The document discusses various bond valuation concepts like coupon rate, current yield, spot interest rate, yield to maturity, yield to call, and realized yield. It provides examples to calculate these measures and explains how bond prices are determined based on factors like interest rates, time to maturity, and cash flows. Bond duration is introduced as a measure of interest rate risk exposure, and bond risks from default and changes in interest rates are explained.
The Markowitz Model assists investors in selecting efficient portfolios by analyzing possible combinations of securities. It helps reduce risk through diversification by choosing securities whose price movements are not perfectly correlated. The model determines the efficient set of portfolios and allows investors to select the optimal portfolio based on their preferred risk-return tradeoff. Markowitz introduced diversification and showed holding multiple lower-risk securities can reduce overall portfolio risk compared to a single higher-risk security. The model calculates expected returns, variances, and correlations between securities to determine the minimum risk portfolio for a given level of return.
The document summarizes the evolution of modern portfolio theory from its origins in Harry Markowitz's mean-variance model to subsequent developments like the Sharpe single-index model and CAPM. It discusses how Markowitz showed investors could maximize returns for a given risk level by holding efficient portfolios on the efficient frontier. The Sharpe model reduced the inputs needed for portfolio risk estimation by correlating assets to a market index rather than each other. CAPM then defined the market portfolio as the efficient portfolio and allowed a risk-free asset, changing the shape of the efficient frontier.
1) Total risk of a security is composed of systematic risk, which stems from external market factors, and unsystematic risk, which is specific to a company.
2) Diversifying a portfolio by holding many securities with returns that are not perfectly positively correlated can reduce total risk through lowering unsystematic risk exposure.
3) The degree of risk reduction from diversification depends on the correlation between the returns of the securities in the portfolio. Perfectly negatively correlated securities eliminate risk, while perfectly positively correlated securities do not allow for risk reduction through diversification.
The document outlines the key stages of an investment management process:
1) Investment policy involves determining personal financial objectives and creating an emergency fund.
2) Investment analysis requires comparing industries, security types, and risks to form beliefs about future prices and returns.
3) Valuation of securities is important, where the value of investments is based on the present worth of future benefits, and assets are valued individually to determine relative attractiveness.
4) Portfolio construction incorporates knowledge of securities features, diversification, timing, asset selection, and allocation of wealth.
Factoring is a financial transaction and a type of debtor finance in which a business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount. Factoring is commonly referred to as accounts receivable factoring, invoice factoring, and sometimes accounts receivable financing.
There are three parties directly involved: the factor who purchases the receivable, the one who sells the receivable, and the debtor who has a financial liability that requires him or her to make a payment to the owner of the invoice.
There are various types of factoring:
Recourse, Non - recourse, maturity and cross - border factoring.
The document discusses risk and return in investments. It defines key concepts such as realized and expected return, ex-ante and ex-post returns, sources and measurements of risk including standard deviation and coefficient of variation. It also discusses the risk-return tradeoff and how higher risk investments require higher potential returns to compensate for additional risk.
The document discusses various bond valuation concepts like coupon rate, current yield, spot interest rate, yield to maturity, yield to call, and realized yield. It provides examples to calculate these measures and explains how bond prices are determined based on factors like interest rates, time to maturity, and cash flows. Bond duration is introduced as a measure of interest rate risk exposure, and bond risks from default and changes in interest rates are explained.
The Markowitz Model assists investors in selecting efficient portfolios by analyzing possible combinations of securities. It helps reduce risk through diversification by choosing securities whose price movements are not perfectly correlated. The model determines the efficient set of portfolios and allows investors to select the optimal portfolio based on their preferred risk-return tradeoff. Markowitz introduced diversification and showed holding multiple lower-risk securities can reduce overall portfolio risk compared to a single higher-risk security. The model calculates expected returns, variances, and correlations between securities to determine the minimum risk portfolio for a given level of return.
The document summarizes the evolution of modern portfolio theory from its origins in Harry Markowitz's mean-variance model to subsequent developments like the Sharpe single-index model and CAPM. It discusses how Markowitz showed investors could maximize returns for a given risk level by holding efficient portfolios on the efficient frontier. The Sharpe model reduced the inputs needed for portfolio risk estimation by correlating assets to a market index rather than each other. CAPM then defined the market portfolio as the efficient portfolio and allowed a risk-free asset, changing the shape of the efficient frontier.
1) Total risk of a security is composed of systematic risk, which stems from external market factors, and unsystematic risk, which is specific to a company.
2) Diversifying a portfolio by holding many securities with returns that are not perfectly positively correlated can reduce total risk through lowering unsystematic risk exposure.
3) The degree of risk reduction from diversification depends on the correlation between the returns of the securities in the portfolio. Perfectly negatively correlated securities eliminate risk, while perfectly positively correlated securities do not allow for risk reduction through diversification.
The document outlines the key stages of an investment management process:
1) Investment policy involves determining personal financial objectives and creating an emergency fund.
