Return&Risk - Final Na to! Pramis.

8/17/2019 Return&Risk - Final Na to! Pramis.

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RETURNAND

RISK GROUP 1

Skibba-Demape-Roche-Santiago-Ferrer-Capuno-Skibba-Demape-Roche-Santiago-Ferrer-Capuno

Skibba-Demape-Roche-Santiago-Ferrer-Capuno-Skibba-Demape-Roche-Santiago-Ferrer-Capuno


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**Investment – is simply any asset into which fn!scan "e place! with the e#pectation that it will$ene%ate positi&e income an!'o% p%ese%&e o% inc%ease

its &ale(

RETURNS) is the le&el of p%o*t f%om an in&estment ))) that is+the %ewa%! fo% in&estin$(

The %et%n on an in&estment may come f%om mo%e than oneso%ce( The most common so%ce is pe%io!ic payments+ sch as!i&i!en!s o% inte%est( The othe% so%ce of %et%n is the chan$e inthe in&estment,s p%ice(

-e call these two so%ces as of %et%n as CURRENT INCOME an!CAPITAL GAINS (CAPITAL LOSSES).


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IN.O/EIncome may ta0e the fo%m of !i&i!en!s f%om stoc0s o%

mtal fn!s+ o% inte%est %ecei&e! on "on!s( To "econsi!e%e! income+ it mst "e in the fo%m of cash o% "e%ea!ily con&e%ti"le into cash(In&estment,s income is sally cash that in&esto%spe%io!ically %ecei&e as a %eslt of ownin$ an in&estment(

PURCHASE PRICE (beg of thee!")

# $%&&& # $%&&&

.ash %ecei&e!

1st 2a%te% 13 3

4n! 2a%te% 43 3

5%! 2a%te% 43 3

6th 2a%te% 53 143

Total income 7fo% the yea%8 93 143

Sale p%ice 7en! of the yea%8 : 1+133 : ;


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.APITA= GAINS 7=OSSES8Amont "y which the p%ocee!s f%om the sale

of an in&estment e#cee! its o%i$inal p%chasep%ice is a capital $ain( If an in&estment sells fo%less than its o%i$inal p%chase p%ice+ it %eslts acapital loss(

Ret"n AAA

Income : 93 : 143

.apital $ain loss8 133 7638

Total %et%n : 193 : 93

IN'ESTMENTS


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>ISTORI.A= PER?OR/AN.E

/ost people %eco$ni@e that ft%e pe%fo%mance is not$a%antee! "y past pe%fo%mance+ "t past often p%o&i!e a

meanin$fl "asis fo% ft%e e#pectations( A commonp%actice in the in&estment wo%l! is to loo0 closely at thehisto%ical %eco%! when fo%mlatin$ e#pectations a"ot theft%e(

>ow !o in&esto%s !istin$ish in&estments that oe%s hi$h %et%ns

than those in&estments that has low %et%ns B

ECPE.TED RETURN

?t%e mate%s when we ma0e in&estment !ecisions( The%efo%e+ e#pecte! %et%n is a &ital meas%e ofpe%fo%mance( It,s what yo thin0 the in&estment will ea%nin the ft%e that !ete%mines what yo shol! "e willin$ topay fo% it(


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=EE= O? RETURN

?A.TORS Inte%nal cha%acte%istics E#te%nal fo%ces


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TI/E A=UEO? /ONE

ANDRETURNS F


8/29

Th%ee possi"le "ene*t)cost %elationships an! thei%inte%p%etations follow1( If the p%esent &ale of the "ene*ts st e2als the cost+

yo wol! ea%n a %ate of %et%n e2al to the !iscont

%ate(

4( If the p%esent &ale of "ene*ts e#cee!s the cost+ yowol! ea%n a %ate of %et%n $%eate% than the !iscont %ate(

