The Idea of Change Essay Example | Topics and Well Written Essays - 1250 words

The Idea of Change - Essay Example This strips the students of their creative power. The educator hence strives to regulate the way that the knowledge comes to the students and thus hinders their own thinking. Freire also related this banking philosophy of education to necrophily. It is mechanical thinking wherein the necrophilous person prefers memory versus experience, and having as opposed to being. It is in this act of controlling that the actual education of a person ceases. Freire offers the solution to this problem. There is a need to â€Å"transform the structure† so that the students can become â€Å"beings for themselves† instead of just being incorporated into this system. He further argues that true liberation does not alienate people and it is â€Å"not another deposit to be made†. He termed this liberation of education as â€Å"praxis,† a problem-posing education that which aims to consider people as conscious beings. As the banking system of education strives to maintain a â€Å"submersion of consciousness†, the problem-posing method aims for the â€Å"emergence of consciousness and critical intervention in reality.† On the other hand, Richard Rodriguez wrote an essay on â€Å"The Achievement of Desrie.† In this essay, Rodriguez wrote an account of how he found himself through education, and how in doing so, his life had drastically changed. As a boy, Rodriguez recounts how he has always admired his teachers, and how he had always been passionate about books – anxious and fervent to learn. He claimed that as he was a very good student, he was also a bad one as he was a certain kind of â€Å"scholarship boy†, described by Richard Hoggart (from whom he derived the term in â€Å"The Uses of Literacy†) as a boy who shifts between environments, the home and the classroom, which are both culturally contradicting. The ideas that the classroom offers to

Research, identify and discuss the advantages and disadvantages of Essay

Research, identify and discuss the advantages and disadvantages of business regulations - Essay Example Regulations are good in the way that they provide a particular direction for businesses to follow. Rules and regulations actually help standardize the business operations as all workers and businesses will follow a particular set of instructions which are applicable to them. On the other hand regulations are also important as some businesses do not self-regulate themselves and can therefore be involved in actions which are harmful to the society. For example if restrictions are not imposed on the emission of factories then many companies might not care about the negative effect of emissions from factories ad may continue to do so in order to save costs of safe emission systems. When regulations are made and implemented, then these companies are bound to follow it otherwise they’ll have to bear the consequences in form of penalty such are monetary fines or closure of business. Therefore, regulation is one form of ensuring that the business doesn’t harm the society. (Porket, 2003) Moreover, regulations are also important in protecting the rights of the employees as without regulations, employers may exploit the employees through bad working conditions or low wages etc. Due to this government tend to make regulations regarding minimum wealth, health and safety conditions. Regulations also help in preventing exploitation of consumers. If there are no regulations, then monopolies would exploit consumers with high prices, companies won’t produce goods with quality standards and might not mention the harmful effects of using a particular product if proper regulations are not in place. Therefore regulations are beneficial as many businesses don’t tend to self-regulate them. (Porket, 2003) Along with advantages, there are also some drawbacks of regulations. These include the costs of complying with these regulations. Regulations which are

Proposal on Business Essay Example | Topics and Well Written Essays - 2750 words

Proposal on Business - Essay Example UK firms that collapsed into the administration as they distorted or deviated under immense pressure of soaring costs and declining of consumer spending. Background Information of the Organization Woolworths is the organization under research, is medium-sized organization situated in the region of UK that appears to experience problems in the current recession period. Furthermore, this online retail company believes in providing the customers with a broad range of quality products with greater choices that include children's clothing, stationery, and toys at a very economical price. Woolworths is one of the UK's oldest store groups with more than thousand employees working at different stores all throughout UK. The statistical records provide with evidence that Woolworths has had a presence on the High Street of UK for several decades (Thompson & Martin &Â  Thompson, pp. 615-618, 2010). The history of Woolworths reveals the fact that it was in the early nineteen hundreds that covere d the local newspapers with its opening in UK. It gained recognition and popularity and the company expanded rapidly within couple of decades with more than five hundred stores in UK. However, in the middle years of the twentieth century, the growth of the company stagnated because competitors invaded the market. Contenders and competitors soon began to take over its market share as they rolled out the new concept on a faster pace (Thompson & Martin &Â  Thompson, pp. 615-618, 2010). The financial performance of Woolworths has been abating and falling in the past few years. The episodes of the shutting down of several stores of this retail company harmonize with the recession and the financial crisis that took place in the recent times. However, latter in the period of recession, Woolworths... The intention of this study is Woolworths as the organization under research, is medium-sized organization situated in the region of UK that appears to experience problems in the current recession period. Furthermore, this online retail company believes in providing the customers with a broad range of quality products with greater choices that include children's clothing, stationery, and toys at a very economical price. Woolworths is one of the UK's oldest store groups with more than thousand employees working at different stores all throughout UK. The statistical records provide with evidence that Woolworths has had a presence on the High Street of UK for several decades. The history of Woolworths reveals the fact that it was in the early nineteen hundreds that covered the local newspapers with its opening in UK. It gained recognition and popularity and the company expanded rapidly within couple of decades with more than five hundred stores in UK. However, in the middle years of the twentieth century, the growth of the company stagnated because competitors invaded the market. Contenders and competitors soon began to take over its market share as they rolled out the new concept on a faster pace. The financial performance of Woolworths has been abating and falling in the past few years. The episodes of the shutting down of several stores of this retail company harmonize with the recession and the financial crisis that took place in the recent times. However, latter in the period of recession, Woolworths reopened its store with in excess of half a million products on offer for the customers.

