Deutsche Bank: Discussing the Equity Risk Premium Harvard Case Solution & Analysis

INTRODUCTION

Deutsche bank is a research group that is based in London. It consists of almost 50 strategists. On the other hand, some of its strategists were based in the New York branch of Deustche bank. The managing director of Deustche bank was Baz, who joined this bank in 2001. This bank was under increased pressure in order to generate effective ideas to overcome the hurdles they were facing.

There were many opportunities that were proposed to their respective clients. It included the findings and research that were related to the short term; however, the long term findings and research have been presented at the treasury level. Baz has also worked as a managing director in London at Lehman brothers and he did M.S and Ph.D. in business economics from Harvard. The main objective to be achieved is the development of franchise, which will have clients with fixed income.

On the other hand, the person named George Cooper is working as a global strategist in the same division, respectively. Both of them are pacing their efforts into the preparation of a presentation in order differentiate whether to choose equities or bonds. There were various activities related to fixed income in which Deustche Bank was involved in i.e. the investor coverage the coverage related to the issuer and the research activities.

They are actually helping their clients in making the right decision in order to provide them with the higher returns on their assets. This specifically includes the mutual and hedge funds, the plans related to pension and the insurance companies. Furthermore, there are several approaches that have been used by Baz and Cooper in order to generate ideas to help their clients specifically and to keep the presence of Deustche Bank at the client specifically.

They perform their work differently; it can be a customized work that is the way in which the customers want services. Hence, they will be tailored in order to match their needs accordingly. Apart from that, standard software is also made available.

PROBLEM STATEMENT

As per the available information the problem statement related to Deutsche shows that Baz and Cooper are trying to help their clients by letting them know about the major differences between the bonds and equities. Apart from that, there have been two approaches used; the first one is related to Gordon’s growth model and the second one is based on taking a vast view of the markets trading in stocks. It further includes choosing the best option between the two approaches suggested in order to make the investors satisfied for the level of risk they are going to take. Due to the risky nature of the stocks the chances in the variations of the stocks are higher as compared to the bonds.

ANYALYSIS

Using the approaches mentioned, what is your groups estimate to the equity risk premium?

The equity risk premium is a vital aspect that is used in the financial economics. It is usually the additional reward that is required by the investors for the investments they have made. On the other hand, generally the returns expected from stocks are usually greater because of its risky nature. As a result, the resulting premiums are greater on investments. On the other hand, the equity risk premium is a part of the Capital Asset Pricing Model (CAPM).

It shows that the risk related to the stocks is greater than the available risks in the market. However, it should be kept in mind that due to the high risky nature of these stocks, the dividends that are being paid on the stocks invested can fluctuate as compared to the bonds. It means that the bond coupon payments are not having a fluctuating nature, they are usually fixed.

As per the facts of the case, it can be seen that Baz and Copper have been trying to reach some conclusion about the overstatement of equity risk premium during the comparison of equities and bonds since 2003. In order to ful fil this purpose, Cooper and Baz had to justify the arguments they have presented in making a presentation for its clients. Furthermore, in terms of priority, it can be seen that usually the bond holders have a higher claim as compared to the equity holders at the time of distribution..................

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