FINE3014A

Question 1

Asset allocation (top-down) specifies:

Answer 1

What proportion of the portfolio will be invested in various nations’ economies. -> how assets will be divided among stocks, bonds, other assets -> industry selections: choose those projected to prosper

Question 2

Intrinsic value

Answer 2

The PV of CF, and the value that we ascribe to the business

Question 3

Constant growth model

Answer 3

• large CF, the greater the Intrinsic value
• less risky CF, smaller discount rate thus greater intrinsic value
• higher growth rate (g), the more valuable the stock, the greater the intrinsic value

Question 4

Growth rate (g)

Answer 4

How much the dividend increases each year AND how much the value of the investment must grow

Question 5

Required rate of return(k)

Answer 5

The amount that the investment earns each year.
Must retain some g in k to grow. Amount paid out is k-g

Question 6

No growth model

Answer 6

The assumption is that a company’s CF are not growing
V0 = D1/k

Question 7

PVGO

Answer 7

Represents the portion of a stocks intrinsic value that is attributable to the company’s growth

Question 8

PVGO as a risk factor

Answer 8

By understanding how much of model’s value comes from asset-in-place and how much comes from future growth, the analyst can understand how significant growth in valuation is and how risky the firm is

Question 9

Advantages of multiples

Answer 9

Multiples can be easy to use
For a money manager with a mandate to be fully invested, relative value is what matters
Multiples are widely used on the buy and sell sides
Multiple help confirm value that you calculated with the DCF method

Question 10

Disadvantages of multiples

Answer 10

• difficult to use correctly
• may not be a valid investment strategy (E.g. one is less overvalued than another)
• significant assumptions
•it is possible that other stocks may be mispriced