- This topic has 1 reply, 2 voices, and was last updated 7 years ago by
.
- Posts
Good day tutor,
Could you Kindly help me on this?
Q1:
This question, Anchorage Retail Co (12/09), has used the beta value of the market index as P^0 when calculating the market return using the dividend growth model.Would this work all the time? What happens if we are given an average current price of the market index as a whole? Do we take the average price and deduct the current dividend yield (to get P^0) or do we again use the Beta value of 1?
Q2:
“Although there is evidence of investors being deterred by Anchorage’s reputation in the past, which may affect current investors’ rational expectations about the company, the effect of such expectations is likely to be diversified away during the pricing process.”I do not understand the phrase “the effect of such expectations…..process”. How do the expectations of investors get diversified? When many other investors hold other expectations…? Does this mean then that expectations of investors are usually diversified away during the pricing process since there are plenty of other investors?
1. Beta measures the systematic risk of an investment relative to the market as a whole (so an investment with, for example, a beat of 0.8 is 0.8 as risky as the market). So the market as a whole always has a beta of 1.
I don’t understand your second paragraph – subtracting the current dividend yield from the market price would be meaningless. Also I have no idea what you mean by P^0!!
2. Factors inherent in Anchorage are unsystematic risk, and CAPM assumes that investors are well-diversified overall and that therefore unsystematic risk is irrelevant. It is the systematic risk i.e the beta that determines the required return and hence the price.
I do suggest that you watch my free lectures on portfolio theory and on CAPM.
- You must be logged in to reply to this topic.