5( If the p%esent &ale of "ene*t is less than the cost+ yo

wol! ea%n a %ate of %et%n less than the !iscont %ate(

Nomn!+ Ret"n , is the actal %et%n that the in&estment

ea%ns e#p%esse! in c%%ent peso(Re!+ R!te of Ret"n , e2als the nominal %et%n minsthe inHation %ate+ an! it meas%es the inc%ease inp%chasin$ powe% p%o&i!e! "y an in&estment(Re-"e Ret"n , %ate of %et%n that flly compensatesfo% an in&estment,s %is0(

REA=+ RISK)?REE+ REUIRED RETURN


9/29

The "e-"e "et"n on any in&estment is consists of th%ee "asic components

the %eal %ate of %et%n+ an e#pecte! inHation p%emim+ an! a %is0 p%emim(

Re-"e "et"n / Re!+ "!te 0 E12e3te In4!ton 0 Rs5

2"emmon nvestment of "et"n 2"emm fo"

nvestment E12e3te In4!ton P"emm , %ep%esents the a&e%a$e %ate of inHatione#pecte! in the ft%e( Rs56f"ee R!te , is calclate! "y a!!in$ the %eal %ate of %et%n an! e#pecte!

inHation p%emim(

Rs56f"ee "!te / Re!+ "!te of "et"n 0 E12e3te n4!ton2"emm

Rs5 P"emm , %ep%esents an o&e%all %is0 of an in&estment which &a%ies

!epen!in$ on speci*c isse an! isse% cha%acte%istics( Isse 3h!"!3te"st3sa%e the type of the in&estment 7stoc0+ "on!s+ etc(8+ its mat%ity+ an! its feat%es(Isse" 3h!"!3te"st3s a%e in!st%y an! company facto%s sch as the line of"siness an! *nancial con!ition of the isse%(

Re-"e "et"n / Rs56f"ee 0 Rs5 2"emm on nvestment R!te fo" nvestment


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>ol!in$ Pe%io! Ret%n F


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Ho+ng Pe"o

) Is the pe%io! of time o&e% which an in&esto% hol!s a $i&en

sec%ity(

Ho+ng Pe"o Ret"n

) The tot!+ "et"n ea%ne! f%om hol!in$ an in&estment

fo% a speci*e! time( Gene%ally e#p%esse! in pe%centa$e(

Tot!+ Ret"n

Income .apital Gains 7losses8


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Ho+ng Pe"o Ret"n (formula)

>PR

Income !%in$ pe%io! L capital $ains 7loss8!%in$ pe%io!

Initial ale


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1( -hat is the >PR fo% an in&esto% who "o$ht a stoc0 a yea%a$o at :M3 an! %ecei&e! :M in !i&i!en!s o&e% the yea%+ if

the stoc0 is now t%a!in$ at :PR 53

4( A yea% a$o+ Gwapo "o$ht a stoc0 at :133 an! %ecei&e!:43 in !i&i!en!s o&e% the pe%io!( If the stoc0 is nowt%a!in$ at :PRB

>PR 7&8

>PR :43 L :63

:133


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-hich in&estment pe%fo%me! "ette%B /tal fn! C that

was hel! fo% th%ee yea%s+ !%in$ which it app%eciate! f%om

:133 to :1M3 an! p%o&i!e! :M in !ist%i"tions+ o% /tal?n! that went f%om :433 to :543 an! $ene%ate! :13

in !ist%i"tions o&e% fo% yea%sB

>PR fo% ?n! C M L 71M3 – 1338Q ' 133 MM

>PR fo% ?n! 13 L 7543 – 4338Q ' 433


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Ann!+9e HPR (formula)

Annali@e! >PR

7Income L .apital Gains 7losses8Q ' Initial aleL11't – 1

7>PR L 181't – 1O% simply+

whe%e+t no( of yea%s


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-hich in&estment pe%fo%me! "ette%B /tal fn! C that was hel! fo%

th%ee yea%s+ !%in$ which it app%eciate! f%om :133 to :1M3 an!

p%o&i!e! :M in !ist%i"tions+ o% /tal ?n! that went f%om :433 to:543 an! $ene%ate! :13 in !ist%i"tions o&e% fo% yea%sB

