index model +w3

Question 1

pros of index models

Answer 1

Pros:
- Less estimates needed
- Allows specialization of effort in security analysis.

Question 2

cons of index models

Answer 2

Cons:
- Oversimplification of real-world uncertainty

• Ignores industry specific events:
  > The model assumes correlation of residuals is always zero.

– But residuals of stocks in same industry can be correlated.

– Pair-wise covariance estimation takes this into account.

Question 3

what does the intrinsic value of a stock mean

Answer 3

intrinsic value is the fair value

Question 4

what determines the intrinsic value of a stock?

Answer 4

Cash-flow from the investment determines the intrinsic value of the investment

Question 5

What are the Cash-flows from holding a stock?

Answer 5

• Dividends
• Selling price (Future price)

Question 6

What will your selling price be based on?

Answer 6

• Future dividends
• Next buyer’s future selling price

Question 7

why would You expect positive/ negative return? (hint:intrinsic value)

Answer 7

• You expect positive return if you believe the current price is lower than intrinsic value.
• You expect negative return if you believe the current price is higher than intrinsic value.

Question 8

what is Fundamental analysis

Answer 8

The intrinsic value of stock depends on the dividend and earnings expected from the firm.
– Fundamental analysis

Question 9

Efficient market hypothesis:

Question 10

Macro economic analysis:
Business success of the firm depends on broader aspects as well, name 3

Answer 10

– Global economic environment
– Domestic macroeconomic environment
– Economic policy

Question 11

macro economic analysis:
what is analysed in industry analysis

Answer 11

Industry analysis:
>Economic factors affecting the firm’s industry
> The position of the firm within its industry