2) Investment analysis requires comparing industries, security types, and risks to form beliefs about future prices and returns.
3) Valuation of securities is important, where the value of investments is based on the present worth of future benefits, and assets are valued individually to determine relative attractiveness.
4) Portfolio construction incorporates knowledge of securities features, diversification, timing, asset selection, and allocation of wealth.
Factoring is a financial transaction and a type of debtor finance in which a business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount. Factoring is commonly referred to as accounts receivable factoring, invoice factoring, and sometimes accounts receivable financing.
There are three parties directly involved: the factor who purchases the receivable, the one who sells the receivable, and the debtor who has a financial liability that requires him or her to make a payment to the owner of the invoice.
There are various types of factoring:
Recourse, Non - recourse, maturity and cross - border factoring.
The document discusses risk and return in investments. It defines key concepts such as realized and expected return, ex-ante and ex-post returns, sources and measurements of risk including standard deviation and coefficient of variation. It also discusses the risk-return tradeoff and how higher risk investments require higher potential returns to compensate for additional risk.
Security Analysis and Portfolio Management - Investment-and_Riskumaganesh
Investment involves allocating funds to assets with the goal of earning income or capital appreciation over time. Speculation aims to profit from short-term price fluctuations by taking on high business risk. Investors typically have a longer time horizon, consider fundamentals, and accept moderate risk for returns, while speculators have a very short horizon, rely on market behavior, and use leverage to seek high returns for high risk. Risks include systematic market, interest rate, and inflation risks that affect all investments, as well as unsystematic business and financial risks that are specific to individual firms.
This document discusses various equity valuation models and concepts. It begins by explaining that common stock represents ownership in a company, with ownership implying control over the company through electing directors. It then discusses the dividend discount model for valuing stocks, including formulas for single-period, multi-period, and perpetual growth models. It also discusses using price multiples like P/E ratios and compares growth companies to growth stocks.
The document discusses the random walk theory as applied to stock prices. It posits that stock prices follow random walks such that their movements cannot be predicted, making it impossible to outperform the market without taking on additional risk. The theory believes that fundamental analysis and technical analysis are futile for predicting prices. It implies the best investment strategy is to invest in a portfolio that reflects the overall stock market. The key aspects of the random walk theory are that stock price changes are independent and have the same probability distribution. Criticisms argue that prices may follow trends in the short run and the theory's basis is flawed.
The document summarizes the Markowitz model for building optimal investment portfolios. It discusses key aspects of the model such as diversification to reduce risk, defining the efficient frontier of portfolios with maximum return for a given level of risk, and including both risky and risk-free assets as well as leverage to construct portfolios. The model provides a framework for investors to analyze risk and return tradeoffs across different portfolio combinations.
This document provides information about a student group project on capital market instruments. It includes the names and roll numbers of the group members, a table of contents for the project, and sections describing different capital market instruments like equity shares, preference shares, debentures, and bonds. It also discusses the differences between equity and debt securities and concludes that the capital market plays an important role in economic development.
Chapter 06 Valuation & Characteristics Of BondsAlamgir Alwani
The document discusses various topics related to bond valuation and characteristics, including:
- Bonds are valued based on the present value of their expected future cash flows.
- Bond prices fluctuate as interest rates change, with bond prices falling when rates rise.
- Other factors like call provisions, convertibility, credit ratings, and bond indentures also impact bond valuation and risk.
- Diluted earnings per share calculations must account for potential share dilution from convertible bonds.
The document discusses the relationship between risk and return when investing. It states that there is a trade-off between expected risk and expected return, with higher risk investments typically offering higher returns to compensate investors for taking on more risk. It also discusses how diversification across multiple assets can reduce the non-systematic/diversifiable risk in a portfolio, but not the systematic/market risk that is related to movements in the overall market. The document defines beta as a measure of a stock's systematic risk relative to the market.
This chapter discusses risk and return, including:
- Risk and return of individual assets is measured using probability distributions and expected return and standard deviation.
- Portfolio risk is lower than holding individual assets due to diversification. Beta measures the sensitivity of an asset's return to market movements.
- The Security Market Line shows the expected return of an asset based on its beta and the risk-free rate. The Capital Asset Pricing Model suggests assets should be priced based on their systematic risk.
This document discusses various types of risk in finance. It identifies default risk, interest rate risk including price and reinvestment rate risks, liquidity risk, inflation risk, market risk, firm-specific risk, economic risk, downside risk, project risk, financial risk, business risk, foreign exchange risks including translation and transaction risks, total risk, and obsolescence risk. It provides brief definitions and examples for each type of risk.
This document discusses different strategies for rupee cost averaging when investing in stocks. It describes rupee cost averaging as regularly investing fixed amounts in stocks with good fundamentals over time regardless of price fluctuations. It then provides examples of how different portfolio balancing strategies like constant rupee, constant ratio, and variable ratio plans work in practice by maintaining different balances between stock and defensive investments as market prices change.
