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Investment Overview Investment: Find the business worth dollar and buy it in 50 cents

Investment Overview Investment: Find the business worth dollar and buy it in 50 cents. Investment Characteristics. Commitment of funds currently available or that will be available in future Acquisition of land , house or shares (physical or financial assets)

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Investment Overview Investment: Find the business worth dollar and buy it in 50 cents

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  1. Investment OverviewInvestment: Find the business worth dollar and buy it in 50 cents

  2. Investment Characteristics • Commitment of funds currently available or that will be available in future • Acquisition of land , house or shares (physical or financial assets) • Both type of assets will give certain benefit in future (interest, appreciation, dividend) • Investment is postponed consumption

  3. Trade off between current and future consumption

  4. Questions • Why should a person postpone his/her present consumption? Answer: Inflation erodes wealth • How much large the return must be to attract investment? Answer: investor's required rate of return would be an aggregate of the risk-free real rate, expected rate of inflation, and risk premium

  5. Speculators

  6. Benefits of Speculation • They essentially provide liquidity for the securities and often match the demand and supply of the market. A. positive news on a firm may attract a large demand for the stock. In the absence of any sellers, the price will shoot up. Some speculators may take a different view and willing to sell the stock to meet the excess demand of the market

  7. Benefits of Speculation • B. mutual fund may wants to sell 1 lakhs shares of a company. If there are limited buyers for the stock, the stock price would crash. Again, speculators would buy the stock in anticipation of selling the same at a small profit once the demand for the stock picks up in the market.

  8. Expected Risk-Return Tradeoff

  9. General Investment Decision Process • A typical investment decision undergoes a five-step procedure 1) Determine the investment objectives and policy 2) Undertake security analysis 3) Construct a portfolio 4) Review the portfolio 5) Evaluate the performance of the portfolio

  10. 1. Determine Investment Objective and Policy • Objective: Return Target. Example 12% return against risk-free rate of 9% Risk Target: 80% below market risk • Policy : • Some avoid Derivatives • Some use both equities and derivative to hedge risk • Some invest in tax exempt policy

  11. 2. Undertake security analysis • Three stages: a) Economic Analysis b) Analysis of broad trends of industry c) Fundamental of specific companies

  12. 3. Portfolio Construction • Allocate wealth into different stocks • Main goal diversification: Diversification does not mean owning more than one stock but stock whose future performance is not highly correlated • Portfolio is not done once and for all • It is constructed over a period of time

  13. 4. Portfolio Revision • Two reasons for liquidation of earlier portfolio and investing in the new portfolio occurs • a) Risk or Expected Return of security change over period of time ( Example tech stocks after dot com bubble) • b) Change in investment objective (Example investment objective of young man and old pensioner)

  14. 5. Evaluate the performance of the portfolio • Portfolio return needs to be evaluated with certain benchmark • Various ratios such as treynor index, sharpe ratio etc is used

  15. Assignment • Visit the broker or Invest firm of your choice. Interview at least 10 people using the Risk Tolerance Questionnaire • Ask them additional question on their knowledge of EPS, Technical analysis, P/E ratio • Put in Excel sheet and submit 25 June

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