Home Depot Term Paper

Pages: 3 (1379 words)  ·  Bibliography Sources: 1+  ·  File: .docx  ·  Level: College Senior  ·  Topic: Economics

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[. . .] The interest rate that could be generated for a risk-averse investor, thus, interest rate paid by the banks on savings accounts or certificates of deposit, varied from 4% up to 6%

which is much lower than the one that could be generated from investing into the shares. But the risks are much higher for the share investors and thus the risk-adjusted returns must be considered in order to arrive at optimal for investor decision. I am not a very risk-averse person and I would not forgoe stable interest on my savings account or certificate of deposit in order to invest money into shares. But as a profit seekrer, I would diversify my savings and invest some part of it into shares. Having set my risk preferences, I would screen the shares in order to arrive at optimal for me portfolio and I should invest into Home Depot. As the interest rates provided by the banks on rather safe investments are not as high as opportunities for players on stock markets, and also considering my risky nature, I would be willing to pay more for equity future today that I believe is promising annual return which I do not consider to be the fact for Home Depot.

On the other hand, as more patient people tend to prefer long-term promising investments rather than short-term but lower yielding investment, the latter would not consider Home Depot as an opportunity for them, while the former may do so. I would construct my portfolio from investing into savings account with stable return, and dividing the rest between very risky with high promising short-term results stocks and put in some part into Home Depot which I consider stock with higher returns in longer future. But if after having examined the stock opportunities, I would have found more promising short-term investment opportunities, I would choose them rather than Home Depot. The dividend discount model also states that the present value of the stock reflects not only one year expectations, but several years expeations and the price is equal in the present time for all. If the expected in the near future return is rather low comparing to other stock and safe investment opportunities, but the price of the share is rather stable and is increasing, also, other indicators are positive, this can signal of very positive middle-term opportunities and may be some inside information availalbe for the players on the market reveals that the comapny has some very good yield mid-term projects which drives up the value of the stock in the today market.

Another indicator of the future expectations of the share movements, is the volume of the shares usually traded which can reveal information available to the insiders and from which not experienced investors can trace behavior for themselves. In the recent past the volumes of the trade during the days when share prices were going down, were increasing, with the total increasing volume trend in the recent past. This can also signal about positive middle-term expectation for the company performance. But the mid-term, for the last five years, correlation coefficient between the volumes traded and the share prices was at the range of -0,45 which is not the same as for the recent past, thus, risk-averse investors would be more prone to follow these mid-term determinants rather than very positive short-term expectations.

To summarize, I would purchase the shares but I do not expect their prices to increase significantly within one-years time in case of no major economic and thus market swings, but I expect the company and thus the shares to perform very well within mid-term which is reflected in positive present share prices expectations. Relatively high price-earnings ratio of 16,75 reflects also very positive future expectations for the price movements though there were some swings within previous five years.

References:

1. Brealey and Meyers, Fundamentals of Corporate Finance, 3rd Edition, p. 289

2. Yahoo Finance, www.finance.yahoo.com

3. Yahoo Finance, Banking section, www.finance.yahoo.com

Brealey and… [END OF PREVIEW]

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APA Format

Home Depot.  (2005, November 6).  Retrieved December 13, 2019, from https://www.essaytown.com/subjects/paper/home-depot-order/446552

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"Home Depot."  6 November 2005.  Web.  13 December 2019. <https://www.essaytown.com/subjects/paper/home-depot-order/446552>.

Chicago Format

"Home Depot."  Essaytown.com.  November 6, 2005.  Accessed December 13, 2019.
https://www.essaytown.com/subjects/paper/home-depot-order/446552.