The Capital Asset Pricing Model Essay Example | Topics and Well Written Essays - 1000 words

The Capital Asset Pricing Model - Essay Example The equation that is applied in the calculation of CAPM for the assets is as follows: E(Ri) =RF +?i [E(RM) - RF] Where, E (Ri) = expected return of the ith level. Rf = risk-free return of an asset (such as short-term government securities), ?i = beta coefficient of ith level, and (RM) = Expected return on the market. The main aim of the CAPM model underlies the identification of the market portfolio as the tangency portfolio between supply and demand in balance. However, there are several theoretical limitations that have hindered the operations of the model, in the manner that these limitations will likely cause deviations in the process of applying the model particularly between the reality and the model. These limitations can be broadly classified as: a. Being based entirely on unrealistic assumptions. b. Testing the model’s validity is quite difficult. c. Its betas will not remain stable over a long duration of time. Based on these limitations, the model is accepted to hav ing been based on several assumptions most of which are not realistic. The CAPM model supposes that the investors are always risk-averse hence, are most likely to select the investment portfolios that are efficient, and which will be based on the standard deviation or variance and expected returns of the returns from the assets (Whitman & Diz, 2013.p.85). a. Unrealistic assumptions Based on the unrealistic assumptions, it is also hard to find a security that is risk free. For example, while a highly liquid short term government security may be considered as risk free, it will be unlikely that the government will default on the security. This is because of the inflation rate which is another significant factor that will affect the portfolio’s returns. This is because; a portfolio’s variance or standard deviation is usually assumed to be an adequate measurement for a investment’s risk level, which is normally certified under the assumption of returns being normall y distributed. However, in practice, there are several other risk measures that will play an important role in the determination of an assets’ degree of risk (Pahl, 2009.p.345). The returns on assets, under the CAPM, are required to take the form of a normal distribution model. Consequently, the return on the assets in the real world may be non-normal and irregularly distributed. b. Difficulty in determining the model’s validity Additionally, it is difficult to assess the validity of the model in the testing of returns of assets. This is because most of the model’s assumptions may not be critical as a result of the practical validity of the model. Consequently, this model recognizes that different investors have different abilities for investing hence; the cost of their investments will be largely expected to have an effect on the efficiency of the portfolio. Additionally, since the portfolio markets tend to be frictionless, it is likely expected that there woul d be no transaction costs, taxes and restrictions on the nature of trade offered. However, theoretically, this act as a limitation for this model as frictionless markets may not be in existence in real practice. Consequently, while the model might assume that assets in the market are infinitely divisible to be held or traded on, the best option would be to have the market portfolio include all the opportunities of investment available in the market, and with a market value. As such, it is

