Concept of Stock Valuation, Risk, Markets Portfolio Theory

Table of Contents

Introduction
How to Value Stocks? Ignore Economic News
Obamas Ersatz Capitalism
References

Introduction

The paper addresses issues that were discussed and why they are issues of interest to the finance audience. The paper also links the articles to the concept discussed in class e.g. stock valuation, risk, markets portfolio theory, etc. Finally, the paper addresses the math in the article and gives an opinion on whether the author got it right.

How to Value Stocks? Ignore Economic News

Brett Arends is a writer who has been receiving awards for his financial writings. One of his articles is How to Value Stocks? Ignore Economic News in which he used logical calculations. In the article, Arends gives an example of Ben Inker who argues that the next progression of the economy should not be taken seriously by investors (Arends 2009). The reason is that shares are evaluated according to the amount they produce after several years. In this case, it takes a very long period before the stock expires while dividends continue to grow. Arends uses Inkers assumption to argue that more than half of an economys value relies on what organizations make and pay after 10 years (Arends par.3). He says that half is fundamentally on what the organizations do after 2034. An example is given where one can buy a $ 200 basket of shares alongside an 8% earnings yield. Half of the yearly earning is paid in dividends while the rest is reinvested. Within the first year, one has a $ 100 investment earning of $7 and gives $3.50 in dividends. The second-year has a growth of $103.50 investment earning of $7.25 and give out $3.62 in dividends. This lasts for a period of ten years in which a growth of $141 and $4.94 dividends is realized. In the next 25 years, the value of an investment can be $236 with $8.27 dividends. If the period extends to 100 years then the value adds up to $3,119 with $109 dividends. Another reason why one should not concentrate on the progress of an economy is that recovery can be achieved. It does not matter what the economy goes through because eventually, it can regain what it lost (Arends par. 2).

Obamas Ersatz Capitalism

The article Obamas Ersatz Capitalism is written by Stiglitz who is a professor of economics at Colombia. Later he became the chairman of the Council of Economic Advisers. Stiglitz uses reasonable facts to address the issue of Americas banks. In his article, Stiglitz talks of the $500 billion that Obamas government issued to tackle the devastating banks in America (Stiglitz par.4). The treasury is therefore hoping to solve the menace which was caused by the banks. This resulted from too much borrowing in which the banks bought perilous estates. This was fueled by managers who took an extreme risk without lending cautiously. The governments plan was to allow the market to resolve the value of the banks deadly assets. Pricing of the deadly assets however will not be done by the market as there will be options to deal with. Part of the administrations plan is to ensure all loses and provide 92 percent of the amount of purchasing assets. A scenario is given in which the treasury creates a public-private corporation and pays $150 for the asset (Stiglitz par.5). In such a case the bank would be delighted to gain more than what it deserves. After a year, if there is no true value, the private party would lose $12 while the administration loses $138. In case a $200 true value is realized, the partnership would divide $74 that remains after refunding the $126 loan. The private party multiplies the $12 investment while the taxpayer gets $37 from the $138 risk. More loss is likely to be realized although the market might reconsider and pay losses. Some Americans are afraid that the banks might be nationalized as what the Obamas administration is doing so far is not effective (Stiglitz par.6).