Stocks PPT PDF
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Uploaded by AppropriateNurture7150
INSEEC
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Summary
This document explains concepts related to preferred and common stocks, characteristic lines, security market lines, and beta in finance. It details the features of preferred and common stocks, and their relationship to risk and return, including the calculations involved.
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Synthesis of the Requested Topics 1. Preferred vs Common Stock (Slides 8-9) - Preferred Stock: - Hybrid Nature: Combines features of debt (fixed dividends) and equity (no maturity date). - Cumulative vs Non-Cumulative: - Cumulative: Unpaid dividends accumulate and must be paid before any...
Synthesis of the Requested Topics 1. Preferred vs Common Stock (Slides 8-9) - Preferred Stock: - Hybrid Nature: Combines features of debt (fixed dividends) and equity (no maturity date). - Cumulative vs Non-Cumulative: - Cumulative: Unpaid dividends accumulate and must be paid before any common stock dividends. - Non-Cumulative: Missed dividends are not carried forward. - Priority: - Paid before common stock dividends but after debt obligations. - No voting rights (typically). - Other Features: - Convertible into common stock. - Call provision allows redemption by the issuing company. - May have a sinking fund for redemption. - Common Stock: - Represents ownership in the company with voting rights. - Dividends are not guaranteed and are paid after preferred stock dividends. - Has no fixed maturity date. - Preemptive Right: Allows shareholders to maintain ownership percentage during new stock issues. 2. Characteristic Line vs Security Market Line - Characteristic Line: - A regression line representing the relationship between the returns of a stock and the market as a whole. - Slope of the line is the stock's beta, indicating its market risk. - Security Market Line (SML): - A graphical representation of the Capital Asset Pricing Model (CAPM). - Formula: r_s = r_f + Beta * (r_m - r_f) - r_s: Required return on the stock. - r_f: Risk-free rate. - r_m: Expected market return. - SML depicts the tradeoff between risk (beta) and return. 3. Beta (Slides 7 and Related Concepts) - Definition: - A measure of a stock's volatility or systematic risk relative to the market. - Beta > 1: More volatile than the market. - Beta < 1: Less volatile than the market. - Beta = 1: Moves in line with the market. - Use in CAPM: - Determines the expected return for an asset based on its risk level.