Moon Palace by Paul Auster Essay Example for Free

Moon Palace by Paul Auster Essay This is the story of Marco Stanley Fogg, an orphan searching for love, his father and the key to the riddle of his origin and fate. Marcos mother was killed in a car accident when he was eleven years old, and he never knew who was his father. Since then he had lived with his Uncle Victor in a small apartment on 112th Street in N.Y. His Uncle was a part of a band who was named Wally Moon and preformed at the Moon Palace diner. When Stanley grew up he went to the University; Uncle Victor gave him for this occasion a present, one thousand books. Afterwards, his Uncle had suddenly died. Then Stanleys situation became worse; He saw his money dwindle to zero, he lost the apartment and wound up living in the streets (He slept for three weeks in Central Park without food and with little money). His friends David Zimmer and Kitty Wu had found him and took care of him til he recover from his illness. Staley lived in Zimmers house until he had moved away to another apartment, then Stanley searched for a new place to live and found a job as a live-in companion for an elderly gentleman in a wheelchair. He lived with him for about half year until the gentleman died. His name was Effing Thomas but his real name was Julian Barber. In the past he was a famous painter but he stopped painting after the death of his brother and he changed his name after being considered dead by mistake. Stanley and Effing were very bonded since Effing was like the father Stanley never had. Dear Diary June, 1967 Today I was again in Broadway Street where was Chandlers Bookstore. I had sold him another box of Uncle Victors book. Sure, I had already read them. I know that they were the only memory, which was left from my uncle, buy I need the money to pay the rent and to buy some food and eat. August, 1968 Today I woke up early in the morning and got out to the street. As I was walking I saw that the drugstore had been opened already, I entered and I dropped a penny into the drugstore Exacto scale to see what was happening to me. From 154 in June, I fell to 139 in July and then to 123 in august. For someone who measured slightly over six feet, this began to be dangerously little. August, 1969 Today Fernandez, the owner of the building, threw me out my apartment. I took my knapsack with a few odds and ends, tucked the clarinet case, that Uncle Victor had left to me, and walked out the door I dont know what Ill do, or where do Ill go October, 1970 Now I have just finished to type down the life story of Effing on the typewriter that he had gave me. I have copied it from the notes I had taken in those nights when we sat down after supper. Me on the sofa and him in his wheelchair. He had told everything; Why had he changed his name and why did he choose this name (Effing), why did he stop painting, what happened to his wife and to his son. And eventually he told me that when he will die he wants his body to be cremated.

