Stocks and Their Valuation
Please read chapters 8 & 9 of Fundamentals of Financial Management, Concise Edition,10th Ed. (link provided)
https://bookshelf(dot)vitalsource(dot)com/#/books/9781337911054/
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After reading; please answer the following questions:
Stock A has an expected return of 7%, a standard deviation of expected returns of 35%, a correlation coefficient with the market of −0.3, and a beta coefficient of −0.5. Stock B has an expected return of 12%, a standard deviation of returns of 10%, a 0.7 correlation with the market, and a beta coefficient of 1.0. Which security is riskier? Why?
If investors’ aversion to risk increased, would the risk premium on a high-beta stock increase by more or less than that on a low-beta stock? Explain.
A bond that pays interest forever and has no maturity is a perpetual bond. In what respect is a perpetual bond similar to a no-growth common stock? Are there preferred stocks that are evaluated similarly to perpetual bonds and other preferred issues that are more like bonds with finite lives? Explain.
Requirements:
Your initial response should be a minimum of 200 words. Then write a subsequent response in support of your initial post as well as a response in opposition of your initial post. Each subsequent response should be a minimum of 125 words.
Be sure to incorporate your weekly readings, citing your sources using proper APA (including in-text citations and references).
Stocks and their Valuation
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Stocks and their Valuation Initial Response
The beta (β) is computed as the co-variance or variance ratio of the security return calculated while taking into account the market return. As the measure of the stock’s variability in regard to the overall financial market, the beta evaluates the systematic risk inherent within the security or an investment portfolio. Based on the information provided, it could be inferred that the beta of -1.5 implies that the price would shift in the negative direction within the market by 1.5 times. In other words, the stock price would deteriorate by 1.5 for every one dollar increase within the market. This occurrence augments the threat to this stock. On the contrary, security B’s beta equals 1, implying that it would shift simultaneously with the market. Stock A’s returns standard deviation indicates that the investment returns are increasingly volatile and could differ up to 35 percent from anticipated returns. On the contrary, Stock B’s standard deviation is merely 10 percent. The standard deviation increases with the investment’s risk level. The employment of standard deviation in evaluating the stock market risk is based on the fundamental assumption that many price actions are anchored on a normal distribution trend. Therefore, stock A is riskier compared to stock B. If the investor’s risk aversion increased, the high-beta share risk premium would further increase compared to the low-beta share (Brigham & Houston, 2021). This is because of the much more substantial alteration in the risk aversion on higher risk shares compared to lower risk stocks.
The similarity between perpetual bonds and no-growth common shares is anchored on cash flow streams. Whereas the no-growth common stock returns dividends,...