1、CHAPTERStock Valuation And Risk第1页，共41页。nExplain the general steps necessary to value stocks and the commonly used valuation models and learn the factors that affect stock pricesnExplain methods of determining the required rate of return on stocksnLearn how to measure the risk of stocksnLearn how to
2、 measure performance of stocknExplain the concept of stock market efficiency第2页，共41页。nThe price of a share of stock is the total value of the company divided by the number of shares outstandingnStock price by itself doesnt represent firm valuelNumber of shares outstandingnStock price is determined b
3、y the demand and supply for the sharesnInvestors try to value stocks and purchase those that are perceived to be undervalued by the marketnNew information creates re-evaluation第3页，共41页。lApply the mean PE ratio of publicly traded competitorslUse expected earnings rather than historicallEquation:Price
4、-Earnings(PE)MethodFirmsStock =Expected EPS Mean industry PE ratioPrice第4页，共41页。nPrice Earnings(PE)The P/E ratio(price-to-earnings ratio)of a stock(also called its earnings multiple,or simply multiple,P/E,or PE)is a measure of the price paid for a share relative to the annual income or profit earned
5、 by the firm per share P/E ratio=Price per share/Annual Earning per share PE是指股票的本益比，称为市盈率,也称为“利润收益率”。本益比是某种股票普通股每股市价与每股盈利的比率。一般来说，市盈率水平为:0-13 即价值被低估,14-20 即正常水平 21-28 即价值被高估 28+反映股市出现投机性泡沫 第5页，共41页。nReasons for different valuationslDifferent earnings forecastslDifferent PE multipliersuDifferent com
6、parison or benchmark firmsnLimitations of the PE methodlErrors in forecast or industry compositelBased on PE,which some analysts questionPrice-Earnings(PE)Method第6页，共41页。lThe price of a stock reflects the present value of the stocks future dividendsut=perioduDt=dividend in period tuk=discount rateDi
7、vidend Discount Method1tttk)(1DPrice第7页，共41页。nConstant-growth dividend discount model-dividends are not expected to remain constant forever,it can be expected to grow at a constant rate P=D(1+g)/k-g=D/k-g where g is rate at which dividends are expected to grow 第8页，共41页。nRelationship between DDM and
8、PE Ratio for valuing firmslPE multiple is influenced by required rate of return of competitors and their expected growth ratelWhen using PE multiple method,the investor implicitly assumes that k and g will be similar to competitorsDividend Discount Method第9页，共41页。nRelationship between DDM and PE Rat
9、io for valuing firmslThe inverse relationship between required rate of return and value exists when applying either the PE ratio or the DDM lThere is positive relationship between a firms growth rate and its value when applying either method第10页，共41页。nLimitations of the Dividend Discount ModellPoten
10、tial errors in estimating dividendslPotential errors in estimating growth ratelPotential errors in estimating required returnlNot all firms pay dividendsuTechnology firmsuBiomedical firmsDividend Discount Method第11页，共41页。nAdjusting the Dividend Discount ModellValue of stock is determined byuPresent
11、value of dividends over investment horizonuPresent value of selling price at the endlTo forecast the selling price,the investor can estimate the firms EPS in the year they plan to sell,then multiply by the industry PE ratioDividend Discount Method第12页，共41页。nCapital Asset Pricing Model(CAPM)lUsed to
12、estimate the required return on publicly traded stocklAssumes that the only relevant risk is systematic(market)riskuUses beta to measure risk rather than standard deviation of returns Rj =Rf+j(Rm Rf)第13页，共41页。Rj =Rf+j(Rm Rf)nCapital Asset Pricing Model(CAPM)lEstimating the risk-free rate and the mar
13、ket risk premiumuProxy for risk-free rate is the yield on newly issued Treasury bondsuThe market risk premium,or(Rm-Rf),can be estimated using a long-term average of historical data.第14页，共41页。Rj =Rf+j(Rm Rf)lEstimating the firms betauBeta measures systematic riskuReflects how sensitive individual st
14、ocks returns are relative to the overall marketuExample:beta of 1.2 indicates that the stocks return is 20%more volatile than the overall marketuInvestor can look up beta in a variety of sources such as Value Line or Yahoo!Finance(Profile)uComputed by regressing stocks returns on returns of the mark