- Bond valuation involves discounting future cash flows from bonds like coupon payments and principal repayment to calculate the present value, which is the bond price.
- Zero-coupon bonds pay the full face value at maturity with no interim coupon payments, while coupon bonds pay regular interest payments and repay the principal.
- Bond prices are inversely related to interest rates - they fall when rates rise and vice versa. Longer-term bonds are more sensitive to interest rate changes.
Mutual funds provide a way for investors to achieve diversification and professional management of their investments. They pool money from individual investors and invest it in a variety of securities like stocks, bonds and money market instruments. This allows even small investors to hold a diversified portfolio. Mutual funds offer various advantages like liquidity, convenience and transparency. However, they also charge fees and expenses and do not allow as much control over investments as direct investing. There are different types of mutual funds categorized by whether they invest in stocks, bonds or money market instruments as well as by their investment objectives like growth, income or capital preservation.
The Arbitrage Pricing Theory (APT) provides an alternative to the Capital Asset Pricing Model (CAPM) for estimating expected returns. The APT assumes returns are generated by multiple systematic risk factors rather than a single market factor. It allows for assets to be mispriced and does not require assumptions of a market portfolio or homogeneous expectations. Under the APT, the expected return of an asset is equal to the risk-free rate plus the product of each risk factor's premium and the asset's sensitivity to that factor.
Fundamental analysis is a method of evaluating securities that involves performing an analysis of the underlying company and industry. It examines factors like the overall economy, industry conditions, and the financial condition and management of companies to determine a company's intrinsic value. The analysis involves evaluating economic, industry, and company-specific factors to estimate future earnings and stock prices. Some key aspects of fundamental analysis include analyzing the economy, industry life cycles, and individual company financials and operations.
Measurement of Risk and Calculation of Portfolio RiskDhrumil Shah
This document discusses measuring risk and calculating portfolio risk. It defines risk as the probability of loss and explains that higher investment means higher risk but also higher potential return. It then discusses measuring the risk of individual assets using variance and standard deviation calculated from the asset's probability distribution of returns. The document also explains how to calculate the expected return, variance and standard deviation of a portfolio by taking the weighted average of the individual assets. Diversifying a portfolio can reduce overall risk since the returns on different assets may not move in the same direction.
This document defines key concepts related to risk and return in investments. It discusses components of return including yields and capital gains. It also defines expected return, relative return, and real rate of return. The document outlines several types of risk that can impact investments such as market risk, interest rate risk, liquidity risk, and foreign exchange risk. It also discusses standard deviation and the coefficient of variation as measures of risk. Finally, the capital asset pricing model is introduced as relating expected return on an asset to its systematic risk.
The document discusses various methods for valuing different types of securities like bonds, preference shares, and equity shares. It explains concepts like book value, market value, and intrinsic value. It provides formulas for calculating the present value of redeemable and irredeemable bonds and preference shares based on interest/dividend payments and redemption value. Methods for valuing equity shares include the dividend capitalization method using models for finite periods, constant dividend growth, and variable dividend growth as well as the earnings capitalization method.
The document discusses risk and return in investments. It defines key concepts like holding period return (HPR), expected return, standard deviation, variance, and coefficient of variation. It provides examples of calculating HPR for stocks based on purchase price, selling price, and dividends. Expected return is the average HPR and can be calculated in different ways. Risk is the variability in returns and can be measured using standard deviation, variance, beta, etc. The document also discusses portfolio returns and how to calculate expected portfolio return based on individual asset expected returns and weights.
The document discusses key financial concepts including:
1) The primary goal of financial management is maximizing shareholder wealth through stock price appreciation. This is achieved by forecasting, investment decisions, coordination, and managing risk.
2) Risk is the probability that investment returns differ from expectations. There are various types of risk including market, business, liquidity, exchange rate, country, and interest rate risk.
3) Portfolio risk is determined not just by the risk of individual holdings, but also their covariance—how their returns move together. A portfolio's risk can be lower than its components' risks through diversification.
Security Analysis and Portfolio Management - Investment-and_Riskumaganesh
Investment involves allocating funds to assets with the goal of earning income or capital appreciation over time. Speculation aims to profit from short-term price fluctuations by taking on high business risk. Investors typically have a longer time horizon, consider fundamentals, and accept moderate risk for returns, while speculators have a very short horizon, rely on market behavior, and use leverage to seek high returns for high risk. Risks include systematic market, interest rate, and inflation risks that affect all investments, as well as unsystematic business and financial risks that are specific to individual firms.
This document discusses various equity valuation models and concepts. It begins by explaining that common stock represents ownership in a company, with ownership implying control over the company through electing directors. It then discusses the dividend discount model for valuing stocks, including formulas for single-period, multi-period, and perpetual growth models. It also discusses using price multiples like P/E ratios and compares growth companies to growth stocks.
