# RISK, RETURN, AND STOCK VALUATION

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(S3) For your Module 3 SLP, we will go back to looking at information about the stock price and stock returns of your four companies. Look up the following information about your four companies on Yahoo Finance, Investing.com, Morningstar, or a similar page: a. The current stock prices b. The stock prices five years ago c. The dividend yield for each stock d. The beta for each stock e. Look up the current three-month treasury bill rate on Fidelity’s Fixed Income page Now do the following calculations with this information: 1. Calculate the average annual capital gain or loss (stock price change) over the last five years. Calculate the percentage change from five years ago, and divide by five. For example, if the stock price increased from 50 to 100 in five years, the percentage increase would be 100% and the average annual gain would be 20% (100 divided by 5). Which of these companies has the highest or lowest capital gain? 2. Now estimate the average total return, which is the capital gain plus dividends. If the dividend yield is 2%, then the average total return would be 22% in the example above. Which of these four companies has the highest or lowest total return? Does the order change? 3. Finally, calculate the Treynor Ratio. First, take the total return for each of your four companies and subtract the three-month treasury bill rate (the “risk-free rate”). Then divide this by the beta of each company. This ratio is a measure of the risk-adjusted return of each stock. The higher the return, the higher the Treynor Ratio. But the higher the beta (which is a measure of risk), the lower the Treynor Ratio. Which of your companies has the highest or lowest risk-adjusted return? Does the order change from what you found in 1) and 2) above? Submit a one-page memo in Word summarizing your findings, and include an Excel file with your data and calculations. REFERENCES: RISK, RETURN, AND STOCK VALUATION (S3) Bennet, T. (2014). Understanding volatility – What is beta? Kilik & Co. Retrieved from: https://www.youtube.com/watch?v=BMKEHiTa4mk Graulich, V. (2013). CAPM: Capital asset pricing model. I Hate Math. Retrieved from: https://www.youtube.com/watch?v=8w43SUAZsY0 Workman, T. (2013). Constant growth dividend discount model – How to value stocks. Subjectmoney. Retrieved from: https://www.youtube.com/watch?v=n76Pz3HOBPo&t=10s Madura, J. (2013). Chapter 11: Stock valuation and risk. Financial Markets and Institutions. Cengage Learning. Retrieved from: http://www.cengage.com/resource_uploads/downloads/1133435181_356478.pdf Ross, S., Westerfield, R., & Jordan, B. (2007) Chapter 11: Risk and Return. Essentials of Corporate Finance. McGraw Hill. Retrieved from http://course.sdu.edu.cn/G2S/eWebEditor/uploadfile/20121125110341494.pdf Optional Reading Graham, J., Smart, S., & Megginson, W. L. (2010). Chapter 5: The trade-off between risk and return [PowerPoint slides]. Corporate Finance, 3e. Cengage Learning. Retrieved from: www.cengage.com/resource_uploads/downloads/0324782918_179569.ppt Smith, T. (n.d.). Cost of equity: CAPM. Finance for Non-Financial Managers. Coursera. Retrieved from: https://www.coursera.org/learn/finance-for-non-financial-managers/lecture/Y55g3/cost-of-equity-capm Stevens, S. (2014). Making a simple bar graph in Excel. StevensStats. Retrieved from: https://www.youtube.com/watch?v=_Txpfyn4ipI Mathresources57. (2013). Bar graph video. Retrieved from: https://www.youtube.com/watch?v=32stoY3TEHI

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## RISK, RETURN, AND STOCK VALUATION

(S3) For your Module 3 SLP, we will go back to looking at information about the stock price and stock returns of your four companies. Look up the following information about your four companies on Yahoo Finance, Investing.com, Morningstar, or a similar page: a. The current stock prices b. The stock prices five years ago c. The dividend yield for each stock d. The beta for each stock e. Look up the current three-month treasury bill rate on Fidelity’s Fixed Income page Now do the following calculations with this information: 1. Calculate the average annual capital gain or loss (stock price change) over the last five years. Calculate the percentage change from five years ago, and divide by five. For example, if the stock price increased from 50 to 100 in five years, the percentage increase would be 100% and the average annual gain would be 20% (100 divided by 5). Which of these companies has the highest or lowest capital gain? 2. Now estimate the average total return, which is the capital gain plus dividends. If the dividend yield is 2%, then the average total return would be 22% in the example above. Which of these four companies has the highest or lowest total return? Does the order change? 3. Finally, calculate the Treynor Ratio. First, take the total return for each of your four companies and subtract the three-month treasury bill rate (the “risk-free rate”). Then divide this by the beta of each company. This ratio is a measure of the risk-adjusted return of each stock. The higher the return, the higher the Treynor Ratio. But the higher the beta (which is a measure of risk), the lower the Treynor Ratio. Which of your companies has the highest or lowest risk-adjusted return? Does the order change from what you found in 1) and 2) above? Submit a one-page memo in Word summarizing your findings, and include an Excel file with your data and calculations. REFERENCES: RISK, RETURN, AND STOCK VALUATION (S3) Bennet, T. (2014). Understanding volatility – What is beta? Kilik & Co. Retrieved from: https://www.youtube.com/watch?v=BMKEHiTa4mk Graulich, V. (2013). CAPM: Capital asset pricing model. I Hate Math. Retrieved from: https://www.youtube.com/watch?v=8w43SUAZsY0 Workman, T. (2013). Constant growth dividend discount model – How to value stocks. Subjectmoney. Retrieved from: https://www.youtube.com/watch?v=n76Pz3HOBPo&t=10s Madura, J. (2013). Chapter 11: Stock valuation and risk. Financial Markets and Institutions. Cengage Learning. Retrieved from: http://www.cengage.com/resource_uploads/downloads/1133435181_356478.pdf Ross, S., Westerfield, R., & Jordan, B. (2007) Chapter 11: Risk and Return. Essentials of Corporate Finance. McGraw Hill. Retrieved from http://course.sdu.edu.cn/G2S/eWebEditor/uploadfile/20121125110341494.pdf Optional Reading Graham, J., Smart, S., & Megginson, W. L. (2010). Chapter 5: The trade-off between risk and return [PowerPoint slides]. Corporate Finance, 3e. Cengage Learning. Retrieved from: www.cengage.com/resource_uploads/downloads/0324782918_179569.ppt Smith, T. (n.d.). Cost of equity: CAPM. Finance for Non-Financial Managers. Coursera. Retrieved from: https://www.coursera.org/learn/finance-for-non-financial-managers/lecture/Y55g3/cost-of-equity-capm Stevens, S. (2014). Making a simple bar graph in Excel. StevensStats. Retrieved from: https://www.youtube.com/watch?v=_Txpfyn4ipI Mathresources57. (2013). Bar graph video. Retrieved from: https://www.youtube.com/watch?v=32stoY3TEHI

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