1. Suppose the CAPM holds. The expected return on the market portfolio is 6% and RF = 4%. Assume continuous compounding. A company will sell 1 unit of gold a year from today. Assume that the mean price of gold next year is $100, and the standard deviation is $20. Assume that the market 3 of gold is 0.9. (a) Find the value of the firm if it did no hedging. (b) If the firm went short $3 times the value of the firm in (a) of the market portfolio, and invested the proceeds in riskless debt, then what would be the hedged firm's beta? What would be its expected return, and what would be the market value of the firm? (c) Find the price of a 1-year forward contract on a unit of gold. Find the value of the firm if it hedged its gold price risk in the forward market. 2. Suppose the market portfolio consists of weights wi = 0.30 and w20.70 in two stocks. Assume that E[R₁] = 0.1, E[R₂] = 0.2, var[R₁] = 0.25, and var[R₂] = 0.45. Assume that the correlation between the two stock returns is 0.5. (a) Compute the variance of the market portfolio. (b) Find the beta of each stock with respect to the market portfolio. (c) Compute the value of w₁ B1+w₂ B₂. .
Dividend Valuation
Dividend refers to a reward or cash that a company gives to its shareholders out of the profits. Dividends can be issued in various forms such as cash payment, stocks, or in any other form as per the company norms. It is usually a part of the profit that the company shares with its shareholders.
Dividend Discount Model
Dividend payments are generally paid to investors or shareholders of a company when the company earns profit for the year, thus representing growth. The dividend discount model is an important method used to forecast the price of a company’s stock. It is based on the computation methodology that the present value of all its future dividends is equivalent to the value of the company.
Capital Gains Yield
It may be referred to as the earnings generated on an investment over a particular period of time. It is generally expressed as a percentage and includes some dividends or interest earned by holding a particular security. Cases, where it is higher normally, indicate the higher income and lower risk. It is mostly computed on an annual basis and is different from the total return on investment. In case it becomes too high, indicates that either the stock prices are going down or the company is paying higher dividends.
Stock Valuation
In simple words, stock valuation is a tool to calculate the current price, or value, of a company. It is used to not only calculate the value of the company but help an investor decide if they want to buy, sell or hold a company's stocks.
![1. Suppose the CAPM holds. The expected return on the market portfolio is 6% and RF = 4%. Assume
continuous compounding. A company will sell 1 unit of gold a year from today. Assume that the mean
price of gold next year is $100, and the standard deviation is $20. Assume that the market 3 of gold
is 0.9.
(a) Find the value of the firm if it did no hedging.
(b) If the firm went short $B times the value of the firm in (a) of the market portfolio, and invested
the proceeds in riskless debt, then what would be the hedged firm's beta? What would be its
expected return, and what would be the market value of the firm?
(c) Find the price of a l-year forward contract on a unit of gold. Find the value of the firm if it
hedged its gold price risk in the forward market.
2. Suppose the market portfolio consists of weights wi
E[R] = 0.1, E[R,] = 0.2, var[R1] = 0.25, and var[R2] = 0.45. Assume that the correlation between
the two stock returns is 0.5.
0.30 and w2 = 0.70 in two stocks. Assume that
(a) Compute the variance of the market portfolio.
(b) Find the beta of each stock with respect to the market portfolio.
(c) Compute the value of wi B1 + w2 · B2.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fab4ef834-bbcc-4669-a4c3-4f579799562b%2Fd9386040-1bf4-4f96-a4a4-3e5a30a4f672%2F4cqmqzx_processed.jpeg&w=3840&q=75)
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