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ECON 2100 Lecture Notes - Lecture 1: Capital Asset Pricing Model, Capital Asset, Weighted Arithmetic Mean

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goldsnake496
3 Apr 2015
School
University of Guelph
Department
Economics
Course
ECON 2100
Professor
Adamoit

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Document Summary

As requested i have been looking into the potential expansion and investment for the. Since these costs are only estimates, i have also used several different methods and models. This memo will detail how i came up with these calculations as well as my recommendations on whether or not this investment is beneficial to our company. To begin the analysis on the toronto-dominion bank i collected their financial data from the past five years including monthly stock closing prices, monthly dividends, equity value, debt and net income. I also collected data on the market for the past four years, including s&p/tsx monthly closing prices, yields on canadian treasury bill and on 7-year government bonds. Using this data i was able to fit it into three models to estimate the average costs of capital as well as our expected rates of returns. Firstly, i used the dividend discount model and the monthly dividends paid since january 1,

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Related Questions

Article:

INTRA, Portugal--Leaders of the world's top central banks warned Wednesday that escalating trade conflicts could ricochet through financial markets and hurt the world economy, potentially prolonging the era of ultralow interest rates.

Rising tensions over trade come at an awkward time for major central banks, which have started moving away from easy-money policies introduced since the global financial crisis.

In a moderated discussion in Portugal, the heads of the Federal Reserve, European Central Bank, Bank of Japan and Reserve Bank of Australia called for calm and warned that the costs of further escalation could be high.

Global stock markets sagged this week after U.S. President Donald Trump called for a fresh round of tariffs on $200 billion of Chinese goods, upping the ante after he previously approved tariffs on $50 billion of goods.

"It's very worrisome and again, I can't see any positive," said ECB President Mario Draghi, who was hosting the event, Europe's answer to the Fed's annual economic symposium in Jackson Hole, Wyo.

Mr. Draghi warned that disputes over trade have created "considerable uncertainty" for the 19-nation eurozone economy, which has slowed sharply in recent months.

The European Union said Wednesday it would impose tariffs on U.S. goods worth around [euro]2.8 billion ($3.2 billion) in response to American import tariffs on steel and aluminum. But the EU's move is unlikely to discourage the U.S. from a second round of tariffs, possibly targeted at European autos, which would hit exports worth 0.3% of the EU's economic output, said Oliver Rakau, an economist with Oxford Economics in Frankfurt.

In a shift reflecting those concerns, Mr. Draghi warned Tuesday that the bank could delay plans announced only last week to phase out its [euro]2.5 trillion bond-buying program and suggested the timing of a first interest-rate increase could be pushed back.

Jerome Powell, chairman of the Federal Reserve, warned in the discussion that changes in trade policy "could cause us to have to question the outlook." The Fed last week raised short-term interest rates and signaled a quicker pace of interest-rate increases to keep the U.S. economy from overheating.

While the tensions haven't yet dented U.S. economic growth, Mr. Powell said businesses increasingly were expressing concerns to the Fed about how the conflict might affect their plans for investment and hiring.

For Japan, whose central bank maintained its aggressive stimulus policies last week to support a softening economy, the trade conflict is "a matter of great concern," said Bank of Japan Gov. Haruhiko Kuroda.

The indirect impact on Japan's economy could be "quite significant if the escalation between China and the U.S. continues," Mr. Kuroda said, because it could affect the Asian supply chain centered on countries like Japan and Taiwan and across southeast Asia.

While the tariffs themselves might not derail the global economic recovery, the fallout could be magnified by investors through financial markets, said Australia's central bank governor, Philip Lowe.

"I believe what is happening [on trade] is incredibly worrying," Mr. Lowe said. "It wouldn't take that much for financial markets to turn this into a very big global event."

The problem for central banks, in Japan and elsewhere, is that they appear to have little ammunition left to deal with any new economic downturn after years of aggressive stimulus. The value of assets held by the Bank of Japan is set to exceed the nation's annual economic output over the coming months, while the ECB's balance sheet also will continue to grow through the end of this year. Both central banks are still holding short-term interest rates below zero.

Asked how the ECB could respond to any new recession, Mr. Draghi said he didn't expect economic growth to turn negative between now and 2020.

Mr. Powell acknowledged that central banks would have less capacity to fight any new recession because interest rates are already close to zero. The U.S. government also has less scope to increase spending than in the past, though it still has room to react, he said.

