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IM-01 Introduction.pptx
- 4. Investment In ordinary sense,Investment is a current outlay of fund for a period of time to derive future payment. In Economics An investment is the purchase of goods (also called capital goods) that are not consumed today but are used in the future to create wealth.
- 5. For example: Afarmer ploughs his field on a daily basis under the expectation that he may reap some returns in the form of grains after a specified period of time. This means that he gives his money, time, & energy anticipating future benefits within a certain time frame.
- 6. In finance, themeaning of investment is purchasing or creating an asset anticipating an interest income, rental income, dividend, profits or any combination of the mentioned returns.
- 7. For example: Ipurchased 100 shares of a company anticipating dividend from these shares. In this case, shares are my investment and I am anticipating dividend income from the investment made.
- 8. Investment in business Investmentrefers to the act of buying an asset to make a profit from its use. Simply put, it is when a business spends money on something that will help it make financial returns.
- 9. Example: Consider a Restaurant,It buys various type of assets, like Furniture, different Appliances and others in order to offer it’s services to the customers. Therefore, with the help of those spending, it will generate money and eventually earns profit.
- 10. Why do businessesinvest? Investment is a crucial element for every business. Without making an completed investment, it would be impossible to establish a business and keep it running. Almost in every business it’s a regular phenomenon to keep investing money in order for the firm to keep them running as well as to keep pace with the changing conditions.
- 11. Why do InvestorsNeed to be Compensated It’s because; i. The time the funds are committed- Opportunity Costs ii. The expected rate of inflation and iii. The uncertainty of the future payments- Risk
- 12. Investment is madein anticipation of future benefits which may not be guaranteed. The reason for this instability is the element of risk associated with the investment made.
- 13. Whether the investmentis made in real estate, capital market or any other kind of securities, the risk involved is indispensable. Before making any investment commitment, it is wise enough to consult an expert or do a dedicated research to assure ourselves of taking the best possible investment decision.
- 14. What is Portfolio Acollection of investments owned by the individuals or organization. These investments often include stocks, which are investments in individual businesses; bonds, which are investments in debt securities that are designed to earn interest; and mutual funds, which are essentially pools of money from many investors that are reinvested by professionals.
- 15. Business Portfolio A BusinessPortfolio is a combination of various products, services and business units that make up a business. By observing this portfolio and each business unit individually, managers can take strategic business level decisions for the whole portfolio. The goal of a company’s portfolio are: To create a presence of the business on the market, To attract more customers and To show how the business differs from its direct competitors on the market. The company portfolio is also used as a business strategy to show the growth
- 16. 'Portfolio Management' Portfolio managementis the art and science of selecting and overseeing a group of investments that meet the long-term financial objectives and risk tolerance of a client, a company, or an institution. Portfolio management requires the ability to weigh strengths and weaknesses, opportunities and threats (SWOT) across the full spectrum of investments. The choices involve trade-offs, from debt versus equity to domestic versus international and growth versus safety.
- 17. Portfolio Manager Professional licensedPortfolio Managers work on behalf of clients, while individuals may choose to build and manage their own portfolios. In either case, the portfolio manager's ultimate goal is to maximize the investments' expected return within an appropriate level of risk exposure.
- 18. Two basic formsof Portfolio Management: Active management Active management is the use of human capital to manage a portfolio of funds. Active managers rely on analytical research, personal judgment, and forecasts to make decisions on what securities to buy, hold, or sell. For example, one may sell stock A in order to buy stock B. Then, a few days or weeks later, one may sell stock B to buy bond C.
- 19. Theory of ActiveManagement Investors who do not follow the Efficient Markets Hypothesis believe in active management. They hold the belief that there are some inefficiencies in the market that allow for market prices to be incorrect. Therefore, it is possible to earn profit in the stock market by identifying mispriced securities and employing a strategy to take advantage of the price correction.
- 20. Such an investmentstrategy can involve purchasing securities that are undervalued or short-selling securities that are overvalued. In addition, active management is used to modify risk and create less volatility than the benchmark.
- 21. What Is theEfficient Market Hypothesis (EMH)? The efficient market hypothesis (EMH), alternatively known as the efficient market theory, is a hypothesis that states that share prices reflect all information According to the EMH, stocks always trade at their fair value on exchanges, making it impossible for investors to purchase undervalued stocks or sell stocks for inflated. Therefore, it should be impossible to outperform the overall market through expert stock selection
- 22. What Does ItMean for Markets to Be Efficient? Market efficiency refers to how well prices reflect all available information. The efficient markets hypothesis (EMH) argues that markets are efficient, leaving no room to make excess profits by investing since everything is already fairly and accurately priced. This implies that there is little hope of beating the market, although you can match market returns through passive index investing.
