...Change in price: DEUR=dP0dr=-1(1+r)*t=1Tt*C(1+r)t Duration of the Portfolio DPortfolioMAC= DBond1MAC*P0Bond1P0Portfolio+DBond2MAC*P0Bond2P0Portfolio * The higher Duration the more sensitive is the Bond to changes of interest rate Markowitz Portfolio theory: Expected Return: μ=1ni=1nri Variance: σ2=1(n-1)i=1n(ri-μ)2 Standard Error: Err=σn Covariance: σAB=1(n-1)i=1n(riA-μA)(riB-μB) Correlation coefficient: ρAB=σABσAσB Markowitz Portfolio Theory: σ2=a2σA2+b2σB2+2abσAB μ=arA+(1-a)rB Portfolio of identical Stocks: σPortfolio=1nσOne stock2+1-1nσBetween two stocks Sharpe ratio (Slope of the Capital Market Line): Sharpe Ratio= (μ-rf)σ CAPM: r=rf+βrm+rf β=σStock,MarketσMarket2 βMarket Portfolio=1 βRisk Free Asset=0 β for estimation of cost of equity: additional risk of borrowing and different interest rates for borrowing and lending are not accounted for. Stocks under SML are overvalued, Stocks above SML are undervalued. On average the stocks are on the SML. Risk decomposition: σ2=βx2σMarket2+σε2...
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...Capital Asset Pricing Model Capital Asset Pricing Model (CAPM) is used to calculate the projected return on the equity of a single company. CAPM is based on risk free rate, the expected return rate on the market and beta coefficient of a single portfolio and security. Re = Rf + β [E(Rm) - (Rf)] According to the formula, Re represents the Return on Equity, Rf is for the risk-free rate, E(Rm) denoted to expected rate of return on the market, and β is the beta coefficient and E(Rm) - Rf is the difference among the expected market rate of return and the risk-free rate, is known as the market premium (Phillips, 2007). The total risk of stock is divided in two parts: the systematic risk, which is risk linked with the market and is impossible to...
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...the capital asset pricing model… Hello this is an essay about the capital asset pricing model Hello this is an essay about the capital asset pricing model Hello this is an essay about the capital asset pricing model Hello this is an essay about the capital asset pricing model Hello this is an essay about the capital asset pricing model Hello this is an essay about the capital asset pricing model Hello this is an essay about the capital asset pricing model Hello this is an essay about the capital asset pricing model Hello this is an essay about the capital asset pricing model Hello this is an essay about the capital asset pricing model Hello this is an essay about the capital asset pricing model Hello this is an essay about the capital asset pricing model Hello this is an essay about the capital asset pricing model Hello this is an essay about the capital asset pricing model Hello this is an essay about the capital asset pricing model Hello this is an essay about the capital asset pricing model Hello this is an essay about the capital asset pricing model Hello this is an essay about the capital asset pricing model Hello this is an essay about the capital asset pricing model Hello this is an essay about the capital asset pricing model Hello this is an essay about the capital asset pricing model Hello this is an essay about the capital asset pricing model Hello this is an essay about the capital asset pricing model Hello this is an essay about the capital asset pricing model Hello...
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...Name: XXXXXX Ahmed XXXXXX Course: XXXXX (Foundation of Financial Analysis and Investment (A) Course: MSC Finance Std: xxxxxxxxx Introduction Asset pricing models are very useful tools in calculating the risk and their respected return for the investors and they are being widely used by financial analyst. From different theories we can determine the value of assets into three steps i.e., Expected Cash Flow, number of periods and the expected rate of returns. Investors have several questions before investing his money in any stock or in any other commodity that is what should be the accuracy of prices of selling or buying the stocks, what could be the risk, what are the factors should be considered that ignores uncertainty and the expected returns of the stock. The Capital Asset Pricing Model (CAPM) and Arbitrage Pricing Theory (APT) both are well known pricing model determines the risk factor for analyzing the appropriate returns for the investors in their own unique ways. CAPM model uses the whole market environment as one factor but on the other hand APT uses five different economics factor which is more detailed in describing risk which accelerates for these factors. The adoption of CAPM is in practice but other hand its various criticisms are documented on it as well and academics are working on the new approaches of it such as APT and others is discussed in later paragraphs. In this assignment I will discuss the assumptions of CAPM and APT model and their...
