5. DEFINITION OF INVSETMENT
DONALD E.FISCHER&
RONALD J.JORDAN
• “An investment is a
commitment of funds
made in the expectation
of some positive rate of
returns. If the
investment is properly
undertaken,the returns
will commensurate with
the risk the investor
assumes”.
F.AMLING
• “The purchase by an
individual or
institutional investor of
a financial or real asset
that produces a return in
proportion to the risk
assumed over some
future investment
period”.
10. TYPES OF INVESTORS
Conservative investors shall take lower risks and is basically risk averse. The
conservative investor’s basic priority is safety of the capital.
Moderate investors are willing to take slightly higher risks as compared to conservative
investors for a moderate level of return.
Aggressive investors are prepared to assume a high level of risk and expects high rate of
return for over a period of 3-5 years. Such investors can park their savings in risky assets like
equity, real estate etc.,
11.
12. ROI
Return on Investment (ROI) is
a performance measure used to
evaluate the efficiency of an
investment or compare the
efficiency of a number of different
investments.
13. RISK AND RETURN
Risk and return are
inseperable.
The investor should keep
the risk associated with the
return proportional as risk
is directly correlated with
the return
16. RISK
RISK
Systematic Risk:
Systematic risk is the one that affects the overall market such as
change in the country's economic position, tax reforms or a change in
the world energy situation
Unsystematic Risk:
The risk which is independent of economic, political and all other
such factors. It is associated with a particular company or industry
19. THE FUNDAMENTAL ANALYSIS
APPROACH
Present Value
Analysis
Intrinsic Value
Analysis
Regression
Analysis
Special
Situation
Analysis
Fundamental analyst have four variants:
23. BASIC VALUATION MODELS
FUNDAMENTALAPPROACH
TIME VALUE OF MONEY
COMPOUND VALUE
• COMPOUNDING VALUES
• COMPOUNDING VALUES WITHIN ONE YEAR
• FUTURE VALUE OF A ‘SERIES OF PAYMENTS’
• COMPOUND SUM OF ANNUTIES
PRESENT VALUE
• DISCOUNTING VALUES
• PRESENT VALUES OF AN ANNUITY
24. VALUATION OF BONDS OR
DEBENTURES
• FACE VALUE
• COUPON RATES
• MATURITY PERIODFIXED INCOME
• ZERO INTEREST BONDS
• RISK
IMPORTANT
ASPECTS OF
BONDS:
25. VALUATION OF BONDS OR
DEBENTURES
BONDS WITH MATURITY PERIOD
PREPETUAL BOND
BOND VALUE & INTEREST RATE THEOREM
PRICE CHANGE AND BOND MATURITY THEOREM
YIELD ON BOND(CURRENT YIELD)
YIELD ON BONDS WITH MATURITY PERIOD
SEMI-ANNUAL INTEREST ON BONDS
YIELD TO CALL
HOLDING PERIOD YIELD
ZERO INTEREST BONDS
MACAULAY’S DURATION OF A BOND
ACCURED INTEREST
26. VALUATION OF
PREFERENCE SHARES
V = VALUE OF PREFERENCE SHARE
D = ANNUAL DIVIDEND PER PREFERENCE SHARE
I = INTEREST RATE ON PREFERNCE SHARES
V=D/I
27. VALUATION OF EQUITY
SHARES
THE VALUATION OF EQUITY
SHARES IS COMPARITIVELY
MORE DIFFICULT.
THE DIFFICULTY ARISES
BECAUSE OF TWO FACTORS:
THE AMOUNT OF DIVIDEND AND
TIMING OF CASH FLOW EXPECTED
ARE UNCERTAIN.
THE EARNINGS AND DIVIDEND ON
COMMON SHARES ARE GENERALLY
EXPECTED TO GROWS
28. VALUATION OF EQUITY SHARES
-DIVIDEND CONCEPT
• BASIC VALUATION MODEL
• ONE YAER HOLDING PERIOD
• MULTIPLE YEARS HOLDING PERIOD
– CONSTANT DIVIDENDS OR ZERO GROWTH IN DIVIDENDS
– CONSTANT GROWTH IN DIVIDENDS
– VARIABLE GROWTH IN DIVIDENDS
– VALUATION OF SHARE NOT PAYING DIVIDENDS IN SOME YEARS
29. VALUATION OF EQUITY
SHARES-EARNING CONCEPT
PRICE
EARNINGS
RATIO
INTRINSIC
VALUE OF
A SHARE
VALUE
EARNING
RATIO
WALTER’S
MODEL
GORDON’S
MODEL
30. CAPM MODEL: SHARE
VALUATION
THE CAPITAL ASSET PRICING MODEL (CAPM) IS USED TO
TAKE DECISIONS IN CONDITIONS OF RISK AND
UNCERTAINITY.
THE CAPM MODEL PROVIDES A SOLUTION TO ELIMINATE
OR MINIMISE SYSTEMATIC RISK BYBY FINDING OUT BETA
RISK.
DUE TO RISK THE RETURN IS UNCERTAIN
THE RISK HAS TO BE ADJUSTED IN THE VALUATION
PROCESS THROUGH THE REQUIRED RATE OF RETURN.