Gloria The Investor Case Studies Example

We know that the Capital Asset Pricing Model has the following form:

ERi=Rf+βiERm-Rf
Rf=0.043ERm=0.119Now we are able to calculate the required rate of return. The calculations are given in .xls file. The results are given in the table below:

We know that the constant growth formula:

P0=Div1r-gP0=Price of StockDiv1=Estimated Dividends for Next Periodr=Required Rate of Returng=Growth Rate

For each stock we perform these calculations in .xls file:

Unfortunately we have no data from question #1 to compare the prices. But the given methods gives an approximate present value of the stocks, hence, it must be close to the initial values.
The results obtained as a result of calculations allow deciding on diversification of the portfolio securities. With the given values of present stock prices Gloria can decide how many stocks of each kind to buy to maximize her dividends. The efficiency of her portfolio depends on the profitability of her investment. According to the market efficiency theory there are many different techniques to determine the optimal portfolio of the stocks with the given value of the stocks and rate of return.

References

Black, Fischer., Michael C. Jensen, and Myron Scholes (1972). The Capital Asset Pricing Model: Some Empirical Tests, pp. 79–121 in M. Jensen ed., Studies in the Theory of Capital Markets. New York: Praeger Publishers.
Lintner, John (1965). The valuation of risk assets and the selection of risky investments in stock portfolios and capital budgets, Review of Economics and Statistics, 47 (1), 13–37.
Rubinstein, Mark (2006). A History of the Theory of Investments. Hoboken: John Wiley & Sons, Inc.