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...Capital Asset Pricing Model Introduction One factor model that extends the capital asset pricing model (CAPM), adding size and value factors in addition to market risk factor in CAPM. This model considers the fact that the cost and small-capitalization stocks outperform the market on a regular basis. Including these two additional factors that corrects the model for the outperformance trend, which is thought to make it a better tool for evaluating the effectiveness of a manager. FAMA and French tried to better assess the market returns, and based on research, it was found that the value of the shares outperform growth stocks; In addition, small cap stocks tend to outperform large cap stocks. As an instrument of evaluation, the effectiveness of the portfolio with a large number of small cap or value stocks will be lower than the CAPM results, the three factor model adjusts down to small cap and value outperformance. There is much debate about how, outperformance is due to the tendency of market efficiency or inefficiency of the market. On the efficiency side of the debate, outperformance, how to explain that the risk of exceeding cost and small-capitalization stocks face as a result of their high cost of capital and increased business risk. On the ineffectiveness of the parties, outperformance is explained by market participants mispricing the value of those companies, which provides the excess return over the long term as the value is adjusted. The model for asset pricing...
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...emerged to attempt to scientifically measure the potential returns on an investment. The Capital Asset Pricing Model (CAPM) and the Arbitrage Pricing Theory (APT) are two of such models. The purpose of this essay is to critically compare the Arbitrage Pricing Theory with the Capital Asset Pricing Model as used by fund managers in the United Kingdom. Captial Asset Pricing Model (CAPM) When Sharpe (1964) and Lintner (1965) proposed the Capital Asset Pricing Model (CAPM), it was seen as a leading tool in measuring if an investment will yield in positive or negative returns. It attempts to explain the relationship between investment risk and expected reward of risky securities (Ushad, 2011; Reilly and Brown, 2011; Heshmat, 2012). The CAPM helps to determine the required rate of return for any risky asset (Reilly and Brown, 2011). “The CAPM states that the expected return on a security or a portfolio equals the rate on a risk-free security plus a risk premium” (Heshmat, 2012: 504). It indicates that the expected return on an asset has a positive linear relationship with the non-diversifiable risk of the security (beta) (Heshmat, 2012). Ushad (2011) explains that the CAPM is based on the premise that higher returns should be associated with higher beta risks. It is usually calculated as follows: E(Ri)= Rf + βi (E(Rm) - Rf). (Ushad, 2011). Where, E(Ri) = return required on financial asset i Rf = risk-free rate of return βi = the sensitivity of the asset’s return to the market ...
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...Capital Asset Pricing Model Case Study Beta Management Company (HBS Case 9-292-122) We are asked to read the Harvard Case and answer the following questions. The answers need to be clear so I can research your work myself to gain a better understanding. Therefore, please make sure I can follow your reasoning – ie: please provide an explanation behind each of your approaches to answer each question. I intend to use your feedback as the basis to gain a better understanding of this course, which I have had difficulty in the area of CAPM. Having your detailed solution with explanations in front of me, will allow me to better research this topic and provide me with the framework to understand this particular problem better. Therefore, the more information you can provide, the better. I am not sure what an average cost is for a tutor to handle a problem such as this, but I have attempted to provide a good incentive to attract a tutor that will understand that I am genuinely seeking to gain a much greater grasp on CAPM and as such, am looking for a tutor to provide an in-depth and accurate response. Thanking you in advance. QUESTIONS: 1. Compute the standard deviation of the stock returns of California REIT and Brown Group during the past 2 years. 2. Suppose that Beta’s position had been 99% of equity funds invested in the index fund, and 1% in the individual stock. Calculated the standard deviation of this portfolio using each stock. How does each stock affect...
