ome Creations is a U.S. textile manufacturer. Holmes believes Home Creations may be an attractive investment for U.S. investors. In order to convince his institutional clients, Holmes collects data on the textile manufacturer's stock as well as local market data (Exhibit 1). Exhibit 1 U.S. Market and Home Creations Stock Price Data 30-Day U.S. Treasury Bill 3.40% 20-Year U.S. Treasury Bond Yield 4.50% Market Beta 1.24 Size Beta - 0.46 Value Beta 0.24 Market Risk Premium 6.40% Size Premium 3.50% Value Premium 1.80% Question 1: Based on the data provided in exhibit 1, which of the following conclusions pertaining to Home Creations is most likely correct? a) The market price for the Home Creations stock is more than its book value. b) The return required on an investment in Home Creations will benefit from the stock's above-average market capitalization. c) Home Creations is a growth stock.
Beltime Associates is a research firm that conducts market surveys and publishes reports on various worldwide market indices. In addition, the firm conducts research on individual securities within specific countries on behalf of various
Brent Holmes is a research analyst at Beltime Associates. Holmes is currently evaluating Lianor's national equity index, a developing country, known as the Jesen equity index. Lianorian's stock exchange opened for public trading 35 years ago, in January 1975, at which time the Jesen index was established. However, returns data for the index components are only available for the years 1990 and onwards. Holmes has estimated the returns for the pre-1990 period based on the shares of 15 companies which were in existence in January 1990 and components of the index. Using the 1990 returns data, Holmes has estimated shares' returns for the 1975-1989 period based on the shares of the 15 corporations and has backfilled these returns. Jesen is a value-weighted index and, as of January 2010, it includes the shares of 45 corporations.
The public opening of the Lianorian stock exchange fueled international
In addition to the Jesen equity index, Holmes is attempting to
Following his evaluation of the S&P 500, Holmes moves on to analyze the stock of Littleton Inc., a textile manufacturer based in Morocco. As an emerging market stock, Holmes believes that the determination of its expected return may be complicated by several factors, two of which are outlined below.
Factor 1: As an emerging market corporation, the systematic risk of Littleton Inc.'s stock relative to the Moroccan equity market index will require a unique adjustment which entails adjusting beta for its tendency to revert to a mean value of 1.0 over the long-term.
Factor 2: In order to estimate expected returns, the Fama-French model will need to be extended to the Pastor Stambaugh model by including an illiquidity risk premium to account for the illiquid nature of emerging market securities.
Home Creations is a U.S. textile manufacturer. Holmes believes Home Creations may be an attractive investment for U.S. investors. In order to convince his institutional clients, Holmes collects data on the textile manufacturer's stock as well as local market data (Exhibit 1).
Exhibit 1
U.S. Market and Home Creations Stock Price Data
|
30-Day U.S. Treasury Bill |
3.40% |
|
20-Year U.S. Treasury Bond Yield |
4.50% |
|
Market Beta |
1.24 |
|
Size Beta |
- 0.46 |
|
Value Beta |
0.24 |
|
Market Risk Premium |
6.40% |
|
Size Premium |
3.50% |
|
Value Premium |
1.80% |
Question 1:
Based on the data provided in exhibit 1, which of the following conclusions pertaining to Home Creations is most likely correct?
a) The market price for the Home Creations stock is more than its book value.
b) The return required on an investment in Home Creations will benefit from the stock's above-average market capitalization.
c) Home Creations is a growth stock.
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