Money and Banking
In determining the price of the share the commonly cited Gordon model for measuring the value of a share of a firms stock is used
P Dt___ D2_______ . . . D8______
( 1 Ke)t (1 Ke ) 2 (1 Ke)8
Where P the current price per share of common stock
Di (i. 1, 8) the per share dividend expected in year i
Ke the cost of equity capital (i.e., the rate at which investors discount future dividends)
one of the assumptions on which the analysis is that investors expect dividends to grow at a constant rate, g. if we let D0 represent the most recent dividend, Equation can be rewritten as follows
P D0 (1 g)t D0 (1 g )2 . . . D0 (1 g )8
(1 Ke )1 (1 Ke )2 ( 1 Ke )8
Simplifying Equation and solving for Ke results in the following expression for the cost of common stock equity, Ke..10
Ke Dt g
P
Equation indicates that the cost of common stock equity can be found by dividing the dividend at the end of period 1 by the current price of stock and adding for the interest reader, the calculations necessary to derive Equation that follow.
P(1 Ke) - P D0 D0 (1 g )
1 g ( 1 Ke )
Since Ke is assumed to be greater than g, the second term on the right side of Equation 1 should be zero. Thus,
P( 1 Ke ) 1 D0
1 g
P( 1 ke) - ( 1 g) D0
1 g
P(Ke g) D0 (1 g)
P Dt__
Ke g
Since common stock dividends are paid from after-tax income, no tax adjustment is required.
Then in this case it will be
P 1000__
0.08-0.03
P 20,000
2 risk perception
Most investors has a tendency of avoiding high risks. It is important to state those prices will changes towards the positive. It is a strategy that is designed to deliver good returns irrespective of overall quality or the fixed income market performance. It helps to reduce the risks since it is a high volatility bet.
Within the financial markets misevaluation is very common bit is it also very difficult to make abnormal profits within this situation. Misevaluations are generally of two types, firstly they are recurrent or arbitrageable and secondly they are non-repetitive and are long-term in nature. In case of recurrent misevaluations, trading strategies can be adopted. This will enable hedge funds and other zeros from getting too big because at least on relative basis market becomes efficient for these assets.
While for non-repetitive and long term misevaluations, it is best to identify the peaks and troughs before it gets too late because early risk losses wipe out capital. Further, the situation can get worse if those limited partners of investors also withdraw the capital after long streaks may cause loss and inefficiency because it may result in buying and selling pressure. Within the financial market there are two main investors who make markets efficient, i.e. hedge funds who make money by identifying the misevaluations and second are macro hedge funds. They take those speculative positions that cannot be easily hedged, such as shorting NASDAQ (Ritter, 2003). Even though mispricing does persist in the real market but certain limits to arbitrage exists. Thus it can be concluded that arbitrage is limited within three aspects. Firstly, there is a high risk that mispricing will get worse and thus it will cause a threat and risk to arbitrage as well. The behavioral bias within the market influence may be greater than the influence of arbitrageurs because arbitraging behavioral bias is not risk free. Further it takes longer than a normal investment horizon even if prices trend towards intrinsic prices. Secondly, financial models may be inaccurate and lastly a high proportion of arbitrage activity requires short selling and short selling is risky and not permitted to many institutional investors.
Question 2
This International Indexes operates with methodologies and benefits similar to those of the composite index. The index elements meet the requirements, ensure global broadening of horizons via a single market and also apply transparency rule base construction. This index also, just like the other indices, leverages of the global most liquid stock market.
3 various information will be required together with these indices. This information includes thee currency in which they are represented, inflationary tendency, the GDP, unemployment level of a country and the balance of payments of the country in question.
4 Volatility Generally in the real time scenario, prices change only when news arrives and since Robert Shillers work economists stated that the aggregate stock prices move much more than can be justified by changes in intrinsic value, i.e. the present value of future dividends. Further the stock and the bond prices are measured to be more volatile than as compared to advocates of rational efficient market theory could have predicted. Looking at the two indices, I concluded the second index is more volatile.
In the first case as shown above Japan indices is the most volatile because it has a standard deviationm of 2987.3 while the other tow has standard deviation of 1223.6 and 1289 for ermany and canadaindecis respectively.
