are to present a proposal that specifically meets the requirements of case
assigned. Your proposal should be from 4 – 6 pages not including title page,
reference section or appendix material, double spaces formatted with Times
Roman 12 pt. You should begin the finished presentation with a title
page. The Case Study must follow APA rules in structure and presentation.
your Case Study should be presented in written narrative format it is expected
that appropriate charts, graphs and tables maybe a part of your
presentation. The charts, graphs and tables should, however, be included
as appendix material and appropriately referenced within the body of your Case
Study material. Do not include the charts, graphs and tables
within the body of your presentation directly.
Case assigned: FRED ALBERTS, ROOKIE
Fred pressed the ‘return’ key, carrying out the trades he had figured would
give him a good return. He had opened the online stock trading account in order
to learn about the process of trading and to take advantage of his academic
knowledge of how the markets determine stock values. He had taken several
finance classes in his undergraduate degree, and had enjoyed learning the way
investors decide how much to bid on stocks. Fred figured he could take
advantage of this knowledge in creating more wealth than he could if he just
invested in an investment fund.
THE BROKER’S ADVICE
When he opened the trading account, Fred had signed up for telephone access
to a broker. The account allowed him a certain number of calls and a certain
amount of time in consultation with the broker each month. Now, Fred had quite
a sum of free cash in the account, money he had transferred from an investment
fund that he was not very happy with. The amount he had to invest was about
$68,000. He decided to take advantage of the advisement service, and made his
first telephone call.
“Welcome to Bettertrade services, Mr. Alberts. My name is Brad Cendron.
How can I assist you today?”, the voice asked.
“Yes; I would like to get your advice on how to invest a sum of money.
My objective is to invest this amount in stocks that appear to be undervalued
by the market. Can you recommend about ten stocks that would fit that
description?”, Fred asked.
“Oh, yes, I’d be happy to. We have listed our top bargains on the
“top stock picks” list on the website. Are you online now?”,
“Yes, I am,” Fred replied. “Oh, I see it here. They are in
order, according to your idea of how much of a bargain they are, right?”
“That’s correct, Mr. Albert. We believe that these 20 stocks are going
to have greater upside potential over time. I can help you make the
transactions, if you’d like.”
“Well, I’m going to do a little more research on my own first, but
thank you for the link. I’ll just carry out transactions via the website, since
the transaction fees are lower that way,” Fred said.
“OK, Mr. Albert,” Brad replied. Let us know if you have other
questions, or if we can assist you further.”
Fred printed out the list of stocks, and set about the task of collecting
information about them. He went to the “market data” link on the
company’s website to get some information. For each firm, he downloaded the
history of dividend payments, and the beta. He also downloaded current treasury
bond rates and the rate of return on a broad market index, which he would use
as an indicator of the market return. Fred summarized the information and
prepared to determine the value of the stocks according to the financial models
he had studied in college.
Fred’s collection of information and the current market prices of the stocks
in the “top stock picks” list from his broker appear in Exhibits 1, 2,
and 3 (attached).
1. For each stock listed, calculate the
required return as indicated by the Capital Asset Pricing Model (CAPM).
2. Calculate the value of each stock
share using the constant growth formula.
3. Compare the values you calculated to
each of the market prices for the top twenty stock picks. Are your calculations
close approximations of the market prices? Why do you think there are
4. What are the implications of your
analysis to Fred’s choice of stocks?
5. Think about your results in terms of
claims of market efficiency. On average, over the long term, do you think that
the models you used to calculate the stock values really works? Why or why not?
6. In light of your answer in number 5
above, how would you advise Fred?