"I really hope that this escalation could be rescinded and a normal trading relationship between the U.S. and China would prevail," Mr. Kuroda said.

As there any positive outcomes of rising trade tensions, according to central bankers? . What actions would central banks in theory launch, in theory, to counteract any problems with economic growth in their countries? Why are central banks worried about these policy moves at this point in time?

The opportunity cost of going to college is almost never discussed, yet it is quite high, so high that it is seriously impacting the broader American economy. For non-economists, “opportunity cost” is one of the most important concepts in economics. Because of scarcity we only have limited resources, and when we use those resources to do something like go to college, we cannot use them for other things that we also believe are desirable.

By far the most important resource we use in producing goods and services is labor or “human capital.” Based on what we pay owners of resources, we can say that roughly two-thirds of all production of goods and services is attributable to direct human effort – work. When kids go to college, they forego entering the labor force in a major, full-time manner. When six or seven percent of the entire American population is in college, that means a significant reduction in work effort occurs because otherwise highly productive persons in the physical prime of their lives are only lightly utilized in making things or providing services.

Today, only slightly over 59 of every 100 Americans of working age actually work, down from almost 66 in 2000. If we had the employment-population ratio of 15 years ago, we would have at least 16 million more working Americans today – an increase of over 10 percent. Our output would be probably the better part of a trillion dollars higher. The push for “college for all” is one reason we have less work effort today (to be sure, the modern welfare state has also lowered work incentives a lot for other reasons).

The college for all crowd says higher education augments one’s human capital, and we forego output today from working to bolster output tomorrow from more productive workers. And, no doubt, that is sometimes true. We have many productive engineers and accountants who gained important skills in college, for example. But is that necessarily true of all college graduates, particularly when Arum and Roksa tell us that graduating college seniors typically have only marginally better critical reasoning skills that freshman? And when over 40 percent of those entering four year colleges fail to graduate in six years? What if millions of those who do graduate take jobs similar to those without that college education? What if the debt incurred to pay for the college leads many to delay marrying, delay buying houses? There is evidence that to some extent the push for college has led to all of these unintended consequences.

The Federal Reserve Bank of New York has published great work showing that there is a very severe underemployment problem amongst college graduates, and other equally good research demonstrating what many of us have been saying for years: the student financial aid programs such as subsidized student loans, have pushed up the cost of college. Now a sister Federal Reserve Bank, namely Philadelphia, is jumping into the act.

The Philly Fed in a new study shows that high student loan debt is preventing young potential entrepreneurs from starting new businesses – they cannot afford the necessary debt. Opportunity cost again: if I borrow a lot to go to college, I cannot afford to borrow to start a business.

Enrollment in all forms of higher education today are up roughly 50 percent or seven million from what they were in 1990. What if enrollments had only risen proportionate to population growth – we would have three or four million fewer enrolled in college today. Would our nation be better or worse off? No one knows for sure, but the continued rise in the proportion of Americans with a college education has been accompanied by a sharp reduction in the rate of economic growth. I bet we would have fewer underemployed recent graduates. I bet we would have less than 17 percent delinquency rates on college loans, and far less than a trillion dollars in loan debt. I bet we would have a higher rate of labor force involvement and entrepreneurial activity among the young. And I bet we would be spending tens of billions less on higher education, and at least a little bit more on capital goods investment, highway construction, et cetera. In short, I suspect we would have been better off as a nation.

Richard Vedder directs the Center for College Affordability and Productivity, teaches at Ohio University, and is an Adjunct Scholar at the American Enterprise Institute.

Question :

This is a short article discussing the concept of opportunity cost and college. Provide your views on this topic.Do you agree/disagree with the article? Why? What are your thoughts on the current employment landscape of college graduates? Provide any insight on this topic on a specific industry, your own experience, or the experiences of people that you know who have already graduated.

*Article*

The U.S. economy is revving up just as Europe and other major economies lose steam, jeopardizing a rare period in which the world’s largest economies have been accelerating in unison.

The European Central Bank on Thursday took another step toward ending the massive stimulus measures it has used in an effort to boost growth since 2015. But ECB officials also said they would hold interest rates steady through summer next year, a sign that they felt the eurozone economy remains fragile.