The document discusses the random walk theory as applied to stock prices. It posits that stock prices follow random walks such that their movements cannot be predicted, making it impossible to outperform the market without taking on additional risk. The theory believes that fundamental analysis and technical analysis are futile for predicting prices. It implies the best investment strategy is to invest in a portfolio that reflects the overall stock market. The key aspects of the random walk theory are that stock price changes are independent and have the same probability distribution. Criticisms argue that prices may follow trends in the short run and the theory's basis is flawed.
The document summarizes the Markowitz model for building optimal investment portfolios. It discusses key aspects of the model such as diversification to reduce risk, defining the efficient frontier of portfolios with maximum return for a given level of risk, and including both risky and risk-free assets as well as leverage to construct portfolios. The model provides a framework for investors to analyze risk and return tradeoffs across different portfolio combinations.
This document provides information about a student group project on capital market instruments. It includes the names and roll numbers of the group members, a table of contents for the project, and sections describing different capital market instruments like equity shares, preference shares, debentures, and bonds. It also discusses the differences between equity and debt securities and concludes that the capital market plays an important role in economic development.
Chapter 06 Valuation & Characteristics Of BondsAlamgir Alwani
The document discusses various topics related to bond valuation and characteristics, including:
- Bonds are valued based on the present value of their expected future cash flows.
- Bond prices fluctuate as interest rates change, with bond prices falling when rates rise.
- Other factors like call provisions, convertibility, credit ratings, and bond indentures also impact bond valuation and risk.
- Diluted earnings per share calculations must account for potential share dilution from convertible bonds.
The document discusses the relationship between risk and return when investing. It states that there is a trade-off between expected risk and expected return, with higher risk investments typically offering higher returns to compensate investors for taking on more risk. It also discusses how diversification across multiple assets can reduce the non-systematic/diversifiable risk in a portfolio, but not the systematic/market risk that is related to movements in the overall market. The document defines beta as a measure of a stock's systematic risk relative to the market.
This chapter discusses risk and return, including:
- Risk and return of individual assets is measured using probability distributions and expected return and standard deviation.
- Portfolio risk is lower than holding individual assets due to diversification. Beta measures the sensitivity of an asset's return to market movements.
- The Security Market Line shows the expected return of an asset based on its beta and the risk-free rate. The Capital Asset Pricing Model suggests assets should be priced based on their systematic risk.
This document discusses various types of risk in finance. It identifies default risk, interest rate risk including price and reinvestment rate risks, liquidity risk, inflation risk, market risk, firm-specific risk, economic risk, downside risk, project risk, financial risk, business risk, foreign exchange risks including translation and transaction risks, total risk, and obsolescence risk. It provides brief definitions and examples for each type of risk.
This document discusses different strategies for rupee cost averaging when investing in stocks. It describes rupee cost averaging as regularly investing fixed amounts in stocks with good fundamentals over time regardless of price fluctuations. It then provides examples of how different portfolio balancing strategies like constant rupee, constant ratio, and variable ratio plans work in practice by maintaining different balances between stock and defensive investments as market prices change.
- Bond valuation involves discounting future cash flows from bonds like coupon payments and principal repayment to calculate the present value, which is the bond price.
- Zero-coupon bonds pay the full face value at maturity with no interim coupon payments, while coupon bonds pay regular interest payments and repay the principal.
- Bond prices are inversely related to interest rates - they fall when rates rise and vice versa. Longer-term bonds are more sensitive to interest rate changes.
Mutual funds provide a way for investors to achieve diversification and professional management of their investments. They pool money from individual investors and invest it in a variety of securities like stocks, bonds and money market instruments. This allows even small investors to hold a diversified portfolio. Mutual funds offer various advantages like liquidity, convenience and transparency. However, they also charge fees and expenses and do not allow as much control over investments as direct investing. There are different types of mutual funds categorized by whether they invest in stocks, bonds or money market instruments as well as by their investment objectives like growth, income or capital preservation.
The Arbitrage Pricing Theory (APT) provides an alternative to the Capital Asset Pricing Model (CAPM) for estimating expected returns. The APT assumes returns are generated by multiple systematic risk factors rather than a single market factor. It allows for assets to be mispriced and does not require assumptions of a market portfolio or homogeneous expectations. Under the APT, the expected return of an asset is equal to the risk-free rate plus the product of each risk factor's premium and the asset's sensitivity to that factor.
Fundamental analysis is a method of evaluating securities that involves performing an analysis of the underlying company and industry. It examines factors like the overall economy, industry conditions, and the financial condition and management of companies to determine a company's intrinsic value. The analysis involves evaluating economic, industry, and company-specific factors to estimate future earnings and stock prices. Some key aspects of fundamental analysis include analyzing the economy, industry life cycles, and individual company financials and operations.
