FINANCIAL MARKETS ANALYSIS INVESTMENTS

 
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PART A
Beta measures the stock risk in comparison to the market and it facilitates in the computation of the assets returns. When beta is equal to one, it means that the level of risk of the stock is the same as that of the stock market (CLARK 2002, p.137). If the stock market increases at the rate of 1%, the stock price is also expected to rise at the same rate of 1%. When it is greater than one, the level of volatility of the stock and its risk is usually higher than that of the stock market. The change of the stock exchange at a given percentage triggers an extreme change in the prices of the stock in the same direction. When beta is less than one but greater than zero, it means that the firm’s stock is less risky than the stock market. A stock market change of roughly 1% leads to a change of like 0.5% in the prices of the stock.
Change in the price of stock=intercept value of regression+ beta of the stock returns * change in market price + error term

Date AT&T Inc
10/09/2015 33.14 2,014.89

10/01/2015 32.53 1,923.82
09/14/2015 32.55 1,953.03
09/01/2015 32.32 1,913.85
08/14/2015 34.05 2,091.54
08/03/2015 34.66 2,098.04
07/14/2015 35.12 2,108.95
07/01/2015 35.57 2,077.42
06/15/2015 34.41 2,084.43
06/01/2015 34.35 2,111.73
05/14/2015 34.13 2,121.10
05/01/2015 34.42 2,108.29
04/14/2015 32.69 2,095.84
04/01/2015 32.89 2,059.69
03/13/2015 32.76 2,053.40
03/02/2015 34.64 2,117.39
02/13/2015 34.66 2,096.99
02/02/2015 33.56 2,020.85
01/14/2015 33.33 2,011.27
01/02/2015 33.87 2,058.20
12/15/2014 32.25 1,989.63
12/01/2014 35.06 2,053.44
11/14/2014 35.9 2,039.82
11/03/2014 34.84 2,017.81

10/14/2015 33.84 1,877.70

Total
From the computation in the excel spreadsheet, beta=0.00814
PART 2
Market Risk premium is obtained by getting the difference between the risk free rate and the market portfolio’s expected return and can be equated to the security market line slope (DAMODARAN 2012, p.154).It is usually determined using three concepts that are historical, expected and required market premiums. When looking at it from a macroeconomic point, it presents a good view of the economy on how it is fairing. It is computed as shown below.
Market Risk Premium = Expected market return – Risk-free rate
According to the information released by the United States, there is no single method that can be used universally to compute the market risk premium (MRP).The primary reason is that the various methods have their weakness and strengths, and they also come up with a broad range of results. In the United States, MRP is determined based on the range rather than in terms of a unique number (BAKER, and RIDDICK 2013, P.395). In the current market, it is estimated that it falls in the range of 5% to 7%. Most of the investors rely on the estimates of MRP on the U.S. economy to make investments in other countries of the world. They usually have a conviction that the U.S. – based MRP estimates are a reflection of the performance of the developed world’s economies. Investors, therefore, use it as the benchmark on which they measure the performance of the market of the developed economies.
An unconstrained investor is never comfortable making an investment in a market that will provide a lower risk-adjusted return. Therefore, in openly developed markets, the risk premiums are expected to gravitate towards each other and the incentive in this country’s market always serve as a good estimate. Sometimes the condition is usually different in the emerging markets. The factors that may contribute to this are the existence of the non-market risk, and limitations of the free flow of capital out and into the country due to the segmentation of investors. The other reason why global investors need to rely on the risk premium rates in United States market is the broadness of the market that has comprehensive data recordings. The situation makes it easier to make decisions since there are facts to support the decision made. The U.S. market risk premium rates have, therefore, played a great role on the way the economies of other countries are performing.
PART 3
In this part, the focus will be on the United States yield curve, and it is better first to understand the meaning of the yield curve, its importance, and its different types. It is a measure through which the fixed-interest securities curve is plotted against the time they take before they get to maturity (DIEBOLD and RUDEBUSCH 2013, p.29) .It is usually highly scrutinized because it helps to present an idea of how the economic activities and the future interest rates will change. The curve shapes can be categorized into three groups; the inverted, flat and standard curve. In the case of normal field curve, the longer maturity bonds usually have a higher yield in comparison to the shorter-term bonds because of the risks that are associated with time (JOHNSON 2010, p.105). In the case of the flat yield curve, the long-term and short-term yields are always close to each other portraying the possibility of an economic transition (FABOZZI, and DRAKE 2009, p.174). An inverted yield curve is the opposite of normal one. The long-term yields are usually lower in this case than the short-term ones showing the possibility of recession hitting the economy. It is a period in which the economy experiences temporary decline in the activities. The industrial and trade activities tends to go down together with the Gross Domestic Product (GDP)
Starting the year 1995, the United States yield curve has remained to be in a steeper format. The curve has been rising normally for the last 20 years up to October 2015.This is considered to be an improvement in the economy despite the depression that hit the world in the year 2008. The Federal Reserve implemented policies like quantitative easing to help the economy remain steady (HAUSKEN, and NCUBE 2013, p.18). The claim of the market becoming better and better was supported by the measured improvement in the economy performance of that country with time. There was an increase in the level of inflation as the prices of goods and services started to go up. Federal Reserve decided to shift the rate policies away from the long rates that were said to be manipulative leading to the formation of this curve. The occurrence of this phenomenon is normal since it happens during every business cycle, and most of the lenders were very keen to see how the market would turn out. To the individual consumers, it benefitted them if they were to acquire the long-term bonds because of the interest as opposed to the house purchases. There was a huge gap on the yields of the short-term and long-term yields. Therefore, during the last twenty financial years, the economy of United States has experienced a very great increase in the gap between the yields of the long-term and short-term yields. There has been a significant increase in the long-term yields as compared to the short-term ones.
For the last 20 years, the rates have been increasing, therefore, the curve have been on an upward trend.

