B : Beta = sensitivity to movements in the relevant market , A positive beta means that the asset's returns generally follow the market's returns, in the sense that they both tend to be above their respective averages together, or both tend to be below their respective averages together. A negative beta means that the asset's returns generally move opposite the market's returns: one will tend to be above its average when the other is below its average.
Bbc 13 04
Investment and portfolio management
Agenda• Financial statements• Why people invest :• Investment Goals• Required Rate Of Return• Capital Markets• Stock Issuing• Debt• Risk Management
Required Rate Of Return• K = Rs = RFR + B ( MRP )• K = Rs : Required Rate Of Return• RFR : Risk Free Rate ( T- bond )• B : Beta = sensitivity to movements in the relevant market
Required Rate Of Return• Assume the company has a beta coefficient of 1.2, that the risk-free rate (the yield on T- bonds) is 7.0%, and that the market risk premium is 5%. What is the required rate of return on the firm’s stock? 7 % + 1.2 (5 %) = 13 %
Debt• (Debt Instrument ) Companies Issuing Bonds to Borrow money from investors and promised to pay it back at a certain rate of interest.• Example : – Interest At Maturity ( Deposits ) – Amortized Cash Flow ( Cars ) – Bond Time Line – Fixed and Floating
Debt• Rating Agency : Moodys , S&P : – The Rating Reflect The Credit Worthiness of the Issuer .
Risk Management• Risk is The uncertainty that an investment will earn its expected rate of return .• Types Of Risk : – Country Risk ( Political ) , Business Risk . Financial Risk ( Leverage ) , Liquidity Risk & Exchange Rate Risk .
Risk Management• Relationship between risk and return