Measurement of Risk and Calculation of Portfolio RiskDhrumil Shah
This document discusses measuring risk and calculating portfolio risk. It defines risk as the probability of loss and explains that higher investment means higher risk but also higher potential return. It then discusses measuring the risk of individual assets using variance and standard deviation calculated from the asset's probability distribution of returns. The document also explains how to calculate the expected return, variance and standard deviation of a portfolio by taking the weighted average of the individual assets. Diversifying a portfolio can reduce overall risk since the returns on different assets may not move in the same direction.
This document defines key concepts related to risk and return in investments. It discusses components of return including yields and capital gains. It also defines expected return, relative return, and real rate of return. The document outlines several types of risk that can impact investments such as market risk, interest rate risk, liquidity risk, and foreign exchange risk. It also discusses standard deviation and the coefficient of variation as measures of risk. Finally, the capital asset pricing model is introduced as relating expected return on an asset to its systematic risk.
The document discusses various methods for valuing different types of securities like bonds, preference shares, and equity shares. It explains concepts like book value, market value, and intrinsic value. It provides formulas for calculating the present value of redeemable and irredeemable bonds and preference shares based on interest/dividend payments and redemption value. Methods for valuing equity shares include the dividend capitalization method using models for finite periods, constant dividend growth, and variable dividend growth as well as the earnings capitalization method.
The document discusses risk and return in investments. It defines key concepts like holding period return (HPR), expected return, standard deviation, variance, and coefficient of variation. It provides examples of calculating HPR for stocks based on purchase price, selling price, and dividends. Expected return is the average HPR and can be calculated in different ways. Risk is the variability in returns and can be measured using standard deviation, variance, beta, etc. The document also discusses portfolio returns and how to calculate expected portfolio return based on individual asset expected returns and weights.
The document discusses key financial concepts including:
1) The primary goal of financial management is maximizing shareholder wealth through stock price appreciation. This is achieved by forecasting, investment decisions, coordination, and managing risk.
2) Risk is the probability that investment returns differ from expectations. There are various types of risk including market, business, liquidity, exchange rate, country, and interest rate risk.
3) Portfolio risk is determined not just by the risk of individual holdings, but also their covariance—how their returns move together. A portfolio's risk can be lower than its components' risks through diversification.
I2
I1
σp
The document discusses portfolio management and various approaches to constructing portfolios. It defines a portfolio as a combination of different asset classes like stocks, bonds, and money market instruments. The traditional approach to portfolio construction evaluates an individual's overall financial plan and objectives to determine suitable securities. The modern approach uses the Markowitz model to maximize expected return for a given level of risk. This models constructs portfolios along the "efficient frontier" where higher returns are achieved for the same level of risk. Factors like diversification, correlation between assets, and an individual's risk tolerance further influence portfolio selection.
International Portfolio Investment and Diversification2.pptxVenanceNDALICHAKO1
Portfolio management involves making investment decisions about asset allocation to balance risk and return for individuals and institutions. A portfolio is a group of financial assets such as stocks and bonds. Portfolio investments are passive and made with the goal of earning returns. Risk is reduced through diversification across many assets whose returns are not perfectly correlated. The expected return of a portfolio is the weighted average of the expected returns of its individual components, weighted by their proportion in the portfolio. Portfolio risk comes from asset-specific and systematic sources and can be measured by the variance and standard deviation of returns. Diversification reduces asset-specific risk but not systematic risk.
This chapter discusses portfolio theory and the benefits of diversification. It introduces the concept of the efficient frontier, which graphs the set of optimal portfolios that maximize expected return for a given level of risk. The chapter also discusses measuring risk and return of portfolios, the single index model, and how introducing a risk-free borrowing and lending opportunity shifts the efficient frontier. The optimal portfolio is found where the efficient frontier is tangent to an investor's indifference curve.
1. The document outlines a presentation on constructing high quality MPF portfolios. It discusses measures of fund performance like return and risk, and how to assess fund risk.
2. It also covers portfolio construction using two and three fund portfolios, how to adjust risk and return using parking funds, and estimating portfolio return and risk based on the funds' attributes.
3. Monte Carlo simulation and behavioral finance concepts in relation to portfolio decisions are also summarized, such as status quo bias, loss aversion, and overconfidence.
This document provides an overview of the key concepts to be covered in Chapter 5 on risk and return. It begins with learning objectives for the chapter, which include understanding the relationship between risk and return, defining and measuring risk and return, investor attitudes toward risk, risk and return in portfolio context, the capital asset pricing model, and efficient financial markets. It then covers definitions of return, examples of calculating return, definitions of risk, and how to determine expected return and standard deviation using probability distributions to measure risk. Other topics summarized are risk attitudes, risk and return for portfolios, diversification, the capital asset pricing model, and systematic versus unsystematic risk.
