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Dear Sir,
Systematic risk is the overall risk of the stock market (all the stocks in that market).
Am I right?
just me make my question clearer …
What is market? Does it refer to stock market? or Markets like IT, Medicines and so on.
The market is the stock market as a whole – the average of all shares.
All share go up and down as the economy is better and worse – this is the systematic risk that is in all shares.
Some types of business go up and down more, some less – this is the systematic risk.
(It is explained in detail in the lectures on CAPM)
Thanks a lot.
Just for logical understanding and clearity….
Investor will usually look at the stock market for eg: DOW and then evaluate the systematic risk of the market.
After that they will assess the charateristic of individual company for their systematic risk, this is determined by beta.Investor will require premium for risk free investment and also the return that is equal to market average (this will depend on beta)
This all is derived by CAPM formula..
Am I right?
Sir can you tell me why share price will decrease if the return share holders are getting increases from 12 to say 15%? keeping dividend payment equal?
This question just arose after watching a lecture..
Thanks
You will see in the lecture that the share price is the present value of the future expected dividends, discounted at the required rate of return.
If the required return increases then discounting the dividends at a higher rate results in a lower market value.
Or to say the same thing more simply. Suppose there is a dividend of 20c a year and you want a 10% return. You would be prepared to pay $2.00 for the share (because 20c is 10% of $2.00). Suppose the dividend stays at 20c and people want a 20% return (because interest rates in general have gone up). Then they would be prepared to only pay $1.00 (because 20c is 20% of $1.00).
So, the logic here is…
We ignore previous investors and look forward at what will new investors pay for the share.
For investors current market price is capital out flow and the dividends they will be getting is the future inflow (just like capital investment appraisal a company does) and we use the principle of perpetuity…
What is more accurate? CAPM or Dividend growth model?
In a perfect world they both give the same. (CAPM determines the return required for the level of risk; the return required is what determines the market value).
However, CAPM is regarded as more accurate because using dividend growth model is ‘working backwards’ to determine the return and relies on knowing the future expected dividend growth. In real life it is impossible to know what rate of dividend growth investors are expecting.
All of this is discussed in the free lectures!
Thanks a lot for clarification….
One more thing… If working capital = CA- CL and CA and CL include variety of components from Bank Cash or OD to Tax payable and Market securities…
But when we use to derive Operating cycle or try to find out working capital funding requirement then why do we only focus on 3 thing i.e Trade payable, Inventories and Account receivable?
Thanks a lot
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