15、et,usually represented by the S&P 500 index or other market proxy第15页，共41页。nLimitation of Capital Asset Pricing Model(CAPM)lBased on the suggestion that the return of stock is positively related to its betalPositive relation between stock return and betalCannot only use beta to determine which stock
16、 investment is feasible when market is expected perform well第16页，共41页。nArbitrage Pricing ModellDiffers from CAPM in that it suggests a stocks price is influenced by a set of factors rather than just the return on the marketlFactors may include things like:uEconomic growthuInflationuIndustry effectsl
17、Problem with APT:factors are unspecified and must be defined第17页，共41页。nArbitrage pricing theory in finance,is a general theory of asset pricing,that has become influential in the pricing of shares.APT holds that the expected return of a financial asset can be modeled as a linear function of various
18、macro-economic factors or theoretical market indices,where sensitivity to changes in each factor is represented by a factor-specific beta coefficient.The model-derived rate of return will then be used to price the asset correctly-the asset price should equal the expected end of period price discount
19、ed at the rate implied by model.If the price diverges,arbitrage should bring it back into line.第18页，共41页。nThe APT along with the CAPM is one of two influential theories on asset pricing.The APT differs from the CAPM in that it is less restrictive in its assumptions.It allows for an explanatory(as op
20、posed to statistical)model of asset returns.It assumes that each investor will hold a unique portfolio with its own particular array of betas,as opposed to the identical market portfolio.In some ways,the CAPM can be considered a special case of the APT in that the securities market line represents a
21、 single-factor model of the asset price,where Beta is exposed to changes in value of the Market.第19页，共41页。nAdditionally,the APT can be seen as a supply side model,since its beta coefficients reflect the sensitivity of the underlying asset to economic factors.Thus,factor shocks would cause structural
22、 changes in the assets expected return,or in the case of stocks,in the firms profitability.第20页，共41页。nOn the other side,the capital asset pricing model is considered a demand side model.Its results,although similar to those in the APT,arise from a maximization problem of each investors utility funct
23、ion,and from the resulting market equilibrium(investors are considered to be the consumers of the assets).第21页，共41页。nEconomic factorslInterest ratesuMost of the significant stock market declines occurred when interest rates increased substantiallyuMarkets rise in 1990s:low interest rates;low require
24、d rates of returnlExchange ratesuForeign investors purchase U.S.stocks when dollar is weak or expected to appreciateuStock prices of U.S.companies also affected by exchange rates第22页，共41页。nMarket-related factorslJanuary effectlNoise tradinguTrading by uninformed investors pushes stock price away fro
25、m fundamental valueuMarket maker spreadslTrendsuTechnical analysisuRepetitive patterns of price movements第23页，共41页。nFirm-specific factorslExpected+NPV investmentslDividend policy changeslSignificant debt level changeslStock offerings and repurchaseslEarnings surpriseslAcquisitions and divestitures第2
26、4页，共41页。nIntegration of factors affecting stock pricesnEvidence on factors affecting stock priceslFundamental factors influence stock prices,but they do not fully account for price movementsuSmart-money investorsuNoise traders uExcess volatilitynIndicators of future stock priceslThings that affects
27、cash flows and required returnslVariance in opinions about indicators第25页，共41页。InternationalEconomicConditionsU.S.FiscalPolicyIndustryConditionsFirmsSystematicRisk(Beta)ExpectedCash Flowsto BeGeneratedby theFirmRequired Returnby InvestorsWho Invest inthe FirmFirm-SpecificConditionsU.S.MonetaryPolicy
28、U.S.EconomicConditionsStock MarketConditionsMarketRiskPremiumFirmsRiskPremiumRisk-FreeInterestRatePrice of theFirmsStock第26页，共41页。nStock analysts interpret“valuation effect”of new information for investorsnAnalysts opinions impact stock buying/sellingnAnalysts ratings seldom recommend selllIncome of