Food and Beverage Essay Example for Free

Food and Beverage Essay Hotel Les Fontaines has a strategy that differs very largely from any of its competitors, as it is one of a kind in its region. The company will focus on delivering a service that provides a more personalized and refreshed service style. There would be more attention to detail especially in the restaurant outlet of which has been proposed as this would be a value added for Les Chalets Des Mosses. Also the operation costs would be lower in the restaurant area compared to rooms, as clients who stay at the hotel are budget guest who like to spend less and in return expect quality service and product. The hotel operates for ten months throughout the year. The restaurant opens for service during lunch and dinner. For the lunch period simple, smart, and affordable dishes catering to the customers needs will be served. As most of the consumers will be children from ages four to twelve and parents from early thirties to late forties, a menu healthy and enjoyable menu for the guests will be designed. Even though quick service would be offered for lunchtime the quality of the food and service would not be compromised. This would allow for the restaurant to make a good first impression in order to encourage the guest to return to Pomodoro On the other hand, the dinner will have a drastically different objective. The average dish will be more luxuries and elegant and will be served in an a la carte fashion. The atmosphere at dinner will promote a sensational and comfortable time for our guests. Both the hotels image and the restaurant harmonize in theme. The hotel Les Fontaines provides a great experience for the clienteles, enticing them to return to Les Chalets des Mosses. Vision: Hospitality is all about the individual and at Les Chalets des Mosses we pride ourselves on our unique service culture. We are in business to meet our customer’s needs and promises that each guest will be treated with a positive service attitude at every point of contact. From the hotel manager to the cleaner and everyone else in-between plays a vital role in delivering a memorable guest experience. Mission: The mission of the restaurant is to deliver the most comfortable and soothing experience for the clients. With exceptional service, responsible stewardship, and high quality food an excellent experience can be provided. Therefore, the Pomodoro’s main objective is to focus on the customers’ best interests. Les Chalets des Mosses provides budget travelers and tourists with a choice of excellent hospitality products that offer excellent value for money, while assuring a good return to owners and inspiration to employees. Objective: The main object of Les Chalets de Mosses is to have a return on investment within two years form Pomodoro’s. Building a loyal customer base and a long-term marketing strategy are what Hotel Les Fontaines is seeking to achieve. Pomodoro is an ambitious concept that is currently, planning on growing and expanding by the year 2020. Also the Pomodoro is trying to aim for eighty to eighty-five percent occupancy rate for the lunch, which will operate for two and a half hours daily. As for dinner Pomodoro’s is trying to attract around seventy to seventy-five percent occupancy. By having a total of hundred twenty seats prepared in the restaurant, the Pomodoro will be the main focus of the company’s FB branch. The restaurant has made a completely different transition from its original concept. Not only did the restaurant change in its size, the type of services and it dishes the market segments has also changed. The most effective sales and marketing tactics have been selected to define the restaurant’s image. The name, Pomodoro, is the first major change to help identify the new Italian restaurant that has opened in Les Chalets des Mosses. The restaurant also has a bar, which would play an important role as while guest are waiting for the table they could spend time at the bar. During the waiting time guest’s may spend money at the bar allowing the restaurant to further maximize its revenue. Also, this new concept of the bar would be perfect after a long day at the ski slopes. The Hotel Les Fontaines will also incorporate three major principles (Schultz Horvath, 2008). The first principle is the training and development process of staff members. By creating a strong and effective program for the staff members, the employees will be able to satisfy even the specific needs of the customers. The Hazard analysis and critical points (HACCP) will be incorporated in the training program to deliver a food safety and social responsibility. With this our guests would feel at ease to eat at Pomodoro’s and families would be more than happy to be with their children. The training program will have to take place before the restaurant begins to operate in 2013. The second principle is the ability to operate efficiently. The restaurant should be able to deliver highly effective operations to the clients. Lastly, the culture of customer service should be noted. Without the necessary service to deliver the satisfaction and gratification of the consumer, a loyal customer base