Lecture 6

Question 1

What are some popular equity valuation measures?

Answer 1

• P/E ratio
• Dividend yield
• Price / book value ratio

Question 2

How is P/E ratio calculated?

Answer 2

price / earnings per share

Question 3

How is dividend yield calculated?

Answer 3

dividend per share / price

Question 4

How is price / book value ratio calculated?

Answer 4

price / book value per share

Question 5

What is the dividend discount model?

Answer 5

Fair value of stock = PV of estimated future dividends

Question 6

What are the main versions of the dividend discount model?

Answer 6

• Zero growth
• Constant growth

Question 7

What is the benefit of diversification?

Answer 7

Same mean return with lower standard deviation

Question 8

What does high beta mean?

Answer 8

High risk premium

Question 9

How is systematic / market risk measured?

Answer 9

Beta

Question 10

What does beta measure?

Answer 10

Systematic / market risk

Question 11

What does a beta of 2 mean?

Answer 11

The stock rises 2% when the index rises 1%

Question 12

What does a beta of -0.5% mean?

Answer 12

The stock rises 1% when the index falls 2%

Question 13

How is CAPM calculated?

Answer 13

a = R - [Rf + Bi(Rm - Rf)]

Question 14

What is the index’s alpha & beta?

Answer 14

a = 0
B = 1

Question 15

What does alpha measure?

Answer 15

Returns adjusted for beta

Question 16

What does HFT stand for?

Answer 16

High frequency trading

Question 17

What is the benefit / drawback of HFT?

Answer 17

• Exacerbates instability
• Improves liquidity but withdraws during turbulence

Question 18

What is an example of HFT exacerbating instability?

Answer 18

2010 Dow ‘Flash Crash’ - dropped 600 points in 5 minutes

Question 19

What is ‘sand in the wheels’?

Answer 19

Tax on capital transactions to discourage short-termism

Question 20

What is another name for a financial transactions tax?

Answer 20

Tobin Tax

Question 21

What are limits on the effectiveness of a Tobin Tax?

Answer 21

• Regulatory arbitrage
• Derivatives to avoid tax

Question 22

What are some drawbacks of a Tobin Tax?

Answer 22

• Reduced market turnover = reduced tax revenue
• Higher liquidity premiums = capital more expensive

Question 23

What is another name for the constant growth model?

Answer 23

Gordon growth model

Question 24

How is the zero growth model calculated?

Answer 24

d / r

Question 25

How is the constant growth model calculated?

Answer 25

d / r - g