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...I. JUDGMENT and DECISION BIASES In the first section of the survey, psychological effects which are relevant for securities markets are defined. These effects mostly derive from common roots. Since it is almost impossible to analyze all the given data, rules of thumbs are preferred such as algorithmic, heuristics and mental modules. Heuristics must be applied to appropriate problems and cases so that they can be effective. There have been debates between both economists and psychologists on how heuristics do. Most of the economists believe in the fact that errors are independent across individual investors. The idea ends up with the equilibrium point and correction. However people mostly share similar heuristics gained from experience. Human mind is not designed solely to make good decisions but also to experience pleasantness. Individuals believe that they are better than they actually are. Also decisions are affected by feelings and mood of decision maker individuals. People can learn from past experiences and failures. However learning is hard and self-deception makes people realize their success more than failures and losses. Many (though not all) of the cognitive biases are stronger for individuals with low cognitive ability or skills than for those with high ability or skills, consistent with biases being genuine errors. A. Heuristic Simplification A.1 Attention/Memory/Ease-of-processing effects Lack of full attention, limitations on memory...
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...MP A R Munich Personal RePEc Archive Investor Psychology and Asset Pricing David Hirshleifer Fisher College of Business, The Ohio State University 10. February 2001 Online at http://mpra.ub.uni-muenchen.de/5300/ MPRA Paper No. 5300, posted 13. October 2007 ÖÙ ÖÝ ¸ ¾¼¼½ ÁÒÚ ×ØÓÖ È×Ý ÓÐÓ Ý Ò Ò× Û Ø Ò ÙÒÒÙÑ Ö ¸ ÙÒ ×× Ø ÈÖ Ò Ö ÒØÖÓ Ù ØÓÖÝ × Ø ÓÒº Ì Ì Ô Ô Ö Ò ÓÒØ ÒØ× Á ÂÙ Ñ ÒØ Ò Áº½ À ÙÖ ×Ø Ë ÑÔÐ ¬ Ø ÓÒ º º º º º º º º º º º º º Áº½º½ ØØ ÒØ ÓһŠÑÓÖÝ» × ¹Ó ¹ÈÖÓ ×× Ò Áº½º¾ Æ ÖÖÓÛ Ö Ñ Ò »Å ÒØ Ð ÓÙÒØ Ò »Ê Áº½º¿ Ì Ê ÔÖ × ÒØ Ø Ú Ò ×× À ÙÖ ×Ø º º º Ð ÍÔ Ø Ò ÓÑ Ò Ò « Ø× º º Áº½º Áº¾ Ë Ð ¹ ÔØ ÓÒ º º º º º º º º º º º º º º º º º º Áº¿ ÑÓØ ÓÒ× Ò Ë Ð ¹ ÓÒØÖÓÐ º º º º º º º º º º º Áº¿º½ ×Ø ×Ø ÓÖ Ñ Ù ØÝ º º º º º º º º º Áº¿º¾ ÅÓÓ Ò × ÓÒ× º º º º º º º º º º Áº¿º¿ Ì Ñ ÈÖ Ö Ò Ò Ë Ð ¹ ÓÒØÖÓÐ º º º Áº ËÓ Ð ÁÒØ Ö Ø ÓÒ× º º º º º º º º º º º º º º º Áº ÅÓ ÐÐ Ò ÐØ ÖÒ Ø Ú × ØÓ ÜÔ Ø ÍØ Ð ØÝ Ò × ÓÒ ×× º º « Ö º º º º º º º º º º º º º º º º ØÓ º º º º º º º º Ø× º º º º º º Ò « Ø× º º º º º º º º º º º º º º º º º º º º º º º º º º º º º º º º º º º º º º º º º º º º º º º º º º º º º º º º º º º º º º º º º Ý × Ò ÍÔ º º º º º º º º º º º º º º º º º º º º º º º º º º º º º º º º º ØÒ º º º º º º º º º º º º º º º º º º º º º º º º º º º Ð º º º º º º º ½¼ ½¾ ½¿ ½ ½ ½ ½ ½ ¾¼ ¾¾ ÁÁ ÁÁº½ ÈÖ Ø Ð ØÝ Ó Ë ÙÖ ØÝ Ê ØÙÖÒ× º º º º º º º º º º º º º º º º º º º º º ÁÁº½º½ ÈÖ Ø Ð ØÝ × ÙÔÓÒ ØÓÖ Ê × Å ×ÙÖ × º º º º º º º º º ÁÁº½º¾ ÈÖ Ø Ð ØÝ × ÙÔÓÒ ÈÖ...
