We update our investment case for Bank Alfalah Limited (BAFL) post release of 1HCY19 financial results, increasing our risk free rate
assumption and rolling over our target price to Dec'20, our revise TP stands at PkR51.3/sh (previous: PkR50.9/sh).
Jourdain was most recently Chair of the Bank of England Risk Free Rate
Benchmark Working Group.
UAE banks with dividend yields in excess of the Risk Free Rate
are not pricing in the attractiveness of their yields, we think (Chart 1).
In the CAPM, asset i's equilibrium expected return is Ki = Rf + iM [RPM], where Rf is risk free rate
of interest, iM is the systematic risk (beta) of the asset I relative to the market portfolio, and RPM is the market risk premium.
Abou Hend went on to explain that in the case of slow demand, which is a possibility, companies will decline this kind of assessment, especially as the risk free rate
will jump from 25% to a range of 30%-32% for five-year term investments.
Third, during market downturn (when the market return is lower than the risk free rate
), market risk premium reports a negative sign, providing unreasonable results.
The two-factor models achieved according to the research carried out by Black, Jensen and Scholes states that a zero-beta portfolio with an predicted return, Rz surpasses the risk free rate
of interest, Rf.
In normal times monetary policy should transmit smoothly to all regions in a monetary union, so that changes in the policy rate should lead to similar changes in the 'risk free rate
' and bank financing costs across Euro Area countries.
For stocks, the discount factor, or cost of equity, adds the yield on a 10 year US treasury (an approximation of a risk free rate
) to an estimate of the amount investors will want to be compensated for the added risk.