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BAO5747 International Portfolio Management
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BAO5747 International Portfolio Management
0 Download3 Pages / 530 Words
Course Code: BAO5747
University: Victoria University
MyAssignmentHelp.com is not sponsored or endorsed by this college or university
Country: Australia
Question:
a Obtain daily share price data for a company listed on the Australian Stock Exchange over the last ten years ending 30 June.b Convert the price data into a continuously compounded daily return series being careful to adjust for dividends and any capital changes.c Plot the daily return series. Does the series look predictable? Provide statistical tests that examine the distribution of the returns. Comment.2 Estimate the beta of the company using the data collected in Part 1. Comment on your beta estimate with reference to:– stability across time– stability across different return intervals
3 a Obtain appropriate estimates of the expected market rate of return and the risk-free rate. Justify your estimates.b Use the CAPM to formulate an expected return for the company.4 Use the Dividend Discount Model to estimate the value of one share. Assume a perpetuity for the dividend stream after five years.5 a Compare your theoretical estimate of the company share price in 4 to the average market price of the share over the last few months.
b What does your valuation indicate that you should do? Discuss.c Is your valuation and the current market price consistent with the notion of an efficient capital market? Discuss.a Obtain daily share price data for a company listed on the Australian Stock Exchange over the last ten years ending 30 June.b Convert the price data into a continuously compounded daily return series being careful to adjust for dividends and any capital changes.c Plot the daily return series. Does the series look predictable? Provide statistical tests that examine the distribution of the returns. Comment.
Answer:
The price computed applying the dividend discount model is AUD 46.27 while the average of stock’s price of CBA prevailing on the Australian Stock Exchange is AUD 71.55 (Appendix). Thus, it could be observed that the theoretical price computed under dividend discount model is lower than the actual price of the stock. This implies that the stock is overvalued in the market and hence the investor could go for selling the holdings in market (Lazzati and Menichini, 2015).
Question-5 (b)
The valuation done applying dividend discount model clearly depicts that the stock is overvalued and it indicates that the investor should sell the stock. The investor has an opportunity to book profits by selling the stocks in the market. The results of dividend discount model implies that the true worth of the stock is AUD 46.27 however it’s been sold in the market at AUD 71.55. This indicates the chances that the stock might decline in future so the investor should think of selling the stock and exit the market by booking the profit.
However, it is notable that the theoretical price computed under the dividend discount model is purely based on the fundamental figures; it ignores the impact of market sentiments on the stock price movements. Further, the valuation models like dividend discount model or PE Multiple Model also suffers from their own limitations. Thus, the results arrived at under these models might not present true picture (Ivanovski, Ivanovska and Narasanov, 2015).
Question-5 (c)
The efficient capital market hypothesis entails that the price of stocks in the efficient market imbibe the impact of new information. This implies that the price of stock prevailing on the stock exchange is always equal to its true worth and hence investors can not make gains by exploiting the situation (Hamid, Suleman, Ali Shah, Akash, and Shahid, 2017).
According to efficient market hypothesis, there is no as such situation of undervaluation or overvaluation of the stock. The price of stock on the exchange would always be equal to the price computed applying technical or fundamental valuation models.
However, looking at the results of dividend discount model and actual price of CBA stock on exchange, it appears that efficient market hypothesis does not hold true. The actual price of CBA is AUD 71.55 while the price arrived at under dividend discount model is AUD 46.27. This proves that the principle laid down in efficient market hypothesis are not holding true. Here, the price of stock is changing due to change in market sentiments and market sentiments change based on the new information. In practicality, an investor would always have that opportunity to earn profit by exploiting the information gap (Hamid, Suleman, Ali Shah, Akash, and Shahid, 2017).
Reference
Hamid, K., Suleman, M.T., Ali Shah, S.Z., Akash, I. and Shahid, R., 2017. Testing the weak form of efficient market hypothesis: Empirical evidence from Asia-Pacific markets.
Ivanovski, Z., Ivanovska, N. and Narasanov, Z., 2015. Application of dividend discount model valuation at Macedonian Stock Exchange. UTMS Journal of Economics, 6(1), pp.147-154.
Lazzati, N. and Menichini, A.A., 2015. A dynamic approach to the dividend discount model. Review of Pacific Basin Financial Markets and Policies, 18(03), p.1550018.
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