[Machine Learning for Trading] {ud501} Lesson 13: 02-03 What is a company worth? | Lesson 14: 02-04 The Capital Assets Pricing Model (CAPM)

What is a company worth?

[Machine Learning for Trading] {ud501} Lesson 13: 02-03 What is a company worth? | Lesson 14: 02-04 The Capital Assets Pricing Model (CAPM)

Yes, the value of $1 would typically reduce over time, and the sum of the individual $1‘s generated every year would converge to a finite value.

but other three answers can be correct in different point of view

 

 

 

 Why company value matters

 [Machine Learning for Trading] {ud501} Lesson 13: 02-03 What is a company worth? | Lesson 14: 02-04 The Capital Assets Pricing Model (CAPM)

intrinsic value => dividend accumulated in the future

book value => assets the company owns

 market cap =>  the value of the stock on the market

 

 

 

 The Balch Bond

 [Machine Learning for Trading] {ud501} Lesson 13: 02-03 What is a company worth? | Lesson 14: 02-04 The Capital Assets Pricing Model (CAPM)

When comparing these different options, assume that they cost you the same today. Say, you have 80 cents to invest, and these are the 3 options you can get for that money.

Note: Rank 1 = most preferred option, 3 = least preferred.

 

Bond: 债券

 

 

 The value of a future dollar

 [Machine Learning for Trading] {ud501} Lesson 13: 02-03 What is a company worth? | Lesson 14: 02-04 The Capital Assets Pricing Model (CAPM)

US government promises 1% interest rate => today it‘s worthwhile to pay 0.99$ to US government for the promise that they‘ll return 1$ in a year

Balch Bond attracts buyers by a higher interest rate 5% <= the same as => charges less

 

 

 

Intrinsic value 

[Machine Learning for Trading] {ud501} Lesson 13: 02-03 What is a company worth? | Lesson 14: 02-04 The Capital Assets Pricing Model (CAPM)

interest rate => how risky the company is

 

 

Interest Rate and Discount Rate are terms that refer to essentially the same quantity, but are used to distinguish two slightly different use cases:

  • Interest Rate is used with a given Present Value, to figure out what the Future Value would be.
  • Discount Rate is used when we have a known or desired Future Value, and want to compute the corresponding Present Value.

For instance, in this case we want to sum up all future dividends - equal to a constant ($1 or FV) every year.

 

 n = 1+IR

 

DR => the same concept in reinforcement learning???

 

 

 

 

 

 [Machine Learning for Trading] {ud501} Lesson 13: 02-03 What is a company worth? | Lesson 14: 02-04 The Capital Assets Pricing Model (CAPM)

 

 

 

Book value 

 [Machine Learning for Trading] {ud501} Lesson 13: 02-03 What is a company worth? | Lesson 14: 02-04 The Capital Assets Pricing Model (CAPM)

ignore patents‘ value

 

 

 

 Market capitalization

 [Machine Learning for Trading] {ud501} Lesson 13: 02-03 What is a company worth? | Lesson 14: 02-04 The Capital Assets Pricing Model (CAPM)

 

 

 

 Why information affects stock price

 [Machine Learning for Trading] {ud501} Lesson 13: 02-03 What is a company worth? | Lesson 14: 02-04 The Capital Assets Pricing Model (CAPM)

[Machine Learning for Trading] {ud501} Lesson 13: 02-03 What is a company worth? | Lesson 14: 02-04 The Capital Assets Pricing Model (CAPM)

future dividend decreases or increases

 

 

 

Compute company value 

 [Machine Learning for Trading] {ud501} Lesson 13: 02-03 What is a company worth? | Lesson 14: 02-04 The Capital Assets Pricing Model (CAPM)

 

 

 

 

[Machine Learning for Trading] {ud501} Lesson 13: 02-03 What is a company worth? | Lesson 14: 02-04 The Capital Assets Pricing Model (CAPM)

Yes, you should buy it right away!

Ignoring the intrinsic value, if you buy the entire company off the market (for $75M) and immediately sell it for its book value ($80M), you have a $5M profit right there!

Even if you are buying some stocks (instead of the whole company), the stock price is expected to increase (as it is currently undervalued).

 

 

 

 

 [Machine Learning for Trading] {ud501} Lesson 13: 02-03 What is a company worth? | Lesson 14: 02-04 The Capital Assets Pricing Model (CAPM)

IV >> Market cap => buy stock

IV << Market cap => short the stock

BV => lowest price => stock value should not be lower than the book value, otherwise, why not buy the company and sell every facilities?

 

 

 

 





 

 

Two questions:

 

How a company determines its Interest Rate?

Why intrinsic value doesnt count the patent value?

 






 

 

 

The Capital Asset Pricing Model 

 1960s developed => 1990s nobel prize

CAPM => led to the development of index funds and the belief that you can‘t beat the market 

 

 

 

 

 Definition of a portfolio

 [Machine Learning for Trading] {ud501} Lesson 13: 02-03 What is a company worth? | Lesson 14: 02-04 The Capital Assets Pricing Model (CAPM)

 

 

 

 Portfolio return

[Machine Learning for Trading] {ud501} Lesson 13: 02-03 What is a company worth? | Lesson 14: 02-04 The Capital Assets Pricing Model (CAPM)

0.75 1% + (-0.25) (-2%)
0.75% + 0.5%
= 1.25%

 

 

 

 The market portfolio

[Machine Learning for Trading] {ud501} Lesson 13: 02-03 What is a company worth? | Lesson 14: 02-04 The Capital Assets Pricing Model (CAPM)

 

 

 

The CAPM equation 

 [Machine Learning for Trading] {ud501} Lesson 13: 02-03 What is a company worth? | Lesson 14: 02-04 The Capital Assets Pricing Model (CAPM)

 

 

 

 Compare alpha and beta

 [Machine Learning for Trading] {ud501} Lesson 13: 02-03 What is a company worth? | Lesson 14: 02-04 The Capital Assets Pricing Model (CAPM)

 

 

 

 CAPM vs active management

 [Machine Learning for Trading] {ud501} Lesson 13: 02-03 What is a company worth? | Lesson 14: 02-04 The Capital Assets Pricing Model (CAPM)

 

 

 CAPM for portfolios

 [Machine Learning for Trading] {ud501} Lesson 13: 02-03 What is a company worth? | Lesson 14: 02-04 The Capital Assets Pricing Model (CAPM)

 

 

 

[Machine Learning for Trading] {ud501} Lesson 13: 02-03 What is a company worth? | Lesson 14: 02-04 The Capital Assets Pricing Model (CAPM)

That‘s right - you want a higher β in upward markets so that you can ride the surge, but a lower β in downward markets so you don‘t crash as much.

 

 

 

 Implications of CAPM

 [Machine Learning for Trading] {ud501} Lesson 13: 02-03 What is a company worth? | Lesson 14: 02-04 The Capital Assets Pricing Model (CAPM)

 

 

 

 Arbitrage Pricing Theory

 [Machine Learning for Trading] {ud501} Lesson 13: 02-03 What is a company worth? | Lesson 14: 02-04 The Capital Assets Pricing Model (CAPM)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

[Machine Learning for Trading] {ud501} Lesson 13: 02-03 What is a company worth? | Lesson 14: 02-04 The Capital Assets Pricing Model (CAPM)

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