Valuation of Equity

Document Type
Essay
Pages
9 pages
Word Count
1865 words
School
N/A
Course Code
N/A
Valuation of Equity
Introduction
Valuation of an equity would depend on the required return the
investor would demand to invest in the equity.
What are the factors that determine the required rate of return on an
investment?
Risk associated with the investment. The greater the risk, greater
will be the required return.
The size of the cash flows received from it. Greater the cash flow
greater would be the valuation
The timing of the cash flows.
How do we define and measure risk of an investment and what do we
mean when we say that investment in asset A is riskier than the
investment in asset B?
What is the relationship between an asset’s risk and its required
return?
Risk associated with an asset can be of two types
Systematic risk: The risk contributed by the factors that affect all
the assets. For example decline in growth rate of the economy.
Unsystematic risk: The risk contributed by the factors that affect
only the asset under consideration. For example decline in growth
rate of the company where the investment has been made.
Introduction
Valuation of an equity would depend on the required return the
investor would demand to invest in the equity.
What are the factors that determine the required rate of return on an
investment?
Risk associated with the investment. The greater the risk, greater
will be the required return.
The size of the cash flows received from it. Greater the cash flow
greater would be the valuation
The timing of the cash flows.
How do we define and measure risk of an investment and what do we
mean when we say that investment in asset A is riskier than the
investment in asset B?
What is the relationship between an asset’s risk and its required
return?
Risk associated with an asset can be of two types
Systematic risk: The risk contributed by the factors that affect all
the assets. For example decline in growth rate of the economy.
Unsystematic risk: The risk contributed by the factors that affect
only the asset under consideration. For example decline in growth
rate of the company where the investment has been made.
When an investor makes an investment he takes two kind of risk
One that is specific to the equity
Other that is related to the macro economic factor, which would affect all
equities
If two equities are co-related with each other by combining these two
equities one can reduce the risk associated with individual equities.
If we take a very large number of equities and the investors will
allocate the invest able fund across all these equities then the
Equity Valuation: Role of Diversification

Trusted by Thousands of
Students

Here are what students say about us.

Copyright ©2021 All rights reserved. | CoursePaper is not sponsored or endorsed by any college or university.