The document discusses various concepts related to portfolio management and investments. It defines portfolio management as building and overseeing investments to meet long-term financial goals and risk tolerance. It also defines investment, investor, holding period return (HPR), holding period yield (HPY), arithmetic mean (AM) and geometric mean (GM) for calculating historical returns. It provides examples to calculate expected returns and discusses different types of risk like business, financial, liquidity and inflation risk.
The Investment Setting-investment ch01.pptxFamiFamz1
The Investment Setting.Why do individuals invest ?
What is an investment ?
How do we measure the rate of return on an investment ?
How do investors measure risk related to alternative investments ?
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The Investment Setting-investment ch01.pptxFamiFamz1
The Investment Setting.Why do individuals invest ?
What is an investment ?
How do we measure the rate of return on an investment ?
How do investors measure risk related to alternative investments ?
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Aikido Masterclass - Starting Your Algorithmic Investing Journey.pdfJamesForsyth21
A deep dive into quantitative investing.
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The Asset Allocation Decision-investment ch02.pptxFamiFamz1
Questions to be answered:
What is asset allocation?
What are the four steps in the portfolio management process?
What is the role of asset allocation in investment planning?
Why is a policy statement important to the planning process?
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3.0 Project 2_ Developing My Brand Identity Kit.pptxtanyjahb
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Aikido Masterclass - Starting Your Algorithmic Investing Journey.pdfJamesForsyth21
A deep dive into quantitative investing.
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- Live demo: start quant investing with Aikido Finance.
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The Asset Allocation Decision-investment ch02.pptxFamiFamz1
Questions to be answered:
What is asset allocation?
What are the four steps in the portfolio management process?
What is the role of asset allocation in investment planning?
Why is a policy statement important to the planning process?
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A Memorandum of Association (MOA) is a legal document that outlines the fundamental principles and objectives upon which a company operates. It serves as the company's charter or constitution and defines the scope of its activities. Here's a detailed note on the MOA:
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Name Clause: This clause states the name of the company, which should end with words like "Limited" or "Ltd." for a public limited company and "Private Limited" or "Pvt. Ltd." for a private limited company.
https://seribangash.com/article-of-association-is-legal-doc-of-company/
Registered Office Clause: It specifies the location where the company's registered office is situated. This office is where all official communications and notices are sent.
Objective Clause: This clause delineates the main objectives for which the company is formed. It's important to define these objectives clearly, as the company cannot undertake activities beyond those mentioned in this clause.
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Liability Clause: It outlines the extent of liability of the company's members. In the case of companies limited by shares, the liability of members is limited to the amount unpaid on their shares. For companies limited by guarantee, members' liability is limited to the amount they undertake to contribute if the company is wound up.
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Capital Clause: This clause specifies the authorized capital of the company, i.e., the maximum amount of share capital the company is authorized to issue. It also mentions the division of this capital into shares and their respective nominal value.
Association Clause: It simply states that the subscribers wish to form a company and agree to become members of it, in accordance with the terms of the MOA.
Importance of Memorandum of Association:
Legal Requirement: The MOA is a legal requirement for the formation of a company. It must be filed with the Registrar of Companies during the incorporation process.
Constitutional Document: It serves as the company's constitutional document, defining its scope, powers, and limitations.
Protection of Members: It protects the interests of the company's members by clearly defining the objectives and limiting their liability.
External Communication: It provides clarity to external parties, such as investors, creditors, and regulatory authorities, regarding the company's objectives and powers.
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Binding Authority: The company and its members are bound by the provisions of the MOA. Any action taken beyond its scope may be considered ultra vires (beyond the powers) of the company and therefore void.
Amendment of MOA:
While the MOA lays down the company's fundamental principles, it is not entirely immutable. It can be amended, but only under specific circumstances and in compliance with legal procedures. Amendments typically require shareholder
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2. What is Portfolio
Management ?
• Portfolio management involves building and
overseeing a selection of investments that will
meet the long-term financial goals and risk
tolerance of an investor. Active portfolio
management requires strategically buying and
selling stocks and other assets in an effort to beat
the broader market.
3. What is
Investment ?
• An investment is an assets or item acquired with the goal of generating
income or appreciation.
