Assume that you buy some shares of Nokia in the United States in dollars. Your friend...

Assume that you buy some shares of Nokia in the United States in dollars. Your friend in France buys some Nokia shares in Europe in euros. Will your rate of return over the next year be the same as your friend’s? Is your market beta risk different from your friend’s risk? Explain.

Solutions

Expert Solution

Rate of return over the next year may be different. Some of the reasons are:

- Mispricing of security, in theory of efficient market hypothesis EMH by Eugene Fama, an asset price incorporates all the available information and will be trading at fair value. We are not part of perfect market, most of the markets worldwide are semi-strong efficient. What it means is, the new information takes a while to get reflected in the price. whereas in perfect market (strong form of efficiency) stock price reflects as soon as some information is made available. Investors in different stock exchanges may be not aware of the exact information leading to different pricing of same security in two different markets.

- Liquidity: It may also happen that as the prices of a security is derived from actual transactions, availability of buyer and seller also be a reason. A higher liquid market absorbs the information faster than relatively illiquid market.

- Globalization: Because of globalization countries growth especially developed countries like United States and France are highly but not perfectly correlated. For CAPM used to calculate expected return will have different risk-free rates will be different and as such the beta that measures market risk.

- Exchange rate risk also affects company’s cash flow, if the company is exporting. However, the affects only about 10 to 20 percent of stocks

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

Assume that you buy some shares for $2.50 per share. At the endof the year,...

Assume that you buy some shares for $2.50 per share. At the end of the year, the price is $3.50 per share. During the year you got a dividend of $0.20 per share. What is the capital gains yield?A. 250.0%B. 100.0%C. 40.0%

Assume the GDP in the United States is at $20.5 billion dollars and has been growing...

Assume the GDP in the United States is at $20.5 billion dollars and has been growing at about 3% for the last 6 years. The unemployment rate is 4.0% and has been stable at that level for 7 months. The inflation rate is at 4.8% which is up from 2.5% two years ago. Economists at the Council of Economic Advisors estimate the NRU to be 4% and the target inflation to be 2.0%. 1. What problem(s) is the economy facing?...

is the United States a friend or foe to Latin America? explain

For this assignment I want you to assume you are the President of the United States,...

For this assignment I want you to assume you are the President of the United States, and China (one of our largest export customers) decides to ban all imports from the U.S. What effect would that have on the U.S. economy? Consider AD, unemployment, inflation, and recession as you contemplate your answer. Once you have determined a potential danger to our economy, what fiscal policy tool would you use to mitigate the damage of China’s decision?

Assume that an economic boom occurs in the United States, so that the United States has...

Assume that an economic boom occurs in the United States, so that the United States has a much higher growth rate than other nations. What will happen to the exchange rate of the U.S. dollar?

Assume the following information for the United States and Mexico. The United States can produce a...

Assume the following information for the United States and Mexico. The United States can produce a maximum of 600 bushels of barley or a maximum of 600 bushels of corn. Mexico can produce a maximum of 200 bushels of barley or 400 bushels of corn. Which country has a comparative advantage in the production of barley? Which country has a comparative advantage in the production of Corn? Show your work for the calculation of opportunity cost. (4 Points)

a. Assume that you would like to buy 100 shares of a stock that is currently...

a. Assume that you would like to buy 100 shares of a stock that is currently priced at $ 70. The initial margin is 75% and maintenance margin is 35%. How much would the total purchase amount to in dollars. How much in total cash of your own do you need in dollars in this example? How much will you be able to borrow in dollars in this example? b. Show your total dollar amount of investment and your results...

You and your brother are planning to buy shares in a manufacturing company. The shares have...

You and your brother are planning to buy shares in a manufacturing company. The shares have just paid a dividend of $2 per share. This annual dividend is expected to grow at a constant rate of 3% p.a. forever. Your brother intends to hold the shares indefinitely, but you intend to sell them in two years. You both have the same required rate of return of 12% p.a. Would you be prepared to pay more than your brother for the...

Assume you are starting an energy drink company in the United States and are working on...

Assume you are starting an energy drink company in the United States and are working on a business proposal. Generate a forecasts (table with numbers) by evaluating and analyzing appropriate data (industry, regional, and national including demand data from a similar company). Please cite your sources (if applicable). Thank you in advance.

If you buy shares of Amazon on the primary market: a. You buy the shares from...

If you buy shares of Amazon on the primary market: a. You buy the shares from the Federal Reserve. b. You buy the shares from the New York Stock Exchange. c. None of the answers are correct. d. Amazon receives the money because the company has issued new shares. e. You buy the shares from another investor who decided to sell the shares

Subjects