Portfolio management UNIT FIVE BBS 4th year by Dilli BaralDilliBaral
Unit 4 discusses return and risk, while Unit 5 covers modern portfolio theory. Portfolio theory holds that investing in multiple assets lowers overall risk if profits from one asset can offset losses in others. An optimal portfolio minimizes risk for a given return or maximizes return for a given risk. It is selected from the efficient frontier of portfolios with the highest return per level of risk. The security market line models the relationship between risk and expected return for individual assets based on the capital asset pricing model.
The document discusses various concepts related to security risk and return, including:
1. Calculating returns from security investments
2. Understanding historical return and risk
3. Efficient market hypothesis and its implications
4. Calculating expected returns and the impact of diversification on risk
It also covers risk-return tradeoff, systematic risk, security market line, and using the Capital Asset Pricing Model.
This document discusses key concepts in portfolio theory, including how to calculate investment returns over single and multiple periods. It defines holding period return (HPR) to measure single period returns and arithmetic average, geometric average, and dollar-weighted return to measure returns over many periods. It also explains how to calculate the expected return, variance, and standard deviation of investments to quantify the expected reward and risk.
This document discusses various concepts related to investment returns and risk. It begins by defining return as income received plus capital gains. It then discusses the components of return including yield and capital gains. It provides a formula to calculate total return. The document then discusses various types of risk including market risk, liquidity risk, and foreign exchange risk. It also covers sensitivity analysis using range and standard deviation. Finally, it discusses portfolio returns and risks, and introduces the Capital Asset Pricing Model to relate expected returns to market risk.
This chapter discusses risk and return in investments. It covers (1) how investments involve uncertainty and investors must focus on expected returns and consider risk, (2) the concepts of risk, return distributions and probabilities, (3) how expected value, variance and standard deviation are used to quantify risk, and (4) how a portfolio's risk is reduced through diversification.
Unit IV Risk Return Analysis bjbiuybjiuyJashanRekhi
The document discusses various types of risk that can impact investments. It defines risk as the variability between expected and actual returns. Some key risks mentioned include market risk, liquidity risk, credit risk, operational risk, currency risk, and country risk. It provides examples of different types of financial risks like market risk, foreign exchange risk, and country risk. It also distinguishes between systematic risk, which stems from external market factors, and unsystematic risk, which is specific to a particular security. The document includes examples of how to calculate expected returns, variance, and standard deviation as measures of risk.
This document discusses risk and return related to various investment alternatives. It provides background information on risk, defines risk and expected return, and discusses different types of risk including stand-alone risk and market risk. It then presents a case study where the reader is asked to analyze the risk and return characteristics of different investment options and construct a portfolio based on the information provided, including calculating expected returns, standard deviations, betas, and required rates of return. The goal is to choose the best investment alternative given the risk-return tradeoff.
Prepared by Students of University of Rajshahi
Pranto Karmoker Ariful Islam Tonmoy Halder Monir Hossain
1711033122 1710733119 1710833120 1711033205
Ashikur Rahman Mahfuzul Haque Jibon Rahman Sohag Miah
1710133113 1710933297 1711033210 1710933202
Siam Hossain Shammira Parvin Farhana Afrose Anjuman Ara
1710333148 1712033136 1712033209 1712433159
Shakil Hossain
1710833138
presented by Group 2
For downloading this contact- bikashkumar.bk100@gmail.com
The document discusses several key concepts related to calculating returns from investments and measuring risk, including:
1. Calculating expected returns by taking a weighted average of possible returns and their probabilities.
2. Defining and calculating historical return and historical risk using measures like standard deviation.
3. The implications of efficient markets where security prices instantly reflect all available information.
4. Diversification can reduce the risk of a portfolio compared to holding individual assets separately.
The document discusses techniques for measuring investment risk and return, including portfolio diversification. It covers key concepts such as:
- Standard deviation and expected return are commonly used to measure investment risk and expected gains.
- Diversification across multiple investments with low correlations can reduce a portfolio's overall risk.
- Correlation measures how investment returns move together, while regression finds the statistical relationship between them to see how diversification may impact risk.
- Systematic risk cannot be diversified away, while uncorrelated idiosyncratic risks can be reduced through diversification. Alternative risk measures like value-at-risk are also discussed.
1. The document discusses risk and return, defining concepts like expected return, risk, standard deviation, beta, and models like the Capital Asset Pricing Model (CAPM).
2. It provides examples of how to calculate expected return, standard deviation, and beta for both discrete and continuous probability distributions.
3. The CAPM model relates a security's expected return to market risk (beta) and the risk-free rate, stating that expected return equals the risk-free rate plus a risk premium based on beta.
Risk and Return Analysis .ppt By Sumon SheikhSumon Sheikh
Risk and return analysis presentation with suitable examples. A perfect class-presentation file.
Prepared by Sumon Sheikh, BBA Student, majoring Accounting and Information Systems at Jatiya Kabi Kazi Nazrul Islam University, Trishal, Mymensingh-2224, Bangladesh.
