SOLUTIONS TO
EXERCISE AND CASES
For
FINANCIAL STATEMENT ANALYSIS AND SECURITY VALUATION
Stephen H. Penman
,
, CHAPTER ONE
Introduction to Investing and Valuation
Concept Questions
C1.1. Fundamental risk arises from the inherent risk in the business – from sales
revenue falling or expenses rising unexpectedly, for example. Price risk is the risk of
prices deviating from fundamental value. Prices are subject to fundamental risk, but
can move away from fundamental value, irrespective of outcomes in the
fundamentals. When an investor buys a stock, he takes on fundamental risk – the
stock price could drop because the firm’s operations don’t meet expectations – but he
also runs the (price) risk of buying a stock that is overpriced or selling a stock that is
underpriced. Chapter 18 elaborates and Figure 18.5 (in Chapter 18) gives a display.
C1.2. A beta technology measures the risk of an investment and the required return
that the risk requires. The capital asset pricing model (CAPM) is a beta technology; is
measures risk (beta) and the required return for the beta. An alpha technology
involves techniques that identify mispriced stocks than can earn a return in excess of
the required return (an alpha return). See Box 1.1. The appendix to Chapter 3
elaborates on beta technologies.
,
EXERCISE AND CASES
For
FINANCIAL STATEMENT ANALYSIS AND SECURITY VALUATION
Stephen H. Penman
,
, CHAPTER ONE
Introduction to Investing and Valuation
Concept Questions
C1.1. Fundamental risk arises from the inherent risk in the business – from sales
revenue falling or expenses rising unexpectedly, for example. Price risk is the risk of
prices deviating from fundamental value. Prices are subject to fundamental risk, but
can move away from fundamental value, irrespective of outcomes in the
fundamentals. When an investor buys a stock, he takes on fundamental risk – the
stock price could drop because the firm’s operations don’t meet expectations – but he
also runs the (price) risk of buying a stock that is overpriced or selling a stock that is
underpriced. Chapter 18 elaborates and Figure 18.5 (in Chapter 18) gives a display.
C1.2. A beta technology measures the risk of an investment and the required return
that the risk requires. The capital asset pricing model (CAPM) is a beta technology; is
measures risk (beta) and the required return for the beta. An alpha technology
involves techniques that identify mispriced stocks than can earn a return in excess of
the required return (an alpha return). See Box 1.1. The appendix to Chapter 3
elaborates on beta technologies.
,
