1 / 14

Lecture 11

Lecture 11. Return and Risk. Taking a Global Perspective. When investors buy or sell securities in othe countries, they also take exchange rate risk or currency risk Fluctuation in currency value can be either a source of loss or profit

lebony
Télécharger la présentation

Lecture 11

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Lecture 11 Return and Risk

  2. Taking a Global Perspective • When investors buy or sell securities in othe countries, they also take exchange rate risk or currency risk • Fluctuation in currency value can be either a source of loss or profit • If the foregin currency strengthens, your returns will increase or vice versa

  3. An Example • Suppose you purchased 100 shares of IBM at NYSE for $300 each. The dollar-rupee parity was 60 rupees a dollar at the that time. So your total investment in rupees was 100x$300 = $30000 x 60 =Rs.1800,000 • At the end of the year, IBM share price was $310, giving you $10 profit per share, your profit is = 100 x 10 = $1000x60 = Rs.60000 • But the dollar-rupee parity had jumped to 78 rupee a dollar, now your total investment is =100x310 = $31000 x 78 = Rs.2418000 • And your profit is 2,418,000-180,0000 = Rs.618,000 • Or in percentage = 618,000/1800,000 = .339 or 33.9%

  4. Equation for calculating returns from foregin stocks • = [(P1/Po)x(C1/Co)] – 1 • [(310/300)x(78/60)] – 1 • [(1.03) x (1.3)] – 1 • 1.339 – 1 • 0.339 or 33.9% • P1 = Ending share price • Po = Beginning share price • C1 = Ending value of demestic currency • Co = Beginning value of domestic currency

  5. Risk • Any investment involves some degree of uncertainty about future returns • Risk arises out of variability in returns • If an asset has no variability in returns, the assets is considered to be risk free like one year T-bills

  6. Sources of Risk • A. Interest rate risk = variability in returns of securities resulting from changes in interest rates • Securities prices move inversely with interest rates [why]?

  7. Interest rates and returns • 1. Increase in interest rates increases the required rate of return •  RRR=  Rf+Risk premium which reduces the prices of the securities (intrinsic value) • 2. It increases cost of borrowing and hence cost capital • 3. It reduces money supply which lower demand for securities and resultantly prices fall-

  8. Sources of Risk • Market risk : variability in returns due to fluctuations in aggregate market • Recession, wars etc • Inflation risk • when purchasing power declines. • Inflation also leads to hike in interest rates because lenders demand more to compensate themselves for loss in purchasing power • Business risk = the risk of doing business in a particular industry. Like OGDC has a unique risk of falling oil prices

  9. Sources of Risk • Financial risk = It is associated with the use of debt financing by companies. The larger the financial leverage, the larger will be the variability in returns • Liquidity Risk = Whether a particular security can be sold quickly and without price concession in the secondary market. • Exchange risk = for international investors, a source of risk come from exchange rate fluctuation

  10. Sources of Risk • Country Risk = For international investors, economic and political stability, law and order situation are important consideration in the investment decision

  11. Measuring Risk • The most commonly used measure of risk for securities is standard deviation • SD measure the total risk of a security or a portfolio • It measure deviations of each observation from the arithmetic mean

  12. Standard Deviation

  13. Interpretation • The 5.89 SD means that the security return can fluctuate between +/-5.89 from the mean value of 16% • More specifically, the return can fluctuate between 16 - 5.89 = 10.11 or 16 + 5.89 = 21.89 • Your return could fall to as low as 10.11% or could rise to 21.89 %

  14. Realized Returns and risk from Investing

More Related