The Security Market Line ( Sml )

Week 1 – Introduction – Financial Accounting (Review) Week 2 – Financial Markets and Net Present Value Week 3 – Present Value Concepts Week 4 – Bond Valuation and Term Structure Theory Week 5 – Valuation of Stocks Week 6 – Risk and Return – Problem Set #1 Due Week 7* – Midterm (Tuesday*) Week 8 - Portfolio Theory Week 9 – Capital Asset Pricing Model Week 10 – Arbitrage Pricing Theory Week 11 – Operation and Efficiency of Capital Markets Week 12 – Course Review – Problem Set #2 Due

In this stage, the risky required return (rm), the same as market return, should be calculated. Stock market index is an approach to evaluate the value of stock market and S&P/ASX 200 is the most significant stock market index which tracks the performance of two hundred big Australian corporations (Australia Stock Market (S&P/ASX 200) 2013). Currently, S&P/ASX 200 is a primary share market index in Australia which replaced the All Ordinaries in April 2000 and has become the benchmark for investment for the Australian Securities Exchange (ASX) (ASX 200 2013). Therefore, S&P/ASX 200 is the best indicator of the market return and used to determine the market return.

The mean, median, and range value estimates for COSTVALU and MKTVALU are higher than ASSESVAL. The statistics for last year’s value estimate (ASSESVAL) are lower than this year’s values estimates (COSTVALU and MKTVALU). The difference may be from an increase in market values over the past year. The direct comparison approach produces the most uniform estimate.

1. Barker Corp. has a beta of 1.10, the real risk-free rate is 2.00%, investors expect a 3.00% future inflation rate, and the market risk premium is 4.70%. What is Barker's required rate of return?

i. (1) Write out the SML equation, use it to calculate the required rate of return on each alternative, and then graph the relationship between the expected and required rates of return. (2) How do the expected rates of return compare with the required rates of return? (3) Does the fact that Collections has a negative beta coefficient make any sense? What is the implication of the negative beta? (4) What would be the market

The Capital Assets Price Model (CAPM), is a model for pricing an individual security or a portfolio. Its basic function is to describe the relationship between risk and expected return, which is often used to estimate a cost of equity (Wikipedia, 2009). It serves as a model for determining the discount rate which is used in calculating net present value. The CAPM says that the expected return of a security or a portfolio equals the rate on a risk-free security plus a risk premium. The formula is:

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Investors' Attitudes: Investors tend to turn to gold when there is economic uncertainty. Gold is typically considered to be a safe haven and a hedge against inflation, currency devaluation, political instability or deflation; most investors believe that gold will always have value, but other investments may turn out to be worthless. When returns on investments such as real estate and bonds fall, more people turn to investing in gold, increasing its

To find the asset Beta (βa), we need to find the weighted average β of equity and the weighted average β of debt. We consider the β of debt to be 0, as debt has no relationship with market risk and it is evident from the balance sheet that Ameritrade had no interest bearing debt in 1997[1].

7. A valuation of the stock or a range of values that would provide a basis for an investment decision. Include the assumptions you make and your calculation steps. You may calculate the stock's required return from an SML or APT

in the proposed term sheet.  Compare the term sheet to M-Y: what type of security (CP, RP,

For example : The UK govt bonds is providing a return of 3% and the average market rate of return is 8.7% .The investor is expecting to invest in ABC ltd , listed in LSE .The beta calculated is 0.9 . Therfore on calculating , Rf = 3 , Rm = 8.7 , β = 0.9 . The return on investment comes out to be as 8.13 which is less than the rate of average market return . Therefore , it would not be beneficial to invest in shares of ABC Ltd .

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As indicated by the case study S&P 500 index was use as a measure of the total return for the stock market. Our standard deviation of the total return was used as a one measure of the risk of an individual stock. Also betas for individual stocks are determined by simple linear regression. The variables were: total return for the stock as the dependent variable and independent variable is the total return for the stock. Since the descriptive statistics were a lot, only the necessary data was selected (below table.)