Valuation of Stocks What is Beta What is an efficient market? Explain two different ways of calculating rate of return

1- Beta in Valuation of Stocks- Its a measure of stock's Volatility with respect to the overall Stock Market. Its a numeric Value. There is High-beta Stocks and Low-Beta Stocks. High Beta stocks are riskier but have high return potential where as Low Beta stocks are associated with minimum risk and hence lower returns. So to measure the Fluctuation of a stock to changes in the overall stock market, Beta is used. By calculating Beta the Volatility of the stock and systematic risk can be judged.

2- An efficient market, as the names suggests is the market that reveals and reflect all the available and necessary information about all the assets. There wont be any undervalued or overvalued securities avaialble in an efficient market. It shows that the investors will benefit by investing in a low cost passive portfolio, i.e. the profits/gain is higher.

3- Rate of return (ROR) can be calculated by two ways-

a) ROR= (Current value - Original Value) / original value * 100

b) ROR= (Capital / Return) ^ (1/n) - 1

where n= number of years

4- Dividend Valuation method is used When you have to predict the price of a company's stock based on the theory that its present-day price is worth the sum of all of its future dividend payments when discounted back to their present value. Free Cash Flow Valuation method is used when -

a) The company does not pay dividends.

b)The company pays dividends, but the dividends paid differ significantly from the company's capacity to pay dividends.

The latter focuses on the operational cash flow the company generates and its expected growth rate in the future.

5- Its called non-dividend paying stock. It has value because - A company can use any money not paid in dividends to generate new profits and increase long-term value to its shareholders. All valuations assume that there exists a liquid market for the shares, or that such a market can reasonably be expected to exist at some point in the future.