Similar to Risk and Return of Portfolio- Canvas.pptx (20)
UnityNet World Environment Day Abraham Project 2024 Press ReleaseLHelferty
June 12, 2024 UnityNet International (#UNI) World Environment Day Abraham Project 2024 Press Release from Markham / Mississauga, Ontario in the, Greater Tkaronto Bioregion, Canada in the North American Great Lakes Watersheds of North America (Turtle Island).
Cleades Robinson, a respected leader in Philadelphia's police force, is known for his diplomatic and tactful approach, fostering a strong community rapport.
Methanex is the world's largest producer and supplier of methanol. We create value through our leadership in the global production, marketing and delivery of methanol to customers. View our latest Investor Presentation for more details.
ZKsync airdrop of 3.6 billion ZK tokens is scheduled by ZKsync for next week.pdfSOFTTECHHUB
The world of blockchain and decentralized technologies is about to witness a groundbreaking event. ZKsync, the pioneering Ethereum Layer 2 network, has announced the highly anticipated airdrop of its native token, ZK. This move marks a significant milestone in the protocol's journey, empowering the community to take the reins and shape the future of this revolutionary ecosystem.
2. Return of individual security
Expected Return
Where
𝑅=Expected rate of return
P=Probability of return
R= Rate of return
N= number of years
𝑅 =
𝑡=1
𝑛
𝑃 ∗ 𝑅
3. Risk of Individual Security
𝜎2 = 𝑅 − 𝑅 2𝑃
Where
𝜎2=Variance
R=Rate of return
P=Probability of occurrence of return
𝑅= Expected rate of return
4. Return of Portfolio
𝑅𝑝 = Ʃ𝑤𝑥 ∗ 𝑅𝑥 + 𝑤𝑦 ∗𝑅𝑦
Where
𝑅𝑝=Expected return of a portfolio
𝑤𝑥= Proportion of fund invested in security x
𝑤𝑦= Proportion of fund invested in security y
𝑅𝑥 𝑅𝑦=Expected returns of security x and security y
5. Question
■ The rate of return and the possibilities of their occurrence for Alpha and Beta company
scrips are given below.
■ Find the expected rates of return for both Alpha and Beta Scrips.
■ If an investor invests equally in both the scrips what would be the expected return.
■ If the proportion is changed to 25% and 75% and then to 75% and 25%, what would be the
expected rate of return?
Probability Return on alpha Scrip Return on Beta’s Scrip
0.05 -2.0 -3.0
0.20 9.0 6.0
0.50 12.0 11.0
0.20 15.0 14.0
0.05 26.0 19.0
7. continue
■ If the investor invests equally
𝑅𝑝 = Ʃ𝑤𝑥 ∗ 𝑅𝑥 + 𝑤𝑦 ∗𝑅𝑦
= 0.5*12+0.5*10.3
= 6+5.15
= 11.15
■ If 75% is put into Alpha and 25% into Beta
= 0.75*12+0.25*10.3
= 9+2.575
= 11.575
■ If 25% goes to Alpha security and 75% into Beta
= 0.25*12+0.75*10.3
= 3+7.725= 10.725
8. Risk of portfolio
𝜎𝑝
2
= 𝑤𝑥
2
𝜎𝑥
2
+ 𝑤𝑦
2
𝜎𝑦
2
+ 2𝑤𝑥𝑤𝑦𝑟𝑥𝛾𝜎𝑥𝜎𝑦
Where
𝜎𝑃= standard deviation of portfolio consisting securities x and y
𝑤𝑥𝑤𝑦=Proportion of funds in securities x and y
𝜎𝑥𝜎𝑦= Standard deviation of returns of security x and security y
𝑟𝑥𝛾=Co-efficient of correlation between security x and security y
9. Co-efficient of correlation
■ The co-efficient of correlation indicates the similarity and dissimilarity in the
Behaviour of two securities. The co-efficient can vary from (+1) to (-1)
rxy=1 signifies perfect positive correlation between securities, and
they tend to move in same direction.
rxy=-1 signifies perfect negative correlation between securities, and
they tend to move in opposite direction.
rxy=0 signifies no correlation between securities, and security returns
are independent.
10. Calculation of coefficient of correlation
rxy=Covariance of x and y / 𝜎𝑥𝜎𝑦
■ In absence of probability
Where Covxy=
𝑅𝑥−𝑅𝑥 𝑅𝑦−𝑅𝑦
𝑛
■ In presence of probability
Covxy =
𝑖=1
𝑛
𝑃 𝑅𝑥 − 𝑅𝑥 𝑅 − 𝑅𝑦
11. Conditions
■ In absence of probability expected return will be calculated by:
𝑅 =ƩR/n
■ Standard deviation of each stock is calculated by:
𝜎 =
𝑅−𝑅 2
𝑛
12. Question
■ The risk and return characteristics of equity share of two companies are shown below:
■ An investor plans to invest 80% of its available funds in X Ltd. and 20% in Y Ltd. The
coefficient of correlation between the returns of the shares of two companies is +1.Find out
the expected returns and variance of the portfolio of shares of both companies.
