Abstract

This paper examines the value of the automobile industry stocks using economic and financial
models. An analysis of a set of financial instruments is conducted, an analysis aimed for the
determination of the price of the financial instruments, and the determination of their true value.
The paper uses time series data on twenty stocks, from the automobile industry. Annually,
empirical data related to a period from January 3rd, 2000 to January 3rd, 2015 was gathered.
The CAPM model is applied to the gathered data, testing the next hypotheses, implied by the
theoretical model:
(1) There is a linear relationship between excess returns and systematic risk.
(2) Market risk as measured by is the only relevant measure of risk.
(3) Excess returns and market risk are positively related.
The results of the conducted analysis state that

Introduction

The statement claiming that the auto stocks are ready to be bought is it real, or it is related to
investor's value traps.
This year, up until now, there are approximately 26 million new vehicles produced by the
worldwide automotive industry and the value is still growing.
Changes in authorities rule regularization and economic opportunities leaded to the occurrence of
three major automobile producing regions- in Western Europe, the U.S., and Japan/South Koreawhich have created various characteristics regarding the size, power-train and fuel efficiency of
their automobile.
Being a growing area, with tens of millions of auto-vehicles produced each year, makes this
industry a continuous competition, due to the high demand existent. In order to gain market share
today the automobile companies must focus on different niches.
Researchers state that there is a growing movement on the investors side regarding the
automotive industry, due to the higher returns provided in comparison with the broader market.

Literature review
The investment decision is based on the analysis of a set of financial instruments, an analysis
through which it is aimed for a proper determination of the price of those financial instruments,
and of course, for a proper determination of their true value. Starting from Markowitzs theory,
William Sharpe (1964) showed that there is a connection between the return of an asset and the
return of a market portfolio, his model, called the Capital Asset Pricing Model, representing a
crucial step in the evaluation of primary financial instruments.
The CAPM model was developed independently by William Sharpe (1963, 1964), Jack Treynor
(1961), Jan Mossin (1966) and John Lintner (1965, 1969). It represents the first model that
proves the connection between the return of an asset and the return of a portfolio which was
already diversified via a risk indicator. Out of all the authors that were mentioned above, William
Sharpe was rewarded with a Nobel Prize for his contributions in the domain of economics and
finances, along with Harry Markowitz and Merton Miller.
Based on the return required by the investors which was previously established by applying the
CAPM model, we can determine if an asset is undervalued, overvalued or correctly valued. For
example, if the estimated return of an asset is lower than the actual return, then that asset is
obviously undervalued and if the return is higher than the actual return, then the asset is clearly
overvalued. The evaluation of an asset can be done by comparing its theoretical price, which is
also supposed to be the correct one, with its market price. If the theoretical price is higher than
the market price, then we can say that the asset is worth less on the market than it should so the
asset is definitely undervalued.
The CAPM model is built on a series of hypothesis, such as:
1. Investors present a behavior such as the one described by Markowitz in his papers, so the
portfolios held by them are efficient or placed on the efficient frontier.
2. Investors build up their portfolios out of financial assets that are subject to transactions
that take place on secondary market, for example stocks or stocks, so they can borrow and
lend at a risk-free rate.
3. Investors have homogenous expectations, which is why they estimate similar distributions
for the future returns.
4. The time horizon of investments is identical for all investors.
5. Financial instruments are dividable ( investors can buy/sell fractions of an asset or of a
portfolio of assets).

6. There are no transaction costs or other taxes/costs that may result from the process of
buying or selling.
7. Inflation rate is considered to be 0 and, in case it is not, it shall be considered as perfectly
anticipated.
8. Capital markets are in equilibrium, the assets being correctly evaluated.
9. There is a perfect competition between investors.
According to the CAPM concept and if the hypotheses presented above are being taken into
consideration, all investors will hold identically efficient portfolios, respectively the market
portfolio or the M portfolio. Obviously, in this case, a question regarding the reason why all
investors shall choose one market portfolio and what particular assets does this portfolio include
is understandable.
The market portfolio will include all the risky assets, as well as the stocks and bonds issued by
corporations at a national and international level and also mortgage titles, real estate, cash, art
objects etc. As a consequence, if the market portfolio includes all the risky assets, than this
portfolio is a completely diversified one from which the specific risk associated to individual
assets is put away.