• Appreciation refers to an increase in the value of an asset over time. When
an individual purchases a good as an investment, the intent is not to
consume the good but rather to use it in the future to create wealth.
4. Who is an Investor ?
• An investor is any person or other entity (such
as a firm or mutual fund) who commits capital
with the expectation of receiving financial
returns.
• Someone who purchase shares of a company
for a long term with the belief that the
company have strong future prospects.
• Investors rely on different financial
instruments to earn a rate of return and
accomplish important financial objectives like
building retirement savings, funding a college
education, or merely accumulating additional
wealth over time.
5. HPR(holding period return)
• Period for which an investor owns certain asset is called
Holding Period
• Holding period return is the total return received from
holding an asset or portfolio of assets over a period of
time
• HPR = (Ending Value of Investment)/(Beginning Value of
Investment)
• It can never be negative.
6. HPY(holding
period yield)
• The holding period yield is the rate of
return including dividends and interest
realized on an investment.
• HPY (Holding period Yield) gives
percentage return on investment for
the holding period.
• HPY = HPR − 1
• It can be positive as well as negative.
7. Question.
• If you commit $200 to an investment at the
beginning of the year and you get back $220 at the
end of the year , what is your return for the period?
The HPR value will always be zero or greater.
It can never be a negative value.
Value > 1.0 reflects an increase in your wealth.
Value < 1.0 means that you have suffered a decline in your wealth.
HPR of zero indicates that you have lost all your money (wealth) invested.
8. Calculating
Mean
Historical
Return
• For Single Investment AM (Arithmetic Mean)
• AM = ΣHPR/n ;
(ΣHPR = the sum of annual holding period
return)
• For Single Value GM (Geometric Mean)
• GM = 𝜋𝐻𝑃𝑅
1
𝑛 − 1
• πHPR= the product of the annual holding
period returns as follows: (HPR1) × (HPR2) . .
. (HPRn)
9. AM or GM; Which one
is superior?
• For long term investment which may face
volatility on year by year basis mean
returns which gives compounded rate
based on initial and final value of asset is
superior.
• GM<=AM.
• They are equal only when Annual rate
of return are same for all years.
• GM is best measure of long term
historical performance. AM gives better
picture of YoY returns for future expected
earning
10. Calculation of Expected return
• Calculation of historical returns is easier because past data is always available.
• Expected returns of investor must be modified for future uncertainties.
• A point estimate of future returns presents most likely outcome on returns
• Investor’s must understand that there are scenarios when returns may vary
between a range which includes point estimates somewhere in between.
• Various returns estimates are made and probabilities are assigned to them to
account for uncertainties around it.
• Therefore, the expected return is calculated as follows:-
• Expected Return =
𝑖=0
𝑛
(𝑝𝑟𝑜𝑏𝑎𝑏𝑖𝑙𝑖𝑡𝑦 𝑜𝑓 𝑟𝑒𝑡𝑢𝑟𝑛 ∗ 𝑝𝑜𝑠𝑠𝑖𝑏𝑙𝑒 𝑟𝑒𝑡𝑢𝑟𝑛)
11. Practice
Example
• Calculate Expected
return in the above
example?
Economic Conditions Probability
Rate of
Return
Strong Economy, No
inflation 0.15 0.2
Weak economy,
above-average
inflation 0.15 -0.2
No major change in
economy 0.7 0.1
12. RISK AND RETURN OF
A SINGLE ASSET
What is return?
What is Risk?
13. Measurement of Risk
1) Behavioral approach
a) Sensitivity analysis
b) Probability distribution
2) Statistical approach
a)Standard deviation
b) Coefficient of variation
14. sensitivity analysis(amounts in Rs crore)
Particulars ASSET- X ASSET- Y
Initial outlay 50 50
Annual return(%)
Pessimistic 14 8
Most likely 16 16
Optimistic 18 24
Range(optimistic-pessimistic) 4 16
15. Expected rate of returns(probability distribution)
Possible outcomes
(1)
Probability
(2)
Return
(%)
(3)
Expected return
[(2)*(3)]
(4)
ASSET- X
Pessimistic(recession) 0.2 14 2.8
Most likely(normal) 0.6 16 9.6
Optimistic(boom) o.2 18 3.6
1 16
ASSET- Y
Pessimistic 0.2 8 1.6
Most likely 0.6 16 9.6
optimistic 0.2 24 4.8
1 16
16. STANDARD DEVIATION OF RETURN-
It measures the dispersion
around the expected value.