Particulars X Ltd. Y ltd.
Expected Return 12% 20%
Standard Deviation 3% 7%
15. Question
■ Stocks L and M have yielded the following returns for the past two years
■ What is the expected return on a portfolio made up of 60% of L and 40% of M?
■ Find out standard deviation of each stock.
■ What is the covariance and co-efficient of correlation between stocks L and M?
■ What is the portfolio risk of a portfolio made up of 60% of L and 40% of M?
Years Return(L) Return(M)
2017 12% 14%
2018 18% 12%
16. Solution
■ Expected rate of return
𝑅 =ƩR/n
■ Expected rate of return of stock L= 12+18/2=15
■ Expected rate of return of stock M= 14+12/2=13
■ Portfolio Return
𝑅𝑝 = Ʃ𝑤𝑥 ∗ 𝑅𝑥 + 𝑤𝑦 ∗𝑅𝑦
= 0.6*15+ 0.4*13
= 9+ 5.2= 14.2
17. continue
■ Standard deviation of stock L
𝜎 =
𝑅 − 𝑅 2
𝑛
=
12−15 2− 18−15 2
2
= 3
■ Standard deviation of stock M
𝜎 =
𝑅−𝑅 2
𝑛
=
14−13 2− 12−13 2
2
= 1
18. Continue
■ Covariance between stock L and M
Covlm=
𝑅𝑥−𝑅𝑥 𝑅𝑦−𝑅𝑦
𝑛
= (-3) +(-3)/2
=-6/2
=-3
■ Correlation coefficient
rlm=Covariance of x and y / σxσy
= -3/3*1
= -1
20. Question
■ A financial analyst is analyzing two investment alternatives, stock Z and stock Y. The
estimated rates of return and their chances of occurrence for the next year are given below
■ Determine expected rates of return, variance, and standard deviation of Y and Z.
■ Is ‘Y’ comparatively riskless?
■ If the financial analyst wishes to invest half in Z and another half in Y, would it reduce the
risk? Explain
Probability of occurrence Security Y Rates of
Return(%)
Security Z Rates of
Return(%)
0.20 22 5
0.60 14 15
0.20 -4 25
21. Solution
■ Expected rate of return of security Y
𝑅 = 𝑡=1
𝑛
𝑃 ∗ 𝑅
=0.2*22+ 0.6*14+0.2*(-4)
= 4.4+8.4-0.8
=12
■ Expected rate of return of security z
𝑅 = 𝑡=1
𝑛
𝑃 ∗ 𝑅
= 0.20*5+0.60*15+0.20*25
= 1+9+5
=15
■ Variance and standard deviation of security Y
𝜎2
= 𝑅 − 𝑅 2𝑃
= (22-12)2*0.20+ (14-12)2*0.60+(-4-12)2*0.20
= 20+2.4+51.2
=73.6
=√73.6
𝜎 = 8.57
22. solution
■ Variance and standard deviation of security z
𝜎2
= 𝑅 − 𝑅 2𝑃
= (5-15)2*0.20+(15-15)2*0.60+(25-15)2*0.20
= 20+0+20
=40
=√40
𝜎 =6.32
■ Since variance and standard deviation of security y is higher, it is riskier than security Z
ryz= 𝐶𝑜𝑣 𝑦𝑧/𝜎y𝜎z
𝐶𝑜𝑣 𝑦𝑧 =
𝑖=1
𝑛
𝑃 𝑅𝑥 − 𝑅𝑥 𝑅 − 𝑅𝑦
= (22-12)(5-15)*0.2 + (14-12)(15-15)*0.60+ (-4-12)(25-15)*0.20
= -20+0-32
= -52
ryz= -52/6.3*8.6
= -52/54.18
= -0.95
23. Continue
■ Portfolio risk
𝜎𝑝
2
= 𝑤𝑥
2
𝜎𝑥
2
+ 𝑤𝑦
2
𝜎𝑦
2
+ 2𝑤𝑥𝑤𝑦𝑟𝑥𝛾𝜎𝑥𝜎𝑦
= (0.5)2*73.6+ (0.5)2*40+2*0.5*0.5*-0.95*8.6*6.32
= 18.4+10-25.81
=28.4-25.81
= √2.6
= 1.6
Combining Y and Z securities reduces the risk. This is because the securities have lower positive
correlation coefficient.
25. Question
■ A portfolio consist of three securities with the following parameters:
■ If these securities are equally weighted, how much is the risk and return of the portfolio of these
securities?
Particulars Security (P) Security (Q) Security (R) Correlation
Coefficient
Expected
Return(%)
25 22 20
Standard
deviation(%)
30 26 24
Correlation
Coefficient
PQ -0.5
QR +0.4
PR +0.6