“The contribution of behavioural finance theory is said to be of critical importance in understanding investor behaviour in modern finance” INTRODUCTION According to Gregory Curtis (2004‚ pg 16)‚ Sometime we behave like perfect economic beings. But other times we behave like‚ well‚ human beings. We make decisions on the basis of biases that don’t reflect real world facts. We allow our responses to decisions to depend on how the questions are framed. We engage in complex mental accounting‚ ignoring
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returns than riskier investments such as the stock market‚ it was only with the development of the Sharpe-Lintner capital asset pricing model (CAPM) that economists were able to quantify these differences in returns. By this research project we will understand how mutual fund manager work with this data. To understand how it works we will use basic CAPM model‚ after that Fama and French’s (1993) three-factor model and will add two addition factors: momentum factor and traded liquidity. With these
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Share Valuation Valuation Situations 1. Initial Public Offerings (IPOs) An initial public offering is the first sale of shares by a company to the public. The shares then become publicly traded. 2. Management Buy-outs (MBOs) A management buy-out is a form of acquisition in which the existing managers of a company acquire a large part or all of the shares of the company. 3. Management Buy-ins (MBIs) A management buy-in is a form of acquisition in which a manager or management team from
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portfolio? 1 4. The market portfolio has a beta of (a) 0. (b) 1. (c) -1. (d) 0.5. (e) none of the above 5. The risk-free rate and the expected market rate of return are 0.06 and 0.12‚ respectively. According to the capital asset pricing model (CAPM)‚ the expected rate of return on security X with a beta of 1.2 is equal to (a) 0.06. (b) 0.144. (c) 0.12. (d) 0.132 (e) 0.18 6. Which statement is true regarding the Capital Market Line (CML)? (a) The CML is the line from the risk-free rate through
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market‚ because we are projecting the future cash flows. Joanna calculated this by using historical data. However cost of debt should be calculated using current YTM of debt. iii. Cost of Equity Joanna calculated cost of debt by using following CAPM formula: Cost of
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Section A One of the most common criticisms of DCF models is that any forecast beyond a couple of years is questionable. Investors‚ therefore‚ are alleged to be better off using more certain‚ near-term earnings forecasts. Such reasoning makes no sense‚ for at least two reasons. First‚ a key element in understanding a business’s attractiveness involves knowing the set of financial expectations the price represents. The market as a whole has historically traded at a price-to-earnings multiple in
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Model (CAPM) are similar in that they assume an almost "perfect world" scenario. Initially‚ CAPM assumes
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Introduction Kimi Ford is a portfolio manager at NorthPoint Group‚ a mutual-fund management firm. She is evaluating Nike‚ Inc. (“Nike”) to potentially buy shares of their stock for the fund she manages‚ the NorthPoint Large-Cap Fund. This fund mostly invests in Fortune 500 companies‚ with an emphasis on value investing. This Fund has performed well over the last 18 months despite the decline in the stock market. Ford has done a significant amount of research through analysts’ reports
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Explain. MGMT 310 - Financial Management 4 Systematic risk vs. Unsystematic risk (p 447) - Solution • The amount of systematic risk is measured by the of an asset. • E(RI) = .25(.02) + .50(.21) + .25(.06) = .1250‚ or 12.50% • Using the CAPM to find the of Stock I‚ we find: .1250 = .04 + .07I I = 1.21 • The total risk of the asset is measured by its standard deviation. • I2 = .25(.02 – .1250)2 + .50(.21 – .1250)2 + .25(.06 – .1250)2 = .00743 • I = (.00743)1/2 = .0862‚ or
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the expected rate of return of an individual security as a function of systematic‚ non-diversifiable risk (itsbeta).[1] Investopedia explains Security Market Line (SML) The SML essentially graphs the results from the capital asset pricing model (CAPM) formula. The x-axis represents the risk (beta)‚ and the y-axis represents the expected return. The market risk premium is determined from the slope of the SML. The security market line is a useful tool in determining whether an asset being considered
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