Assignment (1) Investment finance ch#01.pdf

Assignment of finance Bringham book very helpful

1. ASSIGNMENT
CHAPTER. 01
SUBMITTED TO:
SIR M.ARSHAD
SUBMITTED BY
ABDUL SAMAD

2. INVESTMENT

3. Investment
Investment is the allocation of
resources with the expectation of
generating income or profit.
It involves financial instrument.
➢Stocks
➢Bonds
➢Real Estate
➢Its value will appreciate over time. or it will
yield returns in the form of
❖Dividends
❖Interest
3

4. Portfolio Investment.
Refers to the allocation of assets such as
stocks, bonds, mutual funds, or other
securities into a diversified collection.
Stock market
20%
.
Real Estate 20% Bonds 20% Mutual Funds

5. Riskreferstotheuncertaintyor
variabilityofreturnsassociatedwith
aninvestment.
➢Highertherisk,higherreturns
➢Lowertherisk,lowerreturns
❖Types
❖BusinessRisk
❖FinancialRisk
❖LiquidityRisk
❖CountryRisk
RISK

6. Businessrisk.
Thepossibilitythatacompany's
operationsorcompetitiveposition
maybenegativelyimpactedby
internalorexternalfactors,suchas
changesinmarketdemand,
competition,ortechnology.
Financialrisk.
Theriskrelatedtoacompany's
financialstructure,includingitsuseof
debt.Itencompassestheriskof
insolvencyorinabilitytomeet
financialobligationsduetofactorslike
highdebtlevels,interestrate
fluctuations,orcreditrating
downgrades.
TYPES

7. RISK
LIQUIDITYRISK.
THERISKTHATACOMPANYMAYNOTBEABLETO
MEETITSSHORT-TERMFINANCIALOBLIGATIONS
DUETOALACKOFLIQUIDASSETSORTHE
INABILITYTOQUICKLYCONVERTASSETSINTO
CASHWITHOUTSIGNIFICANTLOSSINVALUE.
COUNTRYRISK.
THERISKASSOCIATEDWITHINVESTINGOR
DOINGBUSINESSINAPARTICULARCOUNTRY,
ARISINGFROMPOLITICAL,ECONOMIC,SOCIAL,
ORREGULATORYFACTORS.ITINCLUDESRISKS
SUCHASEXCHANGERATEFLUCTUATIONS,
POLITICALINSTABILITY,ORCHANGESIN
GOVERNMENTPOLICIES.

8. TYPES OF RISK
➢Market Risk:
The potential for investment losses due to market fluctuations.
➢Credit Risk:
The possibility that a bond issuer will default on payments.
➢Inflation Risk:
The risk that inflation will erode investment returns.
➢Interest Rate Risk:
The impact of changing interest rates on the value of bonds and
other fixed-income investments
➢Risk Premium:
This is the extra return investors require on an investment to
compensate them for the risk associated with it.
It's essentially the return over and above the risk-free rate

9. RETURN
Thisisthegainorlossgeneratedonan
investmentoveraspecificperiodof
time,expressedasapercentageofthe
investment'sinitialcost.Higher
returnsareusuallyexpectedfor
investmentswithhigherrisk.
❖RiskHigh,ReturnHigh
❖RiskLow,ReturnLow

10. TYPES OF RETURN
NominalReturn.
Therawreturnofaninvestmentoveraperiod,notadjusted
forfactorslikeinflation.
RealReturn.
Thenominalreturnadjustedforinflation,reflectingthetrue
purchasingpowerofthereturns.

11. MEASURES OF RETURN
❖Standarddeviation.
Thismeasuresthedispersionorvolatilityofreturns
aroundthemean.Ahigherstandarddeviationindicates
highervolatilityandthushigherrisk
❖Beta.
Betameasuresthesensitivityofaninvestment'sreturns
relativetothereturnsofabenchmarkindex(suchasthe
s&p500).Abetagreaterthan1indicateshigher
volatilitythanthemarket,whileabetalessthan1
indicateslowervolatility.

12. REQUIRED RATE
OF RETURN
Minimumreturnaninvestor
expectstoreceiveforan
investment,consideringthe
riskinvolved.
12

13. Calculation OF RRR.
ThecalculationoftheRRRcaninvolve
variousfactors,includingtherisk-freerate,
theinvestment’sriskpremium,andother
adjustmentsforspecificcircumstances.
➢THETIMEVALUEOFMONEYDURINGTHE
PERIODOFINVESTMENT.
➢THEEXPECTEDRATEOFINFLATION
DURINGTHEPERIOD
➢THERISKINVOLVED
THESUMMATION OFTHESETHREE
COMPONENTSISCALLEDTHEREQUIRED
RATEOFRETURN.
13

14. REAL RISK FREE RATE
Therealrisk-freerate(RRFR)isthebasic
interestrate,assumingnoinflationandno
uncertaintyaboutfutureflows.
14

15. EXPECTED RATE OF RETURN
Riskistheuncertaintythataninvestment
willearnitsexpectedrateofreturn.
➢Itmaybedifferfromrealrateofreturn.
➢Itisanticipatedrate.
Calculation.
=Probabilityofreturns*Possiblereturns
15

16. EXPECTED RATE OF INFLATION
Theexpectedrateofinflationreferstothe
anticipatedaverageannualrateatwhichpricesfor
goodsandserviceswillriseoveraspecifiedperiod.
Thisrateiscrucialforinvestorsasitaffectsreal
returnsoninvestments,interestrates,andoverall
economicconditions.
➢Itisanticipatedratenotrealrateofinflation.
16

17. Real Rate of Inflation
Current rate of inflation
❖17.4%
➢A broad rise in the prices of goods and
services across the economy over time,
eroding purchasing power for both
consumers and businesses.
17

18. THANK YOU
18