cannot be built. Les Fontaines will incorporate the referral marketing for the market strategy. The referral marketing is no doubt the best way to maximize the revenue and raise the awareness of the company and standards to the local customers (Schmitt, Skiera Bulte, 2011). FB Strategy: Diversification is one of the strategies that best fit the new operations situation, as Les Fontaines is in search of a new product and market (Gine, Pisano, Sorell, Szigety, 2006). The restaurant has taken extreme measures to differentiate itself from the competition in the Les Mosses region. As the restaurant caters to a niche market, it will have minimum competition with the surrounding business in the region. This is due to the fact that Pomodoro’s offers various activities for children of which the surrounding hotels do not offer. The psychographic, demographic, geographic, and purchase behavior of clients were analyzed in order to help Les Chalets des Mosses strengthen it own image (Yankelovich, Meer, 2006). In order to create such strategy, the restaurants must create an engaging and rigorous loyalty program. The goal of the hotel is to have local customers who will visit the hotel on a regular bases during the various events that take place in the region of les mosses. Since, the hotel will promote its special offers via newsletter through the zip code, not only does the newsletter grab the customers attention, but also the local customers will become frequent clienteles. This marketing strategy would benefit the whole hotel, not just the restaurant. By sending out newsletters promoting events or special offers in both the hotel and restaurant it may encourage guest to not only use the food and beverage outlets but also to stay and enjoy the experience. The company will take a step forward by taking surveys of the clienteles regarding the activities and subjects that interest them. This way Les Fontaines will be able to predict what the clientele’s hobbies or taste are and provide a service that incorporates partnerships with other companies. For example Pomodoro’s can promote a snow-tubing event to the customers by providing ticket deals. According to Michael Porter, a Harvard Business School professor and the reigning guru of competitive strategy, competition within an industry is driven by five basic factors (Porter, 1979): 1. Threat of new entries. 2. Threat of substitute products or services. 3. Bargaining power of suppliers. 4. Bargaining power of buyers. 5. Rivalry among existing firms. We understand that using one strategy is impossible in todays society, as the range of customers are more diverse as globalization has a larger impact in today’s society. The Les Fontaines will be promoted in various ways. The newsletter will act as a tool to commercialize the company’s anniversaries and offers. Unlike, the other rivals the company will begin to engage the customers with a more personal touch. The snow tubing company in Les Mosses will further advertise the hotel and vice verse due to their partnership. Furthermore, the referrals will function as the company’s key promotional tool. Both Pomodoro and hotel Les Fontaines will attract customers through the various services, products, offers, and business proposals. None of the competing hotels and FB outlets substantially reshaped their business strategies and market segments like Pomodoro’s. The awareness of the hotel will most definitely rise as the customers and other partnering companies spread the word. The company will have a dominating number of advertisements in comparison to the other competing ventures due to their various partnerships. The hotel provides a pleasant and sophisticated service that was specifically designed to differ from other surrounding hotels within the region. Both the restaurant and the hotel will offer a personalized touch to the service that will be provided. This will attract new customers and build strong customer relationships, as the customers will return to the venture on a frequent basis. Despite the cluttered market, the unique products that were designed to meet the specific needs of the customers makes the Les Fontaines stand out from its competitors. List of References: Gine. F, Pisano. G, Sorell. M , Szigety. M. (2006). RD Portfolio Strategy, Diversification And Performance: An Information Perspective. (Doctoral dissertation, Harvard University) Retrieved from http://hbr.org/1979/03/how-competitive-forces-shape-strategy/ar/1 Porter, M. E. (1979). How competitive forces chape strategy. (Doctoral dissertation, Harvard University)Retrieved from http://hbr.org/1979/03/how-competitive-forces-shape-strategy/ar/1 Schmitt, P., Skiera, B., Bulte, C. V. D. (2011). Why customer referrals can drive stunning profits. (Doctoral dissertation, Harvard University)Retrieved from http://hbr.org/2011/06/why-customer-referrals-can-drive-stunning-profits/ar/1 Schultz, G. C., Horvath, A. G. (2008). Strategic plan: 2008-2013. Informally published manuscript, Finance Business, Pennsylvania State Yankelovich D, Meer D. (2006). Rediscovering Market Segmentation. Retrieved from: http://hbr.org/product/rediscovering-market-segmentation/an/R0602G-PDF-ENG