PART 4
As at 1st August 2015, the share value of AT$ T Inc was $34.74, the price it closed at on Jul 31, 2015, since 1st August was on a weekend. The capital asset pricing model is used to describe the relationship that exists between the expected return and the risk and it is used in determining the price of a risky stock (JACOBS, and LEVY 2005, p.270). According to the model, investors should always be compensated in two ways that are the risk and time value of money (MONKS, and LAJOUX 2011, p.243). Risk involves the amount of money that the investors need for making an additional risk when they are making the investment. The time value of money gives compensation to the investors to allow their funds to be used in investment for a period (LIEUALLEN 2008, p.335). The model holds that the expected return of stock equals a risk premium plus the rate of a risk-free security. The investment should only be undertaken in the event that the expected return is less than the required return. The expected return of a stock is computed using the following formula (GRAHAM, SMART, and MEGGINSON 2012, p.235).
Expected return=risk free rate+ beta of the security (average market return-risk free rate)
The risk free rate=0.25%
Average market return=14.4%
Beta=0.00814
Expected return=0.25+0.00814 (14.4-0.25)
=0.365%
Share price 1st August 2014=$ 35.33
Share price 1st August 2015=$ 34.74
Dividend=$0.47
Actual return= [(34.74+0.47-35.33)/35.33]*100%
=-0.34%
The investment should not be undertaken since the expected return is more than the required return.
PART 5
There are several assumptions that have been put into consideration before reaching above the recommendation. One is on the preference by the potential investors who may be willing to purchase the share. All the investors always prefer to get more returns from their investment as well as being rewarded for the risk they take when making the investment. By doing so, they expect to get value for their money rather than lose a portion of what they have invested. They can be described as being risk-averse. They all prefer lending their funds or borrowing at the free risk rate. When this happens, they usually have high level of assurance that their funds will not be lost. The other assumption that mostly touches on the consumer behavior is the absence of the market frictions like the taxes and the transaction costs. Under the perfect capital market, the prices are only affected by the normal forces of demand and supply in the market. No investor activity is expected to have an influence on the prices in the market. At the same time, the fixed assets quantities are fixed and anyone can sell or buy as much as they like or want. They can also be sold in the market at any time that an investor may wish to sell them. The combination of all these assumptions makes it easier to understand the recommendation made above. Therefore, there in some instances that the recommendation may fail to hold because of the issues assumed in arriving at it. The potential investor should carry extra research and consider additional information before they can make a decision on what they need to do.
The Capital Asset Pricing Model is the best method to use in the evaluation of the stocks of a given company. The method only puts into consideration the systematic risk thereby bringing out reality through which a lot of investors have diversified their portfolio (PRATT, and GRABOWSKI 2011, p.32). The unsystematic risk is never put into consideration. When making investment appraisal, the method provides the discount rates that other methods fail to offer. It offers a relative comparison of an entity’s systematic risk to the whole stock market (CFA INSTITUTE 2008, p.8). These strengths thus make it the best method to make an evaluation of the securities in the stock market. Most of the potential investor’s usually rely on it since it gives better results when compared to other methods.