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...concepts to decision making process 2 1.1Explaining the importance of costs in pricing strategy 2 1.2 Designing costing and pricing system 2 1.3 Recommending proposal 4 Task 2 Application of forecasting techniques 5 2.1 Forecasting Techniques 5 2.2 Sources of Funds for the Expansion of ABZ Ltd 6 Task 3 Participating in the Budgeting Process 10 3.1 Selecting appropriate budgetary targets 10 3.2 Preparing Master Budget 11 3.3 Comparing Actual expenditure and income with master budget 12 3.4 Impact of Lack Budget Monitoring Process Policy 12 4.1 Process in Managing Cost Reduction 14 4.2 Potential for the Use of Activity-Based Costing (ABC) 15 5.1 Applying financial appraisal methods 16 5.2 Evaluating and recommending suitable project 16 5.3 Reporting appropriate strategic investment decision 18 Task 5 Interpreting Financial Statements 18 6.1 Analyzing Financial Statements 18 6.2 Applying Financial ratios 18 6.3 Recommending Strategic portfolio management 20 References 21 Task 1: Applying costs concepts to decision making process 1.1Explaining the importance of costs in pricing strategy Cost can be looked upon as one of the most important elements of the process of taking pricing decisions and implementation of pricing strategies. Particularly, companies that adopt cost based pricing strategy, utilizes manufacturing and production costs as the basis of pricing (Brag, 2001). Cost considerations on the part of a company aids in fixing a price...
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...Marketing Challenges in a New Economy There is a new trend in today’s economy that does not involve large chain suppliers, retailers or wholesalers. This new trend involves companies that allow owners to rent out their physical assets to increase their income. This new business practice puts the producer directly in contact with the consumer to conduct business. This new trend in the consumer marketplace is known as the share economy. This paper will discuss how this new concept of the share economy has had an effect on the traditional economy and whether the shared economy is creating new value for the consumer or if it is just replacing existing business. The share economy concept involves individuals renting out their physical assets. For example, an individual who is looking to increase their monthly income has the option to increase their income by renting out their home. Another example would be an individual who rents out their car, which would otherwise be unused in their driveway. According to Geron (2013) Forbes estimates that this new economy will generate revenue into people’s wallets that will surpass $3.5 billion this year, with growth exceeding twenty-five percent. This new share economy has been able to grow at a very successful rate and has impacted a stagnant wage market into a disruptive economic force (Geron, 2013, para 9). One element that has helped to drive the share economy is technology. Technology has helped in improving the connection between buyers...
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...Contents Introduction 2 LO1. Understand the importance of cost, volume and profit for management decision making in the travel and tourism 2 1.1 Importance of Cost and Volume 2 1.2 Pricing Methods 4 1.3 Factors Affecting Profit 5 LO2. Understand the use of management accounting information as a decision making tool in travel and tourism businesses 7 2.1 Types of Management Accounting Information 7 2.2 Decision Making Tool 8 LO3. Be able to interpret financial accounts to assist decision making in travel and tourism businesses 10 3.1 Interpret Financial Accounts 10 LO4. Understand sources and distribution of funding for public and non-public tourism development 12 4.1 Sources of Funding 12 Conclusion 14 References 15 Figure 1: Costs Classification 3 Figure 2: Accounting for Travel Companies 7 Figure 3: Management Information for Decision Making 9 Figure 4: Financial Accounts 10 Figure 5: Sources of Finance 12 Introduction Management decision making is a crucial part for not only regular companies but even for travel and tourism companies. The report here thus highlights and discusses different financial practices as observed and applied at the micro level, i.e. specifically in the travel and tourism industry. The company that has been chosen for analysis and reference study here, is Cox and Kings. Cox and Kings is one of the longest established travel companies around the world. Founded in 1758, the company is headquartered in India and...