Case Study Analysis Cost Of Capital At Ameritrade Finance Essay

Case Study Analysis Cost Of Capital At Ameritrade Finance Essay Capital Asset Pricing Model is a model that describes the relationship between risk and expected return  and  that is used in the pricing of risky securities. Description: Capital Asset Pricing Model (CAPM) The general idea behind CAPM is that investors need to be compensated in two ways: time value of money  and risk. The time value of money is represented by the risk-free(rf) rate  in the formula and compensates the investors for placing money in any investment over a period of time. The other half of the formula represents risk and calculates the amount of compensation the investor needs for taking on  additional risk. This is calculated by taking a risk measure (beta)  that compares the returns of the asset to the market over a period of time and to the market premium (Rm-rf). The CAPM says that the expected return of a security or a portfolio equals the rate on a risk-free security plus a risk premium. If this expected return does not meet or beat the required return, then the investment should not be undertaken. The security market line plots the results of the CAPM for all different risks (betas). Using the CAPM model  and the following assumptions, we can compute the expected return of a stock in this CAPM example: if the risk-free rate is  3%, the beta (risk measure) of the stock is 2 and the expected market return over the period is 10%, the stock is expected to return 17% (3%+2(10%-3%)). CAPM has a lot of important consequences. For one thing it turns finding the efficient frontier into a doable task, because you only have to calculate the co-variances of every pair of classes, instead of every pair of everything. Another consequence is that CAPM implies that investing in individual stocks is pointless, because you can duplicate the reward and risk characteristics of any security just by using the right mix of cash with the appropriate asset class. This is why followers of MPT avoid stocks, and instead build portfolios out of low cost index funds. Cap-M looks at risk and rates of return and compares them to the overall stock market. If you use CAPM you have to assume that most investors want to avoid risk, (risk averse), and those who do take risks, expect to be rewarded. It also assumes that investors are price takers who cant influence the price of assets or markets. With CAPM you assume that there are no transactional costs or taxation and assets and securities are divisible into small little packets. CAPM assumes that investors are not limited in their borrowing and lending under the risk free rate of interest. How to Calculate the Cost of Equity CAPM The cost of equity is the amount of compensation an investor requires to invest in an equity investment. The cost of equity is estimable is several ways, including the capital asset pricing model (CAPM). The formula for calculating the cost of equity using CAPM is the risk-free rate plus beta times the market risk premium. Beta compares the risk of the asset to the market, so it is a risk that, even with diversification, will not go away. As an example, a company has a beta of 0.9, the risk-free rate is 1 percent and the expected return on the equity investment is 4 percent. Instructions Determine the market risk premium. The market risk premium equals the expected return minus the risk-free rate. The risk-free rate of return is usually the United States three-month Treasury bill rate. In our example, 4 percent minus 1 percent equals 3 percent. Multiply the market risk premium by beta. In our example, 3 percent times 0.9 equals 0.027. Add the risk-free rate to the number calculated in Step 2 to determine the cost of equity. In our example, 0.027 plus 0.01 equals a cost of equity of 0.037 or 3.7 percent. . Combining the risk-free asset and the market portfolio gives the portfolio frontier. The risk of an individual asset is characterized by its co-variability with the market portfolio. The part of the risk that is correlated with the market portfolio, the systematic risk, cannot be diversified away. Bearing systematic risk needs to be rewarded. The part of an assets risk that is not correlated with the market portfolio, the non-systematic risk, can be diversified away by holding a frontier portfolio. Bearing non-systematic risk need not be rewarded. For any asset i: where We thus have an asset pricing model the CAPM. Example. Suppose that CAPM holds. The expected market return is 14% and T-bill rate is 5%. What should be the expected return on a stock with ÃŽÂ ² = 0? Answer: Same as the risk-free rate, 5%. à ¢Ã¢â€š ¬Ã‚ ¢ The stock may have significant uncertainty in its return. à ¢Ã¢â€š ¬Ã‚ ¢ This uncertainty is uncorrelated with the market return. What should be the expected return on a stock with ÃŽÂ ² = 1? Answer: The same as the market return, 14%. What should be the expected return on a portfolio made up of 50% T-bills and 50% market portfolio? Answer: the expected return should be  ¯r = (0.5)(0.05)+(0.5)(0.14) = 9.5%. Multifactor CAPM In CAPM, investors care about returns on their investments over the next short horizon they follow myopic investment strategies. In practice, however: à ¢Ã¢â€š ¬Ã‚ ¢ Investors do invest over long horizons à ¢Ã¢â€š ¬Ã‚ ¢ Investment opportunities do change over time. In equilibrium, an assets premium is given by a multi-factor CAPM : Limitations of CAPM Based on highly restrictive assumptions i.e. no tax, transaction costs etc Serious doubts about its testability. Market factor is not the sole factor influencing stock returns. Summary of CAPM CAPM is attractive: 1. It is simple and sensible: is built on modern portfolio theory distinguishes systematic risk and non-systematic risk provides a simple pricing model. 2. It is relatively easy to implement. CAPM is controversial: 1. It is difficult to test: difficult to identify the market portfolio difficult to estimate returns and betas. 2. Empirical evidence is mixed. 