make an analysis of the following statements: a*The fundamental notion of presen
ID: 2793187 • Letter: M
Question
make an analysis of the following statements:
a*The fundamental notion of present value says that any weight that is charged in the future, today is worth less, because its immediate availability has a cost.
b* The alternative valuation of the shares through the Price Earning, is also affected by the rate of inflation, risk and growth.
c* If the growth rate is very variable, the dividend valuation model is irrelevant.
d*. Is it possible to design a portfolio (portfolio) with variance equal to zero? What would be the requirements?
e*. Would you accept a lower return on the Risk-Free Rate for investing in an action with negative Beta?
Explanation / Answer
a) This statement is not so true because the fundamental notion of present value is that any weight charged in the future is worth much less as compared to today because of time value of money which basically states value of money diminishes over time.
b) Yes the price and earnings of share is affected by inflation, risk and growth because these factors affect the profitability of businesses, thus their earnings and therefore their price.
c) Yes, if the growth is very variable then the dividend valuation model is irrelevant because the formula for dividend valuation model assumes constant growth rate.
d) Yes it is quite possible to design a portfolio with variance equal to zero. In such a case usually fixed deposits and government bonds and other debt instruments should be used whose prices wont fluctuate much.
e) No, risk free rate has nothing to do with beta. There is no reason to expect lower return for investing in an asset with negative beta. Instead beta is linked to market index and it shows how the asset performs in relation to the market. Negative beta means when market goes up asset goes down and vice versa.
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