Lecture 6 Flashcards
(25 cards)
What are some popular equity valuation measures?
- P/E ratio
- Dividend yield
- Price / book value ratio
How is P/E ratio calculated?
price / earnings per share
How is dividend yield calculated?
dividend per share / price
How is price / book value ratio calculated?
price / book value per share
What is the dividend discount model?
Fair value of stock = PV of estimated future dividends
What are the main versions of the dividend discount model?
- Zero growth
- Constant growth
What is the benefit of diversification?
Same mean return with lower standard deviation
What does high beta mean?
High risk premium
How is systematic / market risk measured?
Beta
What does beta measure?
Systematic / market risk
What does a beta of 2 mean?
The stock rises 2% when the index rises 1%
What does a beta of -0.5% mean?
The stock rises 1% when the index falls 2%
How is CAPM calculated?
a = R - [Rf + Bi(Rm - Rf)]
What is the index’s alpha & beta?
a = 0
B = 1
What does alpha measure?
Returns adjusted for beta
What does HFT stand for?
High frequency trading
What is the benefit / drawback of HFT?
- Exacerbates instability
- Improves liquidity but withdraws during turbulence
What is an example of HFT exacerbating instability?
2010 Dow ‘Flash Crash’ - dropped 600 points in 5 minutes
What is ‘sand in the wheels’?
Tax on capital transactions to discourage short-termism
What is another name for a financial transactions tax?
Tobin Tax
What are limits on the effectiveness of a Tobin Tax?
- Regulatory arbitrage
- Derivatives to avoid tax
What are some drawbacks of a Tobin Tax?
- Reduced market turnover = reduced tax revenue
- Higher liquidity premiums = capital more expensive
What is another name for the constant growth model?
Gordon growth model
How is the zero growth model calculated?
d / r
