Write short note: a) The risk free asset in the real economy
b) Stock's Beta & it's application
c) Rational of Price earning growth calculation
d) Technical analysis in the investment markets
Answer a) The risk free asset is a security or instrument where investor expect return on investment with no risk.
Risk free asset is referred as US Treasury bond or any other governement bond. It's called risk free asset because it is assumed than governement will not default on its debt obligation to pay the interest and principal. This is very technial in nature as in practical world, every security carries some risk or other, however government bond is still refer as risk free as its a safest security in all available securities in the market.
Answer b) Beta = It is a measurement of stock riskiness or volatility with respect to overall market. A ctock which has higher beta carries greater risk as compare to overall market.
Beta coefficient is used to denote the riskiness and volatily.
If beta coefficient is > 1 then stock is more riskier than overall market.
If beta coefficient is < 1 1 then stock is less riskier than overall market.
If beta coefficient is = 1 then stock is carrying same risk than overall market.
Beta can be negative which indicates stock has negative correlation with respect to market. For example, if index has reported postive return for the day then stock would report negative return and vice versa.
Answer c) PEG Ratio = It is a ratio used to indicate whether security is overvalue or undervalue.
It is calculated as dividing current PE ratio by EPS growth for next year.
PEG = (P/E) / EPS Growth
Where P/E = Share Price / EPS
PEG ratio can greater than or lesser than 1
Greater than 1 PEG indicate that the stock is overvalue
and lesse than 1 PEG indicate that the stock is undervalue.
Answer d )
Technical Analysis = It is method of analysing stocks by understanding the price, volume, charts, volatility and different technical indicators.
It is based on the belief that, price of stock is everything and all the information available in world about a particular stock is already discounted in the price hence one shall study price behaviour only to know its future movement.
Apart from price, there are other technical indicators are used such as moving averages, RSI, chart patterns etc.