>PR fo% ?n! C M L 71M3 – 1338Q ' 133 MM

>PR fo% ?n! 13 L 7543 – 4338Q ' 433 PR fo% ?n! C 73(MM L 181'5 – 1 $:.;78

Annali@e! >PR fo% ?n! 73(


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To con&e%t %et%ns fo% %e$la% time pe%io!s 7such as quarters

or years) into a ho+ng 2e"o "et"n<

>PR 71 L %18 # 71 L %48 # 71 L %58 # 71 L %68Q – 1

whe%e +%1+ %4+ %5 an! %6 a%e pe%io!ic %et%ns(

o% stoc0 po%tfolio ha! the followin$ %et%ns in the fo%2a%te%s of a $i&en yea% L9+ )M+ Low !i! itcompa%e a$ainst the "enchma%0 in!e#+ which ha! total%et%ns of 14 o&e% the yea%B

E#ample

>PR fo% yo% stoc0 po%tfolio 71 L 3(398 # 71 – 3(3M8 # 71 L 3(3


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>PR

Income !%in$ pe%io! L capital $ains 7loss8!%in$ pe%io!

Initial ale

Annali@e! >PR 7>PR L 181't – 1

Holding PeriodReturn

Annualized Holding PeriodReturn

To convert returns for regular time periods into aholding period return

>PR 71 L %18 # 71 L %48 # 71 L %58 # 71 L %68Q – 1


19/29

=e+ , a p%esent)&ale)"ase! meas%e to !ete%mine thecompon! annal %ate of %et%n ea%ne! on in&estments hel!

fo% lon$e% than one yea%( It can also "e !e*ne! as the!iscont %ate that p%o!ces a p%esent &ale of "ene*ts ste2al to its cost( Once yo 0now the e++ yo can !eci!e whethe% anin&estment is accepta"le( If the yield on an investment isequal to or greater than the required return, then the

investment is acceptale! An investment "ith a yieldelo" the required return is unacceptale!

Rs5 , is the nce%tainty s%%on!in$ the actal %et%n that anin&estment will $ene%ate(

Rs56"et"n t"!eo> , is the in&esto%,s attempt to minimi@e%is0 fo% a $i&en le&el of %et%n o% to ma#imi@e %et%n fo% a $i&enle&el of %is0(


20/29

So"3es of "s5< $. sness "s5 , is a !e$%ee of nce%tainty associate!with an in&estment,s ea%nin$s an! the in&estment,s a"ility to

pay the %et%ns 7inte%est+ p%incipal+ !i&i!en!s8 owe! in&esto%s(E# "siness owne%s may %ecei&e no %et%n if the *%m,sea%nin$s is not a!e2ate to meet o"li$ations( ?. @n!n3!+ "s5 , the nce%tainty s%%on!in$ a *%m,sa"ility to meet its *nancial o"li$ations "ecase it has "o%%owe!money( E# ina"ility to meet !e"t o"li$ations col! %eslt in

"siness fail%e an! in losses fo% "on!)hol!e%s an!stoc0hol!e%s( 7. P"3h!sng 2oe" "s5 , the chance that nanticipate!chan$es in p%ice le&els 7inHation o% !eHation8 will a!&e%selyaect in&estment %et%ns( B. Inte"est "!te "s5 , is the chance that chan$es in

inte%est %ates will a!&e%sely aect a sec%ity,s &ale(Gene%ally+ the higher the interest rate, the lower the value ofan investment vehicle, and vice versa. :. L-t "s5 , the %is0 of not "ein$ a"le to sell 7o%li2i!ate8 an in&estment 2ic0ly an! at %easona"le p%ice( Ali2i! in&estment is one that in&esto%s can sell 2ic0ly withotha&in$ an a!&e%se impact on its p%ice(


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. T!1 "s5 , the chance that .on$%ess will ma0enfa&o%a"le chan$es in ta# laws( E#ample Un!esi%a"le

chan$es in ta# laws incl!e elimination of ta# e#emptions+limitation of !e!ctions+ an! inc%ease in ta# %ates( ;. Event "s5 , occ%s when somethin$ happens to acompany that has a s!!en an! s"stantial impact on its*nancial con!ition( It in&ol&es an ne#pecte! e&ent that hasa si$ni*cant an! sal imme!iate eect on the n!e%lyin$