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...Background The significant price increases of new drugs assets from Valeant’s recent acquired company, Marathon, has resulted in complaints from customer and sustainability concerns from investors. In addition, low investment and declining return in R&D indicates a potential problem of the business model. My proposal is to develop more products and revenue streams through R&D strategies rather than raise prices at the expense of our customers. Right pricing strategy and efficient R&D will bring remarkable benefits to Valeant. Current Pricing Strategy of Valeant In the article “Things to Know about Valeant Pharmaceuticals” from Wall street Journal, Rockoff (2015) argues that practices of lowering R&D spending and adding high-revenue drug assets through aggressive deal making reduced its tax rate and aroused concerns from investors. According to Citron Research (2015), Valeant increased prices of two main heart drugs: Isuprel and Nitropress by 525% and 212% respectively, which exceeded the U.S healthcare industry standard of 6-8%. Valeant’s extreme price tactic is only to beat Wall Street earning estimation and boost its stock price. The research also points out that CEO’s interpretation of price hikes, “Organic Growth of Valeant”, appears to be unreliable. In pharmaceutical industry, increase in prices is essential. However, Valeant’s strategy exceeds the limits of entire healthcare system. In the book, “Pricing for Profit”, Hill (2013) suggests that one method to...
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...global manager must develop systems and policies that address Pricing Decisions Price floor: minimum price Price ceiling: maximum price Optimum prices: function of demand Global Marketing Chapter 11 Must be consistent with global opportunities and constraints Global Marketing - Schrage Basic Pricing Concepts Market Price Strategy Law of One Price would prevail in a truly global market International trade helps keep prices low and low prices keep inflation in check Global markets exist for certain products—integrated circuits, crude oil National markets reflect costs, regulation, demand, competition— beer May make or break your profitability May not be able to use the same strategy Internationally as Domestically Global Marketing - Schrage 11-3 Global Pricing Objectives and Strategies 11-4 Global Marketing - Schrage Market Skimming and Financial Objectives Managers must determine the objectives for the pricing objectives Market skimming Charging a premium price May occur at the introduction stage of product life cycle Unit sales Market share Return on investment They must then develop strategies to achieve those objectives Regain investment in R&D and product development faster Penetration pricing Market skimming Global Marketing - Schrage Global Marketing - Schrage 11-2 11-6 11-5 1 Penetration Pricing and Non-financial Objectives Companion Products Products whose...
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...1. Sony is currently pursuing an operations strategy where most of its high-definition TV production is contracted to other firms. By contrast, Samsung is committed to keeping production of its TVs in-house. Why do these firms pursue different operations strategies for basically the same products? Advantages of Sony using the “Buy” (Outsource) strategy: • Allow Sony to concentrate resources on unique applications like movies, video games, and music. • The fastest growth is in low-end televisions sold in developing counties like China; whose production can be more easily outsourced than more sophisticated models. • Outsource partner may be able to manufacture products at cheaper cost. • Flexibility in choosing outsource partner who specializes in product. Sony can match suppliers who can meet market demand. Outsource partner may be an expert or have latest production and manufacturing technologies available. • Sony is losing money, and manufacturing is very capital intensive. Sony can save money and use its resources to fit their strategic organizational objectives. • Offsets: using an outsource supplier may help Sony capture orders or improve business relations with the suppliers home country. Advantages of Samsung using a Make (Produce) strategy: • Samsung leadership believes that giving up manufacturing is tantamount to abandoning your brand. • Samsung can maintain tight control over the value chain, and therefor over quality. • Samsung keeps all the profits...
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