Greater the standard
deviation of returns, greater
the dispersion of return and
greater the risk of the asset.
COEFFICIENT OF VARIATION –
It is a measure of
relative dispersion
used in comparing the
risk of assets with
differing expected
returns. The larger the
coefficient of variation
, the larger the relative
risk of the asset.
19. CAPM Shows the relationship between expected
return and systematic risk of individual
assets/securities and portfolios.
It was jointly developed by William Sharpe, John
Lintner and Jan Mossin.
William Sharpe John Lintner Jan Mossin
20. SECURITY
MARKET LINE:
• Security market line is a
graphic depiction of CAPM
and describe the market
price of risk in capital
markets
21. CALCULATE THE VALUE OF BETA OF ANY COMPANY PRESENT
IN NSE 50 BASD ON 2 YEARS OF DATA.
22. Real Risk-Free Rate :-
• The risk-free rate of return is the theoretical rate of return of
an investment with zero risk. The risk-free rate represents the
interest an investor would expect from an absolute risk-free
investment over a specified period of time.
• In theory, the risk-free rate is the minimum return an investor
expects for any investment because they will not accept
additional risk unless the potential rate of return is greater
than the risk-free rate.
• Determination of a proxy for the risk-free rate of return for a
given situation must consider the investor's home market,
while negative interest rates can complicate the issue.
23. Nominal Risk-
Free Rate :-
• Nominal Risk-Free Rate is a
general risk-free rate indicated
or available on an investment.
• Moreover, it does not take into
account any influence of
inflation.
• In other words, it is the usual
interest rate indicated on the
security and it has no relation
with the rate of inflation. And
this is the rate an investor
usually see.
24.
25. TYPES OF RISK
1. BUSINESS RISK
2. FINANCIAL RISK
3. LIQUIDITY RISK
4. INFLATION RISK
26. BUSINESS RISK
• Business risk is the exposure a company or
organization has to factor(s) that will lower its profits
or lead it to fail. Anything that threatens a company's
ability to achieve its financial goals is considered a
business risk.
27. FINANCIAL
RISK
• Financial risk is the possibility of
losing money on an investment or
business venture.
• Financial markets face financial
risk due to various macroeconomic
forces, changes to the market
interest rate, and the possibility of
default by sectors or large
corporations.
28. LIQUIDITY RISK
• Liquidity risk occurs when an individual investor, business,
or financial institution cannot meet its short-term debt
obligations.
• The investor or entity might be unable to convert an asset
into cash without giving up capital and income due to a
lack of buyers or an inefficient market.
29. INFLATION RISK
• The risk of a loss in your purchasing power because
the value of your investments does not keep up
with inflation. Inflation erodes the purchasing power
of money over time – the same amount of money will
buy fewer goods and services.
30. Exercise
During the past five years, you owned two stocks
that had the following annual rates of return
1. Compute the arithmetic mean annual rate of
return for each stock. Which stock is most
desirable by this measure?
2. Compute the standard deviation of the
annual rate of return for each stock. By this
measure, which is the preferable stock?
3. Compute the coefficient of variance for each
stock. By this relative measure of risk, which
stock is preferable?
Year
Stock
T
Stock
B
1 0.19 0.08
2 0.08 0.03
3 −0.12 −0.09
4 −0.03 0.02
5 0.15 0.04
31. ASSET ALLOCATION
• Asset allocation involves dividing your
investments among different assets, such as
stocks, bonds, and cash.
• The asset allocation decision is a personal one.
• The allocation that works best for you changes at
different times in your life, depending on how
long you have to invest and your ability to tolerate
risk.
32. INVESTMENT
STRATEGY
• An investment strategy is a
set of rules, behaviors or
procedures, designed to
guide an investor's selection
of an investment portfolio.