In an indication of growing economic vigor in the U.S., the Federal Reserve on Wednesday tapped the brakes again, raising the benchmark interest rate by a quarter of a percentage point and signaling it may quicken the pace of future rate increases because of a strengthening economy and tightening labor markets.

The economies’ diverging paths were expressed most prominently in the euro, which on Thursday suffered its worst day against the dollar in two years. The euro lost 1.88% against the U.S. currency, its biggest drop since the day after the U.K. voted to leave the European Union.

The central bank announcements over the past two days offered the latest evidence that heady growth expectations for Europe and other major economies outside the U.S. might not be achieved, defying analysts who began the year convinced that the world economy’s first synchronized expansion in years would continue.

The International Monetary Fund said in January that the world’s seven largest economies each grew more than 1.5% in 2017, and it predicted more solid growth this year. Global manufacturing was booming and the IHS Markit global purchasing managers index that month was its strongest in nearly seven years.

Many investors counted on a revitalized Europe to lead that growth in 2018. But recent labor strikes in France, political turmoil in Italy and softer economic data are causing investors to rethink that premise. Germany last week reported that factory orders dropped 2.5% in April, while eurozone growth was 0.4% in the first quarter, down from 0.7% in the final quarter of 2017. On Thursday, the ECB revised down its eurozone growth expectations for this year to 2.1%, from 2.4%.

“When we look at Europe, the very strong momentum we saw in data last year has been waning this year,” said Holly MacDonald, chief investment strategist at Bessemer Trust.

Europe isn’t the only region to show signs of cooling down. The People’s Bank of China this week also left a suite of key short-term interest rates unchanged. New data showed business activity, including investment and retail sales, slowed in May, suggesting the world’s second-largest economy is facing growing headwinds.

The disappointing figures “warranted China to take a cautious tone,” said Tommy Xie, an economist at OCBC Bank.

In the U.S., meanwhile, recent data suggest an economic expansion that just became the second-longest in the nation’s history is accelerating, rather than slowing down.

The U.S. economy grew modestly over the winter—at a 2.2% annual rate in January through March—but seems to be ramping up further this spring. Growth is on track to exceed a 4% pace in the three months ending in June, which would be the fastest of any quarter in almost four years.

Spending at U.S. retailers soared 0.8% in May, the biggest jump in six months, according to U.S. government data released on Thursday. Consumers, spurred by tax cuts and the lowest unemployment in half a century, shelled out more for cars, clothing, building supplies, health products and bar tabs.

“We may be entering a new level of consumer spending right now,” said economist Robert Frick of the Navy Federal Credit Union. He pointed out that more and more blue-collar workers are finding work as the labor expansion endures, and those workers tend to spend a greater portion of their incomes, out of necessity, than higher-income workers, who save more.

He added that low unemployment, strong consumer spending and modest inflation are likely to keep the economy on strong footing this year: “We’re in a Goldilocks zone right now.”

In the eurozone, rates have stayed pegged at negative levels—now at minus 0.4%—since 2014. Despite some initial concerns, investors have become more relaxed about possible unintended effects of negative rates on the economy.

On Thursday, investors reacted to the ECB’s announcement to end bond purchases while keeping rates low longer by selling the euro and bidding up stocks. It is the latest example of interest-rate moves returning to the driver’s seat of monetary policy. In the wake of the financial crisis, central bankers rolled out a raft of unprecedented and complex measures, including bond buying and lending facilities for banks, pitching them as a way to lower long-term borrowing costs at a time when short-term rates could go no lower.

Not all investors are ready to write off Europe’s growth prospects. Roland Kaloyan, head of European equity strategy at ?Société Générale, believes that lackluster economic data in the first quarter is a “temporary soft patch,” and that “fundamentals remain very solid for eurozone growth,” whereas he expects the U.S. economy to go into a recession around 2020.

Others believe the euro will continue to weaken further this year, but think that markets are swinging too far in favor of U.S. growth.

Next year, “we expect the euro to rebound against the dollar even if the ECB only hikes late in the year,” said Ingvild Borgen Gjerde, an analyst at Capital Economics. “We think the Fed’s tightening cycle will come to an end in mid-2019, far sooner than is discounted in the markets.”

*question*

4. Should a goal of monetary policymakers be to raise the value of its currency? How would a currency appreciate both help and hurt an economy? If a central bank wants to appreciate its currency, how in practice would it do so?