References
BAKER, H. K., & RIDDICK, L. A. (2013). International finance : a survey. Oxford, Oxford University Press
CLARK, E. (2002). International finance. London [u.a.], Internat. Thomson Business
CFA INSTITUTE. (2008). CFA program curriculum: Level I 2008. [Charlottesville, Va.], CFA Institute.
DAMODARAN, A. (2012). Investment valuation: tools and techniques for determining the value of any asset. Hoboken, N.J., Wiley.
DIEBOLD, F. X., & RUDEBUSCH, G. D. (2013). Yield curve modeling and forecasting: the dynamic Nelson-Siegel approach. Princeton, Princeton University Press.
FABOZZI, F. J., & PETERSON DRAKE, P. (2009). Finance capital markets, financial management, and investment management. Hoboken, N.J., Wiley. http://public.eblib.com/choice/publicfullrecord.aspx?p=427596.
GRAHAM, J. R., SMART, S. B., & MEGGINSON, W. L. (2012). Introduction to corporate finance. Australia, South-Western/Cengage Learning.
HAUSKEN, K., & NCUBE, M. (2013). Quantitative Easing and Its Impact in the US, Japan, the UK and Europe. New York, NY, Imprint: Springer.
JACOBS, B. I., & LEVY, K. N. (2005). Market neutral strategies. Hoboken, N.J., John Wiley & Sons. http://www.123library.org/book_details/?id=7064.
JOHNSON, R. S. (2010). Bond evaluation, selection, and management. Hoboken, N.J., John Wiley & Sons. http://public.eblib.com/choice/publicfullrecord.aspx?p=588824.

LIEUALLEN, G. G. (2008). Basic federal income tax. New York, Aspen.
MONKS, R. A. G., & LAJOUX, A. R. (2011). Corporate valuation for portfolio investment: analyzing assets, earnings, cash flow, stock price, governance, and special situations. Hoboken, N.J., Bloomberg Press.
PRATT, S. P., & GRABOWSKI, R. J. (2011). Cost of capital in litigation: applications and examples. Hoboken, N.J., Wiley.
Appendix
Date Open high Low Close Volume
10/09/2015 33.42 33.52 33 33.14 19,347,390
10/01/2015 32.48 32.64 32.17 32.53 30,798,920
09/14/2015 32.74 32.78 32.51 32.55 18,498,570
09/01/2015 32.6 32.79 32.16 32.32 32,933,850
08/14/2015 33.91 34.05 33.78 34.05 22,758,780
08/03/2015 34.95 35.02 34.5 34.66 29,656, 820
07/14/2015 34.74 35.13 34.66 35.12 25,141,220
07/01/2015 35.59 35.63 35.27 35.57 36,969, 350
06/15/2015 34.54 34.57 34.4 34.41 24,461,740
06/01/2015 34.53 34.6 34.24 34.35 28,194,280
05/14/2015 34.08 34.2 34 34.13 23,905,790
05/01/2015 34.56 34.72 34.13 34.42 34,164,110
04/14/2015 32.92 32.93 32.62 32.69 18,235,170
04/01/2015 32.62 32.91 32.54 32.89 25,353, 440
03/13/2015 32.99 33.03 32.6 32.76 26,792,630
03/02/2015 34.37 34.65 34.21 34.64 21,635,420
02/13/2015 34.55 34.73 34.37 34.66 16, 080,350
02/02/2015 33.31 33.62 32.8 33.56 37,263,520
01/14/2015 33.28 33.45 33.04 33.33 22,024,210
01/02/2015 33.76 33.97 33.69 33.87 20,540,410
12/15/2014 32.32 32.44 32.07 32.25 29,982,630
12/01/2014 35.28 35.37 34.91 35.06 19,927,720
11/14/2014 35.64 36.15 35.6 35.9 20,540,170
11/03/2014 34.97 35.03 34.61 34.84 22,165,280
10/14/2015 33.88 34.06 33.72 33.84 22,636,060

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