Sunday, March 10, 2019
Security Analysis & Portfolio Management
1. Introduction Before Fama and french apparent motion it, almost business schools taught their student CAPM is the means of describing the relationship mingled with judge ease up and gamble in gillyf humbleers. In 1992, Fama and French hade a cultivation on behave grocery decision reckons of differences between logical argument sound reflections, they constitute the beta (sensitivity to the mart return) of the CAPM bed non let off whole the differences between the stock returns, and the market assess, platter value ratio, p/e ratio of listed companies can relieve the differences between the stock returns.The Capital asset Pricing Model (CAPM) by Sharpe (1964), Lintner (1965), Black (1972), believe that stock returns just relative to the risk of the all told stock market. barely in fact, only measures the risk cannot explain all the variation in expect returns, the sensitivity to the market return is to a greater extent complicated. This article cause out s how the different between Capital Asset Pricing Model and Fama & French Model, and the track to analysis the stock return. 2. semblance of Value versus ingathering Stock 2. 1 Value Stock & Growth StockIn this article, the researchers define the value stock as those stocks that take for low ratios of obtain value to market value, the return stocks as those that have low ratios of book value to market value. 2. 2 Findings of Value versus Growth Stock on Investing Most investors think the proceeds stocks can bring a better return, because they think those are good company, and the returns will be high. But the researchers find the growth can bring a better return, the value stocks got a high price by the market, which make their returns be low.In fact, the growth stocks have low ratios of book value to market value, it make the growth stocks get good return. 3. Determinants of stock return Fama and French founding that the market risk factor and the value-growth risk factor can explain average return of this set of large international stocks. The market risk factor is the return on an international market portfolio of stocks, and the value-growth factor is the difference between he return on an international portfolio of high book-to-market stocks and the return on an international portfolio of low book-to-market stocks. 4. Capital Asset Pricing Model vs. Fama & French Model 4. 1 CAMP and Its Importance The CAPM is built on a single measure of risk that explains asset returns. The CAPM dos investors determine how much they will earn by taking into account the risk of investments and the time value of money. With high risk, the investor will want a higher rate of return for his investment.Although most researcher question CAMP, but this model still employ widely in investing. Use beta to forecast single stock is different, but the investors still believe that, when the stocks portfolio of beta is small, it means the stock falsify small than the volatili ty of the market when the stocks portfolio of beta is large, it means the stock miscellanea more than the volatility of the market. For the fund managers, this is important, they can use the CAMP, and no way out the market price is rising or falling.When the market price is falling, they can invest the portfolio of beta is low, and vice versa. 4. 2 Fama and French Explanation rough Stock Return Compared with the CAMP, Fama and French use more complicated way to explain the stock return. They use three risk factors to design a more perfect model. It often used by the finance professionals to explain the risk and return of equity portfolios. In this model, the beta still is the most important risk factors.The second risk factor is the size, it compare the weight down average market value of stocks in the market. Small stocks have a different activity than big stocks in ever market. In the farsighted run, the big stocks have low returns than small stocks. But this return is not fr ee, the small stock have more risk. The third factor is equivalence the amount of value stock exposure in relation to the market. In most companies, the value stock rend have lower cyberspace growth rates, higher dividends, and higher book-market value.In the long run, the value have higher return. 4. 3 Implications of the Two Models for Investors This tow models had implications for investors, although the CAPM is not accurate,but it still can help people to get investing idea for the market. First of all, the CAPM thinks the market also simple, it only considers the risk, and there are at least two additive dimensions of risk, no matter it is a domestic or international portfolios of stock, it is get rewarded in average returns.Secondly, another implication is that, it makes the investors believe the value stocks have higher returns than growth stocks in markets around the world. Looking at book-to-market equity, Fama and French found that value stocks outperformed growth stoc ks in 12 of 13 true countries from 1975 to 1995, and that the difference between average returns on global portfolios of high and low book-to-market stocks was 7. 6 percent per year. Furthermore, when earnings-to-price, cash flow-to-price and dividend-to-price were examined, the value premium continued to be evident.Conclusion Although the CAPM stills an important mean to describe the relationship between expected return and risk in stocks. But CAPM has some serious flaws, especially with the assumptions of the riskless rate and the market rate. Investors must consider current market conditions originally deciding what numbers to use. Additionally, CAPM ignores taxes and transaction costs, lower returns on higher risk and adequate risk measurement. Fama and French think more about the stock return, this model use more risk factors to analysis the change of the stock price.