Stock Valuation and CAPM
Compute beta of each stock using regression analysis. Use ordinary least squares regression with the market index return as the independent variable and the individual stock return as the dependent variable. Use data from 1/1/2000 – 1/1/2017.
Compute each stock’s required rate of return using the Capital Asset Pricing Model (CAPM) and beta from above.
Compute the intrinsic stock price using the Gordon Growth Model and the required rate of return.
Discuss whether the stocks are undervalued or overpriced.
Discuss the models used and their limitations, if any.
What are analysts’ opinions of the firm’s stock value?
Discuss the discrepancies between the computed and actual stock prices.
What are the assumptions of capital market theory?
What is a completely diversified portfolio?
How many stocks are usually needed to get a completed diversified portfolio?
How does systematic risk compare to unsystematic risk?
Compare and contrast the Capital Market Line with the Security Market Line.
How does fundamental analysis compare to technical analysis?
There are some studies that suggest that there are other factors besides beta that should be used to estimate expected returns. Name and describe some of these other factors.
