Question on expected yield, stock’s current and future prices and covariance?
Spread the love
A question by Eeyore J The current price of a share of stock in the Down Under Clothing Company of Australia is A$50 and its expected yield over the year is 0.14. The market risk premium in Australia is 0.08 and the riskless interest rate 0.06. What would happen to the stock’s current price if its expected future payout remains constant while the covariance of its rate of return with the market portfolio falls by 50%?
Eeyore J
You can give a better reply? provide a response using the comment section. After review, we will update the answers.
Best Answer
The previous answer can be improved, as this question that’s not means D1 is constant. It means all dividends in the time horizon is constant, which symbols for P+D/1+r is the same after the change. So, it should be (1+r1)/(1+r2) =P1/P2, the new price would be 51.82.
Yuan
use CAPM to find the required return, k. since the covar with the market (its Beta) falls by 50% it must be that Beta=0.5 (the Beta of the market=1.0) So k=Rf +(MRPBeta) k=0.06 + (0.080.5)=0.10 or 10% Then use the constant growth (Gordon) model to find the price P0=D1/(k-g) where P0=price today D1=dividend at end of the year which is $50*0.14=7.00 k=0.10 g=0 ( no growth as stated in the problem) P0= 7.00/ (0.10-0)= $70 The price should go to $70.
Alexandre Laurentl is working in the jewelry and investment gold since 2002. Alexandre graduated from The Normandy School of Business and from the University of Perpignan a Bachelor of economics in 1995.
Spread the loveThe conventional wisdom dictating the inverse relationship between the Nasdaq 100 and gold seems to be undergoing a subtle yet intriguing transformation. These typically disparate markets, one emblematic of tech-driven equities and the other synonymous with defensive play, have converged in an unforeseen alignment within the current market dynamics. Five Key Highlights: Summary:…
Spread the loveSafes under a certain price point might not offer adequate security for valuables like gold and silver. It emphasizes the need for a substantial safe, advises against cheap options, and recommends specific hiding spots for valuables. When it comes to safeguarding your valuables like gold and silver, aiming for a safe under $1400…
Spread the loveTraditionally viewed as a safe haven during uncertain times, gold’s recent price surge coincides with heightened geopolitical tensions in the Middle East following a surprise attack by Hamas on Israel. Typically, a robust dollar tends to exert pressure on precious metal prices, given their US dollar denomination. The US dollar index has strengthened…
Spread the loveTo prevent rust spots from appearing on gold coins, it’s important to understand that gold itself does not rust or tarnish due to its non-reactive nature. However, the presence of other metals, such as copper or silver, in the gold alloy can lead to the development of red or brown spots over time.…
Spread the loveSome gold bullion coins seem to exhibit red spots, often referred to as “copper spots.” These spots result from high concentrations of copper in localized areas. It’s interesting to note that even in gold labeled as 24k, which is considered the purest form, there can be around 0.01% impurities, primarily concentrated copper, causing…
Spread the loveI’ve noticed milk spots on several silver coins, mainly Canadian maples and British Britannias. It’s frustrating because these spots diminish the premium value of the coins, and most shops only offer to buy them at the base metal price. I’m aware that this issue stems from the minting process, involving planchets, etc. However,…
Using gold as payment involves the need to verify its purity, which is a drawback for widespread use as currency.…
Ah, seriously? I’m not a fan of gold, but that’s like asking a BTC seller why they don’t accept Bitcoin…
Gold-backed coins might look safe, but their stability depends on keeping that link to gold intact. Take Terra, for instance—they…
I’d stick to buying actual gold any day. You know the saying, “Not in your possession, not your gold”? It’s…
Cryptos like Bitcoin and Ether are cool ’cause you can send cash without middlemen. But the downside? Prices are all…
Leave a Reply