In this case Hong Kong index is the most volatile with a standard deviation of 3139.4 while UK and Canada has 1135.4 and 1289 respectively. Considering all cases therefore Hong Kong stock market is the most volatile among the two.
According too the efficient market, future returns cannot be predicted but now everyone aggress that stock prices can be partly predicted on the basis of past returns, such as price to earning or price to book ratio. But still controversy continues that whether mispricing or risk is the better-off method to observed predictability because up till now no one has been able to specify an observable risk measure that can explain existing data patterns, whether they are theoretical or metaphysical. Even though after so many theories and finding and researches still fund managers often face hard performance rates and thus leading market inefficiency. But there are always good performers as well and regardless of the successful trading rules real world portfolio managers face real hardships beating the market. Further, market behavior create such anomalities do not lead the fund managers to earn abnormal profits and returns. Thus predictions can be made but there is no surety that the prediction or forecasting they made will really prove to be successful, thus instead of causing profit at times behavioral finance has lead investors to great loss. The theories written in the books by different researchers and scholars are far different from the practical life if one was to invest in 1990 and recoup the investment in 1999 the best market to put the money is Hong Kong market because it has a high volatility at the same time a high return. There is a believe that the higher the volatility of the stock price the higher the return. This has been proven to be true in this case because it has 269 percent.
Question 3
Individual, group or organizations are generally overconfident about their abilities to control events, they overestimate their reliability of knowledge and they underestimate risks. Due to this, students tend to make overconfident decisions about their exams and change of exams to surprise will require behaviour change. The higher the confidence student has with in himself there are more likely chances risk of overconfidence, especially those individual who are not well informed about the exam schedule. Overconfidence could be in terms of too little diversification, this leads them to study too much in those subjects in which they are most familiar with. Further, according to De Bondt and Thalers research, people overreact to unexpected news events which results in overreaction hypothesis leading the prior losers to prior winners. And under and over reaction are the main causes of trends, momentums and fads. But overconfidence may also lead to certain positive aspects as it may help in the general students overreactions, excess volatility and also speculative among students.
Therefore behaviour change is important as it affects not only the studying decision making of students but it also holds an overall command in the class. Schedules and students behavior have a great link with each other because behavior not only helps to understand the psychological factors but they help in determining and forming a good studying culture Thus understandings of psychological factors for effective decision making of studying are relevant to the management of time in college. Behavioral acts as a guide for students goals and concerns as they help in forming a right perception and set such preferences for them so that the risk could be minimized. Further, it also helps to make good studying making decisions by explaining the efficiencies and suggest exam taking and high study strategies.
Most of the behavioral principles are not only derived from psychology but also from sociology and anthropology. While some scholars also view that behavioral and behavioral economics are very close and related fields because they both apply scientific research on human and social cognition, and emotional biases so that rational economic decision can be made. Further, efficient allocation of resources could be attained, maximum returns could be achieved and market prices could be exploited. Some of the basic behavioral principles within the behavioral are prospect theory regret and cognitive dissonance, anchoring, mental compartments, overconfidence, over and under reaction, representativeness heuristic , disjunction effect, gambling behavior and speculation, perceived irrelevance of history, magical thinking, quasimagical thinking, attention anomalies, the availability heuristic, culture and social contagion, and global culture (Shiller, 1998). But among these principles some of the known principles are cognitive dissonance, regret theory, prospect theory, heuristic and overconfidence. These behavioral principles consider range of psychological variables which results in emotional reactions which affect both the personal and general economic conditions. All these principles create an impact on students decision making because they generally study in such an manner in which it can get maximum return.
Others take to the trial and error method in which individuals develop rules of thumb and they find out things for themselves due to this it often leads to other errors as well. It is also defined as the usage of experience and practical efforts so that desired questions can be answered and performance can be improved. It is with the help of Heuristic that information is spread on a faster pace and decision making at times become more difficult. This approach is widely used all over the world but still it is not always beneficiary as sometimes market acts in an irrational manner which may effect the whole market negatively. Herd behavior is a form of heuristics where individuals that are present in the decision making environment are conformed to the majority of individuals by following their decisions.
Generally it is viewed that the individuals behave rationally but behavioral has pointed that these students seldom make rational decisions, as they tend to make two common mistakes, i.e. excessive study and planning an ethical behaviour.