- 23. Active management aimsto generate better returns than a benchmark, usually some sort of a market index. Unfortunately, a majority of active managers are unable to consistently outperform effectively than that of the passively managed funds. In addition, actively managed funds charge higher fees than passively managed funds.
- 24. Fundamental Information The factsthat affect a company's underlying value. Examples of fundamental information include , Net asset Value, debt, cash flow, supply of and demand for the company's products, and so forth. For instance, if a company does not have a sufficient supply of products to it’s customers demand, it will fail.
- 25. For example, moneymanagers may only buy blue-chip stocks for a certain fund and growth stocks for another. The basic thought of active management is how the manager can maximize the return for investors by buying or selling securities on a fairly regular basis.
- 26. Blue Chip Stocks Avery high quality investment involving a lower-than-average risk of loss of principal or reduction in income. The term is generally used to refer to securities of companies having a long history of sustained earnings and dividend payments.
- 27. Stocks in awell-known and highly respected publicly-traded company. Blue chip companies are usually financially sound and are thought to be relatively low-risk investments. They tend to be less volatile than other companies and to provide solid growth to portfolios.
- 28. Growth stock The stockof a firm that is expected to have above-average increases in revenues and earnings. These firms usually retain most earnings for reinvestment and therefore, pay small dividends. The stock, often selling at relatively high price-earnings(P/E) ratios, is subject to wide swings in price. Share in a company performing better, or expected to perform better, than its industry or the market as a whole.
- 29. Passive Management Passive management,on the other hand, involves buying an index, an exchange-traded fund, or some other investment vehicles with securities the investor does not directly choose. For example, one may buy an exchange-traded fund that holds all the stocks on the S&P 500 or DSE-30 An exchange traded fund (ETF) is a basket of securities that trade on an exchange, just like a stock. ETF share prices fluctuate all day as the ETF is bought and sold
- 30. Key Takeaways ofPassive Management • Passive management is a reference to index funds and exchange-traded funds, that mirror an established index, such as the S&P 500. • Passive management is the opposite of active management, in which a manager selects stocks and other securities to include in a portfolio.
- 31. • Passively-managed fundstend to charge lower fees to investors than funds that are actively managed. • The Efficient Market Hypothesis (EMH) demonstrates that no active manager can beat the market for long, as their success is only a matter of chance; longer-term, passive management delivers better returns.
- 32. Index An index isused to track the performance of equity or other assets. A basket of securities makes up the index used to track the performance. Indices can be broad-based or track the performance of specific sectors/stocks etc.
- 33. Broad Based Index DSE-30is a broad-based index which tracks the performance of the top 30 stocks listed on the DSE known as DSE-30 Index. Specific Index The indices can also be of specific sectors, like the Pharmaceutical index, which tracks the performance of the top Pharmaceutical’s stocks listed on the DSE.
- 34. DSE 30 Index,this index is constructed with 30 leading companies which can be said as investable index of the exchange. It almost reflects around 51% of the total market capitalization.
- 35. Criteria for inclusionin DSE-30 Index The Dhaka Stock Exchange (DSE) rebalances its DS30 index as per criteria set by S&P Dow Jones Indices. • According to DS30 criteria, eligible stocks must have a float-adjusted market capitalization worth above Tk 500 million as of the rebalancing reference date. • And the eligible stocks also must have a minimum three-month average daily traded value worth 5.0 million as of rebalancing reference date. • Stocks must be profitable as measured by positive net income over the last 12-month period, as of the rebalancing reference date.
- 36. Standard & Poor’s500 Index Definition The S&P 500, short for Standard and Poor’s 500, is a stock market index that tracks performance of 500 U.S.-based large-cap companies from various sectors. The S&P 500 is a market cap-weighted index, meaning companies with the highest valuations have the most impact on the index’s value.
- 37. The S&P 500index was launched in 1957 and had 425 companies from the industrial sector, 25 companies from the railroads sector, and 50 utility firms. Over the years, the index’s composition has changed to reflect the current American economy. Technology is currently the dominant sector, accounted for more than 1/4 of the overall index.
- 38. Exchange-Traded Fund A securitythat represents all the stocks on a given exchange. For example, an exchange- traded fund may track the Standard and Poor's 500. Investors use exchange-traded funds as a way to easily diversify their portfolios at relatively low cost.
- 39. Dow Jones IndustrialAverage (DJIA) • The Dow Jones Industrial Average (DJIA), also commonly referred to as “the Dow Jones” or simply “the Dow,” is one of the most popular and widely-recognized stock market indices. It measures the daily stock market movements of 30 U.S. publicly-traded companies listed on the NASDAQ or the New York Stock Exchange (NYSE). The 30 publicly-owned companies are considered leaders in the United States economy.