• Individuals have different
profit objectives, and their
individual skills make
different tactics and
strategies appropriate.
35. 1. You win $300 in an office football pool.
a) Spend it on groceries
b) Purchase lottery tickets
c) Put it in a money market account
d) Buy some stock
36. 2. Two weeks after buying 100 shares of a $20 stock, the price jumps to over $30. You decide
to :
a)Buy more stock ; its obviously a winner
b) Sell it and take your profits
c) Half to recoup some costs and hold the rest
d) Sit tight and wait for it to advance even more.
37. 3. On days when the stock market jumps way up, you:
a) Wish you had invested more
b) Call your financial advisor and ask for recommendations
c) Feel glad you’re not in the market because it fluctuates too
much
d) Pay little attention
38. 4. You’re planning a vacation trip and can either lock in a fixed room-and-meals rate
of $150 per day or book standby and pay anywhere from $100 to $300 per day. You:
a) Take the fixed-rate deal
b) Talk to people who has been there about the availability of last-minute
accommodations
c) Book standby and also arrange vacation insurance because you’re leery of the tour
operation
d) Take your chances with standby
39. 5. The owner of your apartment building is converting the units to
condominiums. You can buy your unit for $75,000 or an option on a unit for
$15,000. (Units have recently sold for close to $100,000, and prices seem to
be going up.) For financing, you’ll have to borrow the down payment and pay
mortgage and condo fees higher than your present rent. You:
a) Buy your unit
b) Buy your unit and look for another to buy
c) Sell the option and arrange to rent the unit yourself
d) Sell the option and move out because you think the conversion will attract
couples with small children
40. 6. You have been working for three years for a rapidly growing company. As an
executive, you are offered the option of buying up to 2% of company stock:
2,000 shares at $10 a share. Although the company is privately owned (its
stock does not trade on the open market), its majority owner has made
handsome profits selling three other businesses and intends to sell this one
eventually. You:
a) Purchase all the shares you can and tell the owner you would invest more if
allowed
b) Purchase all the shares
c) Purchase half the shares
d) Purchase a small amount of shares
41. 7. You go to a casino for the first time.
You choose to play:
a) Quarter slot machines
b) $5 minimum bet roulette
c) Dollar slot machines
d) $25 minimum-bet blackjack
42. 8. You want to take someone out for a special dinner
in a city that’s new to you. How do you pick a place?
a) Read restaurant reviews in the local newspaper
b) Ask coworkers if they know of a suitable place
c) Call the only other person you know in this city, who eats out a lot
but only recently moved there
d) Visit the city sometime before your dinner to check out the
restaurants yourself
43. 9. The expression that best describes
your lifestyle is:
a) No guts, No glory
b) Just do it!
c) Look before you leap
d) All good things come to those who wait.
44. 10. Your attitude toward money is best
described as:
a) Dollar saved is a dollar earned
b) You’ve got to spend money to make money
c) Cash and carry only
d) Whenever possible, use other people’s money
45. Evaluate Yourself
Q1. Q2. Q3. Q4. Q5. Q6. Q7. Q8. Q9. Q10.
a – 1 a – 4 a – 3 a – 2 a – 3 a – 4 a – 1 a – 2 a – 4 a – 2
b – 4 b -1 b – 4 b – 3 b – 4 b – 3 b – 3 b – 3 b – 3 b – 3
c - 2 c – 3 c – 2 c – 1 c – 2 c – 2 c – 2 c – 4 c – 2 c – 1
d - 3 d - 2 d – 1 d - 4 d - 1 d – 1 d – 4 d – 1 d – 1 d – 4
46. Total Score
indicates:
10–17: You’re not willing to take chances with your money, even though it means you can’t make
big gains.
18–25: You’re semi-conservative, willing to take a small chance with enough information.
26–32: You’re semi-aggressive, willing to take chances if you think the odds of earning more are in
your favor.
33–40: You’re aggressive, looking for every opportunity to make your money grow, even though
in some cases the odds may be quite long. You view money as a tool to make more money.
49. Rolling return
• Rolling returns, also known
as "rolling period returns"
or "rolling time periods,"
are annualized average
returns for a period,
ending with the listed
year
• Example
Take SENSEX and calculate
the rolling returns for 1, 3, 5,
7 and 10 years.