3. Alternative pricing models might do better. Multi-factor CAPM. Consumption CAPM (C-CAPM). APT. Other Methods for calculating cost of equity There are 3 methods which are mainly used for calculating Cost of equity other than CAPM Arbitrage Pricing theory 3 factor method Dividend Growth Method Arbitrage Pricing Theory APT assumes that returns on securities are generated by number of industry-wide and market-wide factors. Correlation between a pair of securities occurs when these securities are affected by the SAME factor or factors. Return on any stock traded in a financial market consists of two parts. R = Re + U Where, R = return on any stock Re = Expected or Normal return (depends on all of information shareholders have on the stock for next month.) U = Uncertain or Risky return (this comes from information revealed in the month) U = m +  Ã‚ ¥Ã¢â€š ¬Ã‚   Where, m = Systematic risk or market risk (it influences all assets of market)  Ã‚ ¥Ã¢â€š ¬Ã‚  Ã¢â€š ¬Ã‚  Ã¢â€š ¬Ã‚ ½ Unsystematic risk (it affects single asset or small group interrelated of assets, it is specific to company) The capital asset pricing theory begins with an analysis of how investors construct efficient portfolios. But in real life scenarios, it isnt necessary that every time portfolios will be efficient. It is developed by Stephen Ross. Moreover, the return is assumed to obey the following simple relationship: Where b1, b2 and b3 are sensitivities associated with factor 1, factor 2 and factor 3 which can be interest rate or other price factors. Noise =  Ã‚ ¥ is event unique to the company. APT states that the expected risk premium on a stock should depend on the expected risk premium associated with each factor and the stocks sensitivity to each of the factors. Thus, formula modifies to: Where, rf = risk free rate is subtracted from each return to give risk premium associated from each factor. Analysis of the formula: If we put value for b = 0, the expected risk premium will be zero. It will create a diversified portfolio which has zero sensitivity to macroeconomic factor which offers risk free rate of interest. Portfolio offered a higher return, investors could make a risk-free (or arbitrage) profit by borrowing to buy the portfolio. If it offered a lower return, you could make an arbitrage profit by running the strategy in reverse; in other words, you would sell the portfolio and invest the proceeds in U.S. Treasury bills. Consider portfolio A and B are sensitive to factor 1, A is twice sensitive to factor1 as then portfolio Therefore, if you divided your money equally between U.S. Treasury bills and portfolio A, combined portfolio would have exactly the same sensitivity to factor 1 as portfolio B and would offer the same risk premium. Steps of Arbitrage Pricing Theory The various steps during Arbitrage Pricing Theory can be stated as: Identify the macroeconomic factors: APT doesnt indicate which factors are to be considered. But there are 6 principle factors which are: Yield spread interest rate, exchange rate, GNP inflation portion of the market return Estimate the risk premium of each factor Estimate the factor sensitivity Net Return = risk free interest rate + expected risk premium 3 factor model It is a special case of APT It considers 3 major factors called as market factor size factor book to market factor. There is also evidence that these factors are related to company profitability and therefore may be picking up risk factors that are left out of the simple CAPM. The practical application of this model is to estimate the betas for the three factors and then use them to predict where returns should fall, much like the CAPM. It was researched by Fama and French. Dividend Growth Method Dividend Discount Model. It is useful when the growth rate of dividend is forecasted constantly. The present value of stocks is given as Where, r = discount rate, g = rate of growth, DIV = annual cash payment, This formula can be used when growth rate g When growth rate = rate of return, the present value becomes infinite. For perpetual growth, r > g. Growing perpetuity formula, Where,P0 in terms of next years expected dividend DIV g = the projected growth trend r = expected rate of return on other securities of comparable risk. We can estimate cost of equity from this formula by re-arranging. Lets understand by an example: Suppose that your company is expected to pay a dividend of $1.50 per share next year. There has been a steady growth in dividends of 5.1% per year and the market expects that to continue. The current price is $25. Then cost of equity r is given as: When the growth rate isnt constant but varies from year to year, then average can be calculated. Growth rate for current year is calculated using the formula: For example, Year Dividend (in Rs. Million) Percent change (g) 2000 1.23 2001 1.30 (1.30 1.23) / 1.23 = 5.7% 2002 1.36 (1.36 1.30) / 1.30 = 4.6% 2003 1.43 (1.43 1.36) / 1.36 = 5.1% 2004 1.50 (1.50 1.43) / 1.43 = 4.9% Growth rate is average of all percent changes and equals This model serves the major advantage of being easy to understand and use but has a major drawback total dependence on dividend and it cannot be used where company isnt paying any dividend. Also, it doesnot consider any risk and is highly sensitive to the change in growth rate. Estimating Beta Beta is an important term in Capital Asset Pricing Method. Beta is the non-diversified risk of holding a single stock. But it turns out that companies in similar markets have similar risks. Interpretation of beta Beta = 1,it matches market portfolio Beta > 1, higher risk. Beta Methods for calculation of beta It is calculated as: beta_{i} = frac {mathrm{Cov}(R_i,R_m)}{mathrm{Var}(R_m)} Where, Ri = rate of return of asset and Rm is rate of return of market. Thus, beta is dependent on regression analysis. Beta is found by statistical analysis of individual, daily share price returns, in comparison with the markets daily returns over precisely the same period. We need to gather a lengthy time-series of observations for the market return and the individual asset return. Then required co-variances and variances can be calculated. If coefficient of correlation P is known then The alternative method of calculating beta is (by rearranging terms from CAPM equation): In practice, an additional constant alpha is also added in the above equation which tells how much better (or worse) the funds did than what the CAPM predicted. Alpha is a risk-adjusted measure of the so-called active return on an investment. Here, E(Ri) Rf is estimated return on asset portfolios and E(Rm) Rf is estimated return on market index. In order to check that there are no serious violations of the linear regression model assumptions. The slope of the fitted line from the linear least-squares calculation is the estimated Beta. The vertical intercept of this curve is called as the alpha. For a portfolio of assets, we have the relation: Given that beta is a linear risk measure, the beta of a portfolio of assets as simply the weighted average of all the individual betas that comprise the portfolio. HANU Estimate of Risk Premium We dont have reliable estimate where stock market will move in future. So we are using long term historical spreadsheets for estimate large stock than small stocks because they are more closer to proper estimate of market We are considering all values after Second World War because after that laws became stable in U.S. Risk premium = Rm Rf U.S. government securities rate = 6.69% (20 years bond, Exhibit 3) Average annual return for Large company stocks = 14 % (Exhibit 3) So Risk premium for Ameritrade = 14 % 6.69 % =7.31 %