Principles of Investments Discussion Questions

  1. Concept Question: Under what conditions does EMH exist and under what conditions does EMH not exist.
  2. Open-Ended Calculation Question: Demonstrate the following concept using two different stocks of your choosing. Show the concept of risk vs. return quantitatively in your two
  3. Calculate & Explain Question: Below you will find various metrics and parameters to value two stocks “A” and “B.” These are actual securities, and the current price is as of the close of business day October 26th, 2011. Given these metrics below, please render your opinion of value for each security, whether overvalued, undervalued or fair value, and why? Please use the CAPM spreadsheet given in lectures if needed, assume Rm = 12% and Rf = 5%.

 

 

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  1. Calculate & Explain Question: Recalculate your answers similar to question #3 (i.e. arrive at a value for stocks A and B) but this time use the S ector Multiple to derive Stock A and B’s values. If your values differ from question 3, why?

 

Key Metrics Stock A     Stock B
Current Price Per Share as of 10-26-2011 $16.87     34.83
Return on Common Equity 33.39%     27.32%
Dividend Payment $1.59     $3.19
Required Rate of Return of the Investor 10.00%     10.00%
Growth Rate 17.60%     10.30%
Beta 1.15     1.38
S ector Earnings Multiple (i.e. the “Multiple”) 18.77x     18.77x
A ctual Earnings Multiple (i.e. the “Multiple”) 17.22x     10.26x

 

 

  1. Calculate & Explain Question: DO NOT use CAPM to arrive at a “theoretically appropriate RRR,” instead assume a RRR of 10% (as stated in the table above) with a Rm = 12% and Rf = 1.5% and recalculate the values of Stock A and Stock B and determine whether overvalued, undervalued or fair value. If you had to choose either A or B, which stock provides the more advantageous value proposition?

 

 

  1. In the Current Event lectures, there are impacts to supply and demand due to Shelter-In-Place in March/April/May 2020, but the economy is “open” in March/April/May 2021. Explain what will happen to CAPM calculations on stocks in general as economic data appears “more positive” Q2-2021 relative to the same quarter last year which was Q2-2020. Further explain how portfolio managers should be positioned heading into Q3-2021.

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