these stock. This is in line with Warren Buffets’s and EMH investment theories which state “Buy the sells and sell the buys” . The fundamental behind this theory is the fact that stocks which have never performed in the past will perform in the future whereas stocks which have performed well in the past will not be performing as brilliantly as they have done before. Hence, it is better to buy stocks of companies which are relatively lagging behind the blue chip stocks. In other words it is better to buy the dogs of today than stars of the past. 3) Capital Assets pricing model is based on just one facet of the risk return model. This risk is represented by beta and can be explained as stock
Name Date Value Stocks Versus Growth Stock 1) Fama and French define value stocks as undervalued stocks which are under priced. These stocks have high ratio of book value to market value. Similarly growth stocks are defined as those stocks which are considered by the market as blue chip stocks and are trading at a high price because of high demand for these stocks in the market…
The issuer of the bond benefits from the bond conversation mechanism because the issuer can eliminate bonds from the marketplace when the market conditions are unfavorable. Another reason a company might desire to convert a bond into equity is if the company does not want to pay of the principal of the bond due to cash flow problems.
Name: Instructor: Course: Date: Stock market summary essay Introduction This essay seeks to relay to the reader a comprehensive summary of a stock market case. The case involves an investor who has $1 million and seeks to invest in various stocks of his choice.
The stock market can be very profitable but can also lead to losses. The stock market is very profitable creating a lot of interest to many people and though it may result in losses, there is a lot of benefit to the institutions selling their stocks, the individual that buy it and the governments of the various countries, making it one of the most popular earners.
Commodities are traded in commodities markets, with derivatives are traded in a diversity of markets. The size of the worldwide 'bond market' is estimated at $45 trillion. The size of the 'stock market' is estimated at about $51 trillion. The world derivatives market has been estimated at about $480 trillion 'face' or nominal value, 30 times the size of the U.S.
It is necessary to note that trading is also constantly increasing in developing and emerging markets such as Taiwan, Korea, India, Mexico, etc. The value of traded shares was reported to rise from 3% to 17% during last years.
It is suggested by theoretical economists and financiers that stock markets are able nowadays to promote long-run economic growth.
Cash and carry arbitrage transactions can be described as paying for a commodity in the cash market with funds outsourced from borrowed money. Here, the investor in stocks would sell the corresponding futures contract at a price higher than the amount paid for in order to make a profit (Peel, and Taylor 2002.
A firm’s Stock Rate of Return (SRR) is the gain or loss of an investment in its stocks over a specified period, usually expressed as a percentage increase over the initial investment cost. A Stock Rate of Return measurement measures the stock value, based on their past rates of return.
Many analysts stress that stock markets are necessary for economic growth and they are able to provide the developing countries with a boost to economic indicators. Today developing and emerging markets attract a lot of interest from investors. This paper tries to establish the degree to which stock markets are promoting long-term economic growth.
The former is the simplest measure in stock valuation, for this reason it is common. Common and preferred stocks are the two kinds of stock.
An equivalent value of stock by every investor is controversial in
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