29、 analyst may come from investment banking side of business selling company shareslCompanies shun analysts who recommend“sell”lAnalyst may personally own shares of company第27页，共41页。nAnalyst may obtain“new”information with company executives in conference calllOther investors are not privy to informat
30、ionlRegulation FD(Fair Disclosure)from SEC requires“release”of new significant information at the same time as teleconference calls with analysts.nOther analyst recommendationslValue LinelInvestors Business Daily第28页，共41页。nMarket price volatility of stocklIndicates a range of possible returnslPositi
31、ve and negativelStandard deviation measure of variabilitynVolatility of a stock portfolio depends upon:lVolatility of individual stocks in the portfoliolCorrelation coefficients between stock returnslProportion of total funds invested in each stock第29页，共41页。nBeta of a stocklMeasures sensitivity of s
32、tocks returns to markets returnsnBeta of a stock portfoliolWeighted average of the betas of the stocks that comprise the portfoliop=wi i 第30页，共41页。nValue at RisklEstimates the largest expected loss to a particular investment position for a specified confidence levellWarns investors about the potenti
33、al maximum loss that they may incur with their investment portfoliolFocuses on the“loss”side of possible returnslUsed to analyze risk of a portfolio第31页，共41页。nMethods of determining the maximum expected losslUse of historical returnsuExample:count the percent of total days that a stock drops a certa
34、in levellUse of standard deviationuUsed to derive boundaries for a specific confidence levellUse of betauUsed in conjunction with a forecast of a maximum market dropuBeta serves as a multiplier of the expected market loss第32页，共41页。nDeriving the maximum dollar losslApply the maximum percentage loss t
35、o the value of the investmentnCommon adjustments to the value-at-risk applicationslInvestment horizon desiredlLength of historical period usedlTime-varying risklRestructuring the investment portfolio第33页，共41页。nMethods of forecasting stock price volatilitylHistorical methodlTime-series methodlImplied
36、 standard deviationuDerived from the stock option pricing modelnForecasting a stock portfolios volatilitylOne method involves forecasts of individual volatility levels and using correlation coefficientsnForecasting a stock portfolios betalForecast changes in individual stock betas第34页，共41页。nSharpe I
37、ndexlAssumes total variability is the appropriate measure of risknA measure of reward relative to riskfR-RIndex Sharpe 第35页，共41页。lTreynor IndexuAssumes that beta is the appropriate type of riskuMeasure of risk-adjusted returnuHigher the value;the higher the return relative to the risk-free ratefR-RI
38、ndex Treynor 第36页，共41页。Weak-form efficiencyuSecurity prices reflect all historical price and volume informationuImplication:investors cannot earn abnormal returns based on past price movementslSemistrong-form efficiencyuSecurity prices reflect all public informationlStrong-form efficiencyuSecurity p
39、rices reflect all information第37页，共41页。nTests of the Efficient Market Hypothesis(EMH)lTest of weak-formuSearches for non-random patterns in pricesuCannot find dependencies that can overcome transaction costslTest of semistrong-formuEvent studiesuGeneral support for semi-strong efficiencylTest of str
40、ong-formuInsiders can earn excess returnsuStrong-form efficiency does not appear to hold第38页，共41页。nU.S.investors desire foreign stockslDiversification effectslHigh real rates in parts of worldnCorporations desire to finance in all marketslDiversified sources of fundslStock traded where operatinglEnh
41、ance global image第39页，共41页。nDeregulation increases access to foreign markets nNew stock markets in emerging economiesnInvestors seek underpriced stocks in less efficient marketsnInvestors seek diversificationnHigher average returns and variability第40页，共41页。nValuation of foreign stockslPrice-earnings(PE)methodlDividend discount modeluAdjusted for expected exchange rate movementsnMeasuring performance from investing in foreign stocksnInternational market efficiencylSome countries appear to be inefficientlBeware of the associated volatility and exchange rate risks第41页，共41页。