&ale of an in&estment( E#ample annoncement "y AppleInc( that its fon!e% an! .EO+ Ste&e o"s+ was ta0in$ a lea&eof a"sence !e to health conce%ns( D. M!"5et "s5 , is the %is0 that in&estment %et%ns will!ecline "ecase of ma%0et facto%s in!epen!ent of the $i&en

in&estment( /a%0et %is0 actally em"o!ies a nm"e% of!ie%ent %is0s p%chasin$ powe% %is0+ inte%est %ate %is0+ an!ta# %is0( E#amples political+ economic+ an! social e&ents+ aswell as chan$es in in&esto% tastes an! p%efe%ences(


22/29

St!n!" ev!ton , the most commonsin$le in!icato% of an asset,s %is0( It meas%es the !ispe%sion7&a%iation8 of %et%ns a%on! an asset,s a&e%a$e o% e#pecte!%et%n(

RISK O? A SING=E ASSET

F (Ret%n fo% otcome t – A&e%a$e o%e#pecte! %et%n)?

Total nm"e% of otcomes ) 1

n

t)1SD

Fn

t)17 %t – % 8

4

n)1

SD


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ea% 7t8 E##on/o"il Pane%a %ea!

1;;; 14(< 16(9

4333 13(4 1;5(9

4331 )V(< 149(4

4334 )9(; 55(9

4335 43(< 15(M

4336 49(1 4(3

433M 11(9


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=e!"(t)

($)Ret"n

("t) 6 8

(?)Ave"!ge

Ret"n 8

(7)($), (?)

8

(B)(7)?

81;;; 14(< 11(V 3(; 3(9

4333 13(4 11(V )1(M 4(1

4331 )V(< 11(V )1;(5 5V5(5

4334 )9(; 11(V )43(< 645(54335 43(5 11(V 9(; V;(M

4336 49(1 11(V 1


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=e!"(t)

($)Ret"n

("t) 6 8

(?)Ave"!ge

Ret"n 8

(7)($), (?)

8

(B)(7)?

81;;; 16(9 66(6 )4;(< 9VV(5

4333 1;5(9 66(6 16;(6 44541(1

4331 149(4 66(6 9V5(9 V349(1

4334 55(9 66(6 )13(< 115(34335 15(M 66(6 )53(; ;M5(V

4336 4(3 66(6 )64(6 1V;


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>ISTORI.A= RETURNS ANDRISK

ASSESSING RISK

RISK)RETURN .>ARA.TERISTI.S O? A=TERNATIEINEST/ENT E>I.=ES


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AN A..EPTA=E =EE= O? RISK

Th"ee b!s3 "s5 2"efe"en3es 7%is0)in!ie%ent+ %is0)a&e%se+ an! %is0)see0in$8

?o% the %is0)in!ie%ent in&esto%+ the %e2i%e! %et%n !oes notchan$e as %is0 $oes f%om #1 to #4( In essence+ no chan$e in %et%n

wol! "e %e2i%e! fo% the inc%ease(

?o% the %is0)a&e%se in&esto%+ the %e2i%e! %et%n inc%eases fo% aninc%ease in %is0( ecase they !o not li0e %is0+ these in&esto%s%e2i%e hi$he% e#pecte! %et%ns to compensate them fo% ta0in$

$%eate% %is0(

?o% the %is0)see0in$ in&esto%+ the %e2i%e! %et%n !ec%eases fo%an inc%ease in %is0( Theo%etically+ "ecase they enoy %is0+ thesein&esto%s a%e willin$ to $i&e p some %et%n to ta0e mo%e %is0(


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If yo% way isn,t wo%0in$+ t%yGOD,S way FF

6EN

Return&Risk - Final Na to! Pramis.

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Transcript of Return&Risk - Final Na to! Pramis.