- 40. The DJIA isone of the stock indices created by Dow & Jones Company founder and Wall Street Journal editor Charles Dow. When the DJIA launched in 1896, it was comprised of only 12 US companies that were mainly engaged in industrial activities.
- 41. What is an'Investment Vehicle' An investment vehicle is simply an investment product that is offered to investors that provide the chance for investors to earn a return, or profit, on the product purchased.
- 45. An investment vehiclemay involve the purchase of a debt obligation, which entitles one to repayment with interest (Bond), or it may involve buying an ownership stake in a business(Stock), with the hope that the business will become profitable or any product that could be tangible as well as intangible.
- 46. Some Terminologies Interest Pure rateof interest; The rate of exchange between the future payment and current payment Example; Deposit $100 today and receive $110, then pure rate of return would be 10% (110/100 – 1) This concept assumes there is no inflation and risk.
- 47. Some Terminologies continued… NominalRate of return; The minimum rate of return that an investor must receive from it’s risk free investment. Example; Pure rate 10% and if inflation rate is 5%, then nominal rate of return would be 15%. So, Nominal rate of return = PRR + Inflation
- 48. Risk premium As aninvestor you must be compensated addtionally due to the uncertainty you are bearing. The additional return added to the nominal, risk-free interest rate is called Risk Premium. Risk Premium = Required rate of return – Nominal rate
- 49. Required Rate ofReturn It is the minimum rate of return that a Company must offer the investors in order to fully compensate for putting money into a particular security or project due to; i. The time the funds are committed, ii. The expected rate of inflation and iii. The uncertainty of the future payments RRR = NRR(PRR+Inflation) + Risk premium
- 50. General Types ofRisk 1. Business Risk 2. Financial Risk 3. Liquidity Risk- i. Time to convert ii. Certainty of investment recovery
- 51. Business Risk &Financial Risk Income Statement Sale 100000 -COGS/Purchase price 60000 GP 40000 -OE ( S & Adm Ex) 30000 EBIT )Earning Before IT) 10000 -Interest 5000 EBT 5000 Business Risk Area Financial Risk Area
- 52. 4. Exchange rateRisk-The risk that changes in currency exchange rates cause the value of an investment to decline Example Investment in NYSE-1000 shares @ $10,000 when exchange rate of Taka & dollar was BDT95.00 One year later 1000 shares can be sold for $12,000. But exchange rate of Taka & dollar becomes BDT-100.50 Now, Investor in USA will receive Lower HPR than the investor in Bangladesh. Or if reverse happened. Suppose, exchange rate decreases to Tk.96/dollar. Then situation would be different for BD investor. 5. Country/Political Risk: The risk that is related with country specific risk or due to domestic events – such as political uncertainty, financial troubles, or natural disasters like Covid-19 – will weaken a country’s financial markets.
- 53. Math Holding Period Return(HPR) Holding Period Yield (HPY) Annual Holding Period Return (AHPR) Annual Holding Period Yield (AHPY)
- 54. Holding Period Return(HPR) For investments, the Holding Period Return (HPR) refers to the total return earned from an investment or an investment portfolio over the holding period, that is, the period for which the asset or portfolio was held by the investor. The holding period can be anything such as 1 day, 1 month, 6 months, 1 year, 5 years and so on.
- 55. Example; If you buyan asset now at $100 and sell it at $120 after 2 years, the holding period return will be (120/100) = 1.20. HPR = (Ending value of investment ÷ Beginning value of Investment)
- 56. Holding Period Yield= (HPR – 1)X100 Example; HPY = (1.20-1.0)x100 = 20% AHPR = (HPR) = (1.2)1/2 [n=2 years) =1.0954 AHPY = (HPR) -1 = 1.0954-1 =0.0954 =9.54%
- 57. Some problems forsolutions 1.Mr. X purchased 2000 shares of Bata Shoe Company at Tk. 60 each one year back. The share can be sold now for @Tk. 70. And the company also will pay 20% cash dividend on face value which is Tk. 10 each. Calculate ; i. HPR, HPY, AHPR, AHPY
- 58. 2. Mr. Ypurchased 5000 shares of AB Bank Ltd. at Tk. 40 each two year from now. During this time the bank has paid 10% cash dividend and 20% stock dividend. The market price of the share is Tk. 30 each. Consider that, the face value of the share is Tk. 10. Calculate ; i. HPR, HPY, AHPR, AHPY
- 59. 3. Mr. Zpurchased 15000 shares of Prime Finance Ltd. at Tk. 25 each 6 month from now. During this time the company has paid 20% cash dividend and 30% stock dividend. The market price of the share is Tk. 16 each. Consider that, the face value of the share is Tk. 10. Calculate ; i. HPR, HPY, AHPR, AHPY
- 60. Expected rate ofreturn The return that is expected to be earned on a given investment each period over a time horizon. Where, Pi = Probability of return of individual security Ri = Possible return of individual security
- 61. Examples; Situation -1; Under perfectcertainty; When investor is absolutely certain about return on investment. If the investor expects 10% certain return on its investment
- 62. Solution 1; P1 =1.0, under certain possibility Ri = 10% = 0.10 E(Ri) = (P1)(R1) = 1.0 X 0.10 = 0.10 = 10%
- 63. Situation -2; Under uncertainty;When investor is not absolutely certain about return on investment. Suppose the investor expects 10% return on its investment, but possibility is 50%.
