Risk Free RAte

[StudentInvestor]

I want to value Nigerian securities/shares using the Dividend Discount (DDM) model and Capital asset Pricing Models (CAPM), but there is a missing link, and that is the risk interest rate. Does any body know what the risk free interest rate is in Nigeria?

Without asking for too much, does anybody know the risk premiums for each sector of the economy in Nigeria, like Banking, insurance, Conglomerates, Building Materials etc?

[olusolakemmy]

Originally Posted by StudentInvestor

I want to value Nigerian securities/shares using the Dividend Discount (DDM) model and Capital asset Pricing Models (CAPM), but there is a missing link, and that is the risk interest rate. Does any body know what the risk free interest rate is in Nigeria?

Without asking for too much, does anybody know the risk premiums for each sector of the economy in Nigeria, like Banking, insurance, Conglomerates, Building Materials etc?

i reqlly hope to learn from this topic.
i dnt seems to know anything abt the model or how it wrks.
however for the benefit of other forum member, i provided information or definition of what risk free interest rate and risk premium i hope we can build on this

[olusolakemmy]

A risk premium (plural risk premia) is the minimum difference between the expected value of an uncertain bet that a person is willing to take and the certain value that he is indifferent to.

The risk-free interest rate is the interest rate that it is assumed can be obtained by investing in financial instruments with no default risk. However, the financial instrument can carry other types of risk, e.g. market risk (the risk of changes in market interest rates), liquidity risk (the risk of being unable to sell the instrument for cash at short notice without significant costs) etc.

The risk-free interest rate is thus of significant importance to modern portfolio theory in general, and is an important assumption for rational pricing. It is also a required input in financial calculations, such as the Black-Scholes formula for pricing stock options. Note that some finance and economic theory assumes that market participants can borrow at the risk free rate; in practice, of course, very few borrowers have access to finance at the risk free rate.

[BigSeun]

Originally Posted by StudentInvestor

I want to value Nigerian securities/shares using the Dividend Discount (DDM) model and Capital asset Pricing Models (CAPM), but there is a missing link, and that is the risk interest rate. Does any body know what the risk free interest rate is in Nigeria?

Without asking for too much, does anybody know the risk premiums for each sector of the economy in Nigeria, like Banking, insurance, Conglomerates, Building Materials etc?

The coupon rate on the FBN bond or FBN treasury bill rate can be use as the risk free rate.

[StudentInvestor]

Yes, the 364 Treasury rate, I found out yesterday was 7.99, I used that the Diamond Bank shares and the formula tells me that Diamond is over valued, i am still experimenting on it, may be my other variables may not be correct. i will keep you guys posted.

[StudentInvestor]

OOPs, it is the 364 Day treasury rate

[Yusuf]

Originally Posted by StudentInvestor

OOPs, it is the 364 Day treasury rate

Please Dear StudentInvestor, I will like to learn from you on this. If possible do teach all of us and for further training I will like us to communicate via my mail.

You can send any material you are willing to share with me on yusufismaila@yahoo.co.uk.

I ll be glad if you oblige this request.

Thanks

[SpecNomics]

Originally Posted by StudentInvestor

Yes, the 364 Treasury rate, I found out yesterday was 7.99, I used that the Diamond Bank shares and the formula tells me that Diamond is over valued, i am still experimenting on it, may be my other variables may not be correct. i will keep you guys posted.

Interesting work StudentInvestors!


Re CAPM:

What is your hypothesis, do you expect most shares to be over/under valued and Why? How did you arrive at Beta? For Market Return, to measure it what did you use i.e. NSE or Banking sub-sector returns? Did you consider using the Moving Average (Simple, or better still Exponential) over a period of years or you just used the last year return? Consider testing Market Return over the range of its deviation to see how the E(r) changes? How did you calculate Actual Return?

Re DDM:

What are your assumptions on Growth Rate? How did you arrive at your discount rate? Are using a Constant Growth Model or a 3 Stage Model, the latter seems to give better results and is intuitively more appropriate?

You find this article useful to flesh out what you should consider?
http://www.bankofengland.co.uk/publi...n/qb020106.pdf

Give us feedback, Godspeed.

[StudentInvestor]

Good Questions,

It appears that most shares that trade on the NSE are over valued. You can easily see this in the high P/E ratio. Unfortunately, we are not able to sell short the over valued securities. I have been wondering how the buyers value the securities. As a CAIA, I have found it difficult to understand how any body will buyt a stock that has a P/E in the thousands.

I assumed that the Beta was 1.5 granting that the banking industry in Nigeria is always on the upward range but I am trying to run a regression analysis of the NSE index and the rest of the sectors to get a more credible Beta.

I thought of using the moving average but I could not get enough information, if you know where I can get that, I will be delighted

I looked at the growth rate of Diamond bank, and assumed it will grow at 8%.
For the discount rate, I looked at the balance sheet of Diamond, and it appears solid, so I felt that the risk premium is not high.

Enough of that now, before I let out all the weapons I have in my kitty.

Thanks for the link.

[Yusuf]

Originally Posted by StudentInvestor

Good Questions,

It appears that most shares that trade on the NSE are over valued. You can easily see this in the high P/E ratio. Unfortunately, we are not able to sell short the over valued securities. I have been wondering how the buyers value the securities. As a CAIA, I have found it difficult to understand how any body will buyt a stock that has a P/E in the thousands.

I assumed that the Beta was 1.5 granting that the banking industry in Nigeria is always on the upward range but I am trying to run a regression analysis of the NSE index and the rest of the sectors to get a more credible Beta.

I thought of using the moving average but I could not get enough information, if you know where I can get that, I will be delighted

I looked at the growth rate of Diamond bank, and assumed it will grow at 8%.
For the discount rate, I looked at the balance sheet of Diamond, and it appears solid, so I felt that the risk premium is not high.

Enough of that now, before I let out all the weapons I have in my kitty.

Thanks for the link.

Dear StudentInvestor,

You seems to be enjoying this your analysis alone. I requested to learn from you without response. what we use this forum for is what we called synergy, learn from me and I learn from you.
Please in the spirit of sharing, do let me learn with you. You can PM me with you E-mail address for further discussion or you let every other forum members (who are interested) benefit from the learning process.

Waiting to hear from you.

Thanks

[StudentInvestor]

Sorry, It is not that I am ignoring any body or using the analysis alone, like you know, in the capital market as in any other market, there cannot be a seller without a buyer, so there is no way i can use it alone. The fact is that I am still experimenting the workability of the model on Nigerian securities, until i find out that it is usable it makes no sence to start blowing my the trumpet. Currently I am trying to do regression analysis to estimate Beta which is a vital variable for the model. I will keep you updated.

Thanks