06-28-2010, 10:16 AM
Idea Solution Of Question 1
Question stock beta#1
Vu handout page#105
Average Required ROR for all rational investors in an Efficient Market can be estimated using the CAPM Theory: Beta and Risk Free Rate of Return.
Total Rate of Return (ROR) for Single Stock = Dividend Yield + Capital Gain. GORDON’S FORMULA FOR COMMON STOCK PRICING OR VALUATION USES REQUIRED RETURN r = DIV/Po + g. In Efficient Markets, Price of Stocks is based on Market Risk (or Beta). We can formulate the required rate of return in terms of Beta risk so how can we use beta coefficient to calculate the required rate of return for the average investor in the market. The answer to it is the
Vu handout page # 114
Po* = DIV1 / [ (rRF + (rM - rRF ) βA ) - g]
Where
Po*=80
DIV1= 5
g= 7%
rRF = 6%
rM = 10%
βA ) ?
Now put the values and get answer which is = βA 1.8125
Question stock beta#1
Vu handout page#105
Average Required ROR for all rational investors in an Efficient Market can be estimated using the CAPM Theory: Beta and Risk Free Rate of Return.
Total Rate of Return (ROR) for Single Stock = Dividend Yield + Capital Gain. GORDON’S FORMULA FOR COMMON STOCK PRICING OR VALUATION USES REQUIRED RETURN r = DIV/Po + g. In Efficient Markets, Price of Stocks is based on Market Risk (or Beta). We can formulate the required rate of return in terms of Beta risk so how can we use beta coefficient to calculate the required rate of return for the average investor in the market. The answer to it is the
Vu handout page # 114
Po* = DIV1 / [ (rRF + (rM - rRF ) βA ) - g]
Where
Po*=80
DIV1= 5
g= 7%
rRF = 6%
rM = 10%
βA ) ?
Now put the values and get answer which is = βA 1.8125