50. Value Weighted Index
• Type of stock market index in which individual components of the
index are included in amounts that correspond to their total
market capitalization.
51. aStock split two-for-one during the year.
bCompany paid a 10 percent stock dividend during the year.
EXAMPLE-
52. Equal
Weighted
Index
• All stocks carry equal weights.
• Arithmetic Mean/Geometric mean
of percentage change of stocks
calculated.
• HPR obtained by using AM/GM of
change is multiplied to the
beginning value to calculate index
value for the period
53. Fundamental Analysis is a holistic
approach to study a business. When
an investor wishes to invest in a
business for the long term (say 3 – 5
years), it becomes essential to
understand the business from various
perspectives. It is critical for an
investor to separate the daily short-
term noise in the stock prices and
concentrate on the underlying
business performance.
Fundamental Analysis
55. Fundamental
analysis
serves to
answer
questions,
such as:
1. Is the company’s revenue growing?
2. Is it actually making a profit?
3. Is it in a strong-enough position to beat out
its competitors in the future?
4. Is it able to repay its debts?
57. The qualitative analysis captures the company’s aspects or risks difficult to
measure in numbers- such as management competencies and credibility,
competitive strategies, R&D capabilities, brand recall, and others.
Investors usually ignore the qualitative analysis, which many a time cost
them profoundly.
Qualitative Factor
58. qualitative factors of the company that
investor should be aware of
• Business Model
A business model describes the company’s plans for earning revenues, its products and services, the target market so as to maintain its
profitability.
• Competitive Advantage
This helps the company to create an economic moat around the business, thus helping the company to keep competitors at bay and
enjoy longevity, growth, profits, and dominate the market share.
• Management:
Sound management with strong credibility always works for the betterment of the company and its employees and also generates
wealth for the shareholders. Thus, it is always in the interest of the shareholders to be associated with trustworthy and competent
management rather than with management having questionable credibility.
• Corporate Governance:
This is the framework of rules, practices, and processes which direct and control the firms as well as involves balancing the interests
between management, directors, and stakeholders. Investors should always invest in companies that are run ethically, fairly,
transparently, and efficiently and whose management respects its shareholders’ rights and interests.
59. Quantitative Factor
• These are the measurable factors that influence the value of a firm.
• The biggest source of quantitative data is Financial Statements, analysing which
helps investors to make better investment decisions.
• The three most important financial statement are: -
1. BALANCE SHEET
2. INCOME STATEMENT
3. CASH FLOW STATEMENT
60. EIC Analysis of a Company: -
1. Economic Analysis:
Economic analysis is the study of economic systems. It is also a study of a production process or an
industry. The analysis aims to determine how effectively the economy or something within it is
operating.
2. Industry Analysis:
An industry analysis looks at how your company compares to others that are in the same niche. it's
a tool that allows you to understand your position among your competitors.
3. Company Analysis:
the process of evaluating a company’s profitability, profile, product and services It’s important for
any investor to perform a thorough analysis in order to get a fair view of the company he/she is
interested in.
64. Months Price CFPI Inflation
CPI Inflation
January 383.4 13.63 7.59
February 365.65 10.81 6.58
March 294.85 8.76 5.84
April 351.6 11.73 7.22
May 366.9 9.21 6.27
June 387.45 8.72 6.23
July 428.05 9.27 6.73
August 532.35 9.05 6.99
September 499.95 10.68 7.22
October 492.85 11 7.61
November 538 9.5 4.93
December 589.9 3.41 4.59
Performance of TCP according to GDP.
80. DDM(DIVIDEND DISCOUNT
MODEL)
• The dividend discount model (DDM) is a quantitative
method used for predicting the price of a company's
stock based on the theory that its present-day price is
worth the sum of all of its future dividend payments
when discounted back to their present value.
𝑃 =
𝐷
(𝑟−𝑔)
• P = price predicted
• D = dividend paid
• r = cost of equity
• g = growth rate
81. Example
• Take 15 dividend giving companies and then calculate the future price of
the companies where the growth rate of 4% and rate of return is 12%.