Defining Investment - Investment Management - Lecture Slides, Slides of International Management

Download Defining Investment - Investment Management - Lecture Slides and more Slides International Management in PDF only on Docsity! Publicly Traded Stocks Bonds Firm Asset Equity Private Private Privately Owned Equity Debt  Market Maker Small Investors Bid/Ask Prices Types of orders Institutional Investors A current commitment of INR for a period of time in order to derive future payments that will compensate for:
the time the funds are committed
the expected rate of inflation
uncertainty of future flow of funds. 7 Holding Period Return 8 10.1 200 220 Investment of Value Beginning Investment of Value Ending HPR == = Holding Period Yield HPY = HPR - 1 1.10 - 1 = 0.10 = 10% Annual Holding Period Return
Annual HPR = HPR 1/n where n = number of years investment is held Annual Holding Period Yield
Annual HPY = Annual HPR - 1 9
When evaluating future investment alternatives we need to know what is the expected rate of return
Risk is uncertainty that an investment will earn its expected rate of return
Probability is the likelihood of an outcome 12 ∑ = ×= = n i 1 i Return) (Possible Return) ofy Probabilit( )E(R Return Expected )R(P....))(R(P))(R[(P nn2211 +++= ))(RP( 1 ii n i ∑ = = Risk-free Investment 13 0.00 0.20 0.40 0.60 0.80 1.00 -5% 0% 5% 10% 15% Risky Investment with 3 Possible Returns 14 0.00 0.20 0.40 0.60 0.80 1.00 -30% -10% 10% 30% ER if returns expected are 20%,35% and 40% respectively? When comparing investments where the conditions are dissimilar Coefficient of variation (CV) a measure of relative variability that indicates risk per unit of return Standard Deviation of Returns Expected Rate of Returns 17 E(R) iσ= 1.9 Investment X Investment Y CV Expected Return 0.07 0.12 ? Standard Deviation 0.05 0.07 ? variance of the series holding period yield during period I expected value of the HPY that is equal to the arithmetic mean of the series the number of observations 18 2/n n 1i i 2 HPY)(EHPY[∑ = −=σ = = = = n E(HPY) HPY i 2 σ Determinants of Required Rates of Return
Time value of money during the period of investment
Expected rate of inflation during the period
Risk involved 19 Dependent upon
Conditions in the Capital Markets
Expected Rate of Inflation and monetary condition
Is what you see in the newspapers and media 22 Nominal RFR = (1+Real RFR) x (1+Expected Rate of Inflation) - 1
Investors seek higher returns than the risk free rate which means taking on higher risks ( risk premium) Some types of risk:
Business risk
Financial risk
Liquidity risk
Exchange rate risk
Country risk 23
Uncertainty of income flows caused by the nature of a firm’s business
Sales volatility and operating leverage determine the level of business risk. 24
Uncertainty of return is introduced by acquiring securities denominated in a currency different from that of the investor.
Changes in exchange rates affect the investors return when converting an investment back into the “home” currency. 27
Political risk is the uncertainty of returns caused by the possibility of a major change in the political or economic environment in a country.
Individuals who invest in countries that have unstable political-economic systems must include a country risk- premium when determining their required rate of return 28
The relevant risk measure for an individual asset is its co-movement with the market portfolio
Systematic risk relates the variance of the investment to the variance of the market
Beta measures this systematic risk of an asset 29 32 Rate Risk (business risk, etc., or systematic risk-beta) RFR Security Market Line Expected Movements along the curve that reflect changes in the risk of the asset NRFR + RPi = E(Ri) where: RPi = risk premium for asset i E(Ri) = the expected return for asset i NRFR = the nominal return on a risk-free asset 33 The market risk premium for the market portfolio (contains all the risky assets in the market) can be computed: RPm = E(Rm)- NRFR where: RPm = risk premium on the market portfolio E(Rm) = expected return on the market portfolio NRFR = expected return on a risk-free asset 34