- 64. Solution 2; P1 =0.50, since probability is 50% Ri = 10% = 0.10 E(Ri) = (P1)(R1) = 0.50 X 0.10 = 0.05 = 5%
- 65. Situation-3 Solution; E(Ri) = Economic ConditionProbabi lity Rate of return Strong Economy, No inflation 15% 20% Weak Economy 15% -20% Normal Economy 70% 10% Economic Condition Pi Ri PiXRi Strong Economy, No inflation 0.15 0.20 0.03 Weak Economy 0.15 -0.20 -0.03 Normal Economy 0.70 0.10 0.07 E(Ri) =0.07=7 %
- 66. Risk of expectedrate of return Variance This is the difference between the actual result and the expected one. It measures how far a set of numbers are spread out from their average value Greater the dispersion of expected return, greater the uncertainty or risk of the investment.
- 67. Standard Deviation; Standard deviationis a basic mathematical concept that measures volatility in the market or the average amount by which individual data points differ from the mean. Simply put, standard deviation helps determine the spread of asset prices from their average price. It is the square root of the Variance.
- 68. KEY TAKEAWAYS • Oneof the most common methods of determining the risk an investment poses is standard deviation. • Standard deviation helps determine market volatility or the spread of asset prices from their average price. • When prices move wildly, standard deviation is high, meaning an investment will be risky. • Low standard deviation means prices are calm, so investments come with low risk.
- 69. Co-efficient of Variation; Ifthe conditions for two investment alternatives are not similar-that is, if there are major differences in expected rates of return- then only variance & standard deviation could be misleading to measure the degree of risk of investment.
- 70. Under this circumstances,it is necessary to use a measure of relative variability to indicate per unit of expected return. Co-efficient of Variation is a widely used relative measure. Formulae; CV = Standard deviation/Expected return
- 71. What does theco-efficient of variation tell us? The co-efficient of variation (CV) indicates the size of a standard deviation in relation to its mean. The higher the co-efficient of variation, the greater the dispersion level around the mean.
- 72. Applications of theCoefficient of Variation COV is used to analyze the risk of per unit of return of an investment When used to evaluate investment risk, COV can be interpreted similarly to the standard deviation in Modern Portfolio Theory (MPT). But the COV is arguably a better overall indicator of relative risk when it's used to compare different securities.
- 73. The COV's mainadvantage is its applicability to any given quantifiable data, thus paving the way for a comparative analysis between two unrelated entities. This quality separates COV from a standard deviation analysis, which cannot facilitate a meaningful comparison between two independent variables.
- 74. For example, supposetwo different stocks offer different returns, with each exhibiting a different standard deviation. Specifically, let's assume Stock A has an expected return of 15% with a standard deviation of 10%, while Stock B has an expected return of 10% coupled with a 5% standard deviation. In this scenario, the COV for Stock A is 0.67 (10%/15%), while the COV for Stock B is 0.5 (5%/10%). Simply put, the data suggests that Stock B is a superior investment from a risk-based perspective.
- 75. The Bottom Line •The co-efficient of variation is a simple way to compare the degree of variation from one data series to another. It can be applied to pretty much anything, including the process of picking suitable investments. • Generally speaking, a high CV indicates that the group is more variable, whereas a low value would suggest the opposite.
- 82. Exercise-01 Year Annual rateof return 2006 7% 20007 11 2008 -4 2009 12 20010 -6
- 83.
- 84. Exercise-03 Possible return Probability 60% 15 -30 10 -105 20 40 40 20 80 10
- 87. Exercise for practice Chapter-1 ReferenceBook- “Investment Analysis and Portfolio Management” By, Frank K. Reilly Keith C. Brown 12th Edition or Latest