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According to amity mba project guidelines you have to submit the synopsis after
getting it signed by the guide of the same relevant field .The synopsis should have
the
1
2.
following
Title
of
statement
3.Why
4.Expected
5.Objective
topics
of
is
the
Contribution
of
6.Research
7.Chapter Scheme.
Dear Sir,
Ref: Request for Clearance Letter
the
project
the
problem.
topic
chosen.
from
the
the
study.
study.
methodology.
Yours faithfully,
Derick Mwansa.
Dear Sir,
Ref: Request For Change of Pay Point From Finance Bank To Barclays Bank Account
number 006-1223843
With reference to the above mentioned subject, I write to your office requesting for a change
in the pay point. My preferred pay point is Barclays Bank account number 006-1223843.
Attached is a clearance letter from the Bank Manager, Finance Bank Kabwe.
Yours faithfully,
Derick Mwansa.
Parts of a computer
Windows 7
In this page
System unit
Storage
Mouse
Keyboard
Monitor
Printer
Speakers
Modem
If you use a desktop computer, you might already know that there isn't any single part called
the "computer." A computer is really a system of many parts working together. The physical
parts, which you can see and touch, are collectively called hardware. (Software, on the other
hand, refers to the instructions, or programs, that tell the hardware what to do.)
The following illustration shows the most common hardware in a desktop computer system.
Your system might look a little different, but it probably has most of these parts. A laptop
computer has similar parts but combines them into a single, notebook-sized package.
System unit
The system unit is the core of a computer system. Usually it's a rectangular box placed on or
underneath your desk. Inside this box are many electronic components that process
information. The most important of these components is the central processing unit (CPU), or
microprocessor, which acts as the "brain" of your computer. Another component is random
access memory (RAM), which temporarily stores information that the CPU uses while the
computer is on. The information stored in RAM is erased when the computer is turned off.
Almost every other part of your computer connects to the system unit using cables. The
cables plug into specific ports (openings), typically on the back of the system unit. Hardware
that is not part of the system unit is sometimes called a peripheral device or device.
System unit
Top of page
Storage
Your computer has one or more disk drivesdevices that store information on a metal or
plastic disk. The disk preserves the information even when your computer is turned off.
Nearly all computers today come equipped with a CD or DVD drive, usually located on the
front of the system unit. CD drives use lasers to read (retrieve) data from a CD; many CD
drives can also write (record) data onto CDs. If you have a recordable disk drive, you can
store copies of your files on blank CDs. You can also use a CD drive to play music CDs on
your computer.
CD
DVD drives can do everything that CD drives can, plus read DVDs. If you have a DVD
drive, you can watch movies on your computer. Many DVD drives can record data onto blank
DVDs.
Tip
Floppy disk
Why are these disks called "floppy" disks? The outside is made of hard plastic, but that's just
the sleeve. The disk inside is made of a thin, flexible vinyl material.
Top of page
Mouse
A mouse is a small device used to point to and select items on your computer screen.
Although mice come in many shapes, the typical mouse does look a bit like an actual mouse.
It's small, oblong, and connected to the system unit by a long wire that resembles a tail. Some
newer mice are wireless.
Mouse
A mouse usually has two buttons: A primary button (usually the left button) and a secondary
button. Many mice also have a wheel between the two buttons, which allows you to scroll
smoothly through screens of information.
Mouse pointers
When you move the mouse with your hand, a pointer on your screen moves in the same
direction. (The pointer's appearance might change depending on where it's positioned on your
screen.) When you want to select an item, you point to the item and then click (press and
release) the primary button. Pointing and clicking with your mouse is the main way to
interact with your computer. For more information, see Using your mouse.
Top of page
Keyboard
A keyboard is used mainly for typing text into your computer. Like the keyboard on a
typewriter, it has keys for letters and numbers, but it also has special keys:
The function keys, found on the top row, perform different functions depending on
where they are used.
The numeric keypad, located on the right side of most keyboards, allows you to enter
numbers quickly.
The navigation keys, such as the arrow keys, allow you to move your position within
a document or webpage.
Keyboard
You can also use your keyboard to perform many of the same tasks you can perform with a
mouse. For more information, see Using your keyboard.
Top of page
Monitor
A monitor displays information in visual form, using text and graphics. The portion of the
monitor that displays the information is called the screen. Like a television screen, a
computer screen can show still or moving pictures.
There are two basic types of monitors: CRT (cathode ray tube) monitors and the newer LCD
(liquid crystal display) monitors. Both types produce sharp images, but LCD monitors have
the advantage of being much thinner and lighter.
Printer
A printer transfers data from a computer onto paper. You don't need a printer to use your
computer, but having one allows you to print e-mail, cards, invitations, announcements, and
other material. Many people also like being able to print their own photos at home.
The two main types of printers are inkjet printers and laser printers. Inkjet printers are the
most popular printers for the home. They can print in black and white or in full color and can
produce high-quality photographs when used with special paper. Laser printers are faster and
generally better able to handle heavy use.
Speakers
Speakers are used to play sound. They can be built into the system unit or connected with
cables. Speakers allow you to listen to music and hear sound effects from your computer.
Computer speakers
Top of page
Modem
To connect your computer to the Internet, you need a modem. A modem is a device that sends
and receives computer information over a telephone line or high-speed cable. Modems are
sometimes built into the system unit, but higher-speed modems are usually separate
components.
Cable modem
Synopsis
In order to clarify your thoughts about the purpose of your thesis and how you plan to reach your
research goals, you should prepare a synopsis. A synopsis is a short, systematic outline of your
proposed thesis, made in preparation for your first meeting with your supervisor. It serves to
ensure that your supervisor gets a clear picture of your proposed project and allows him or her to
spot whether there are gaps or things that you have not taken into account.
Your synopsis will work as a kind of protocol for the further steps you need to take to ensure that
your thesis reaches the required academic level and that you finish on time.
Although there are no rigid rules for how a synopsis should look, it must contain:
Background:
Set the stage by addressing the scientific background: How will your proposed research
contribute to the existing body of knowledge? Use your own words and be as specific as
possible.
o
Overall and specific objectives the actions to be taken in order to address the
problem, as described in the lesson of the same name.
Method outline:
What type of study is best suited to support the actions stated in the specific objectives?
What kind of data (qualitative, quantitative) will your study require? What is your geographical
study area and who is your target group(s)? Are there ethical considerations you have to
make? Etc.
Time plan:
In the beginning, a rough timeline showing a plan on how your work will be divided over time.
When is your deadline for e.g. literature search, potential fieldwork (e.g. interviews and/or
questionnaire administration), data analysis, writing and layout? Once your problem
formulation and objectives are approved by your supervisor, all details should be added to
your time plan.
References:
Create a short list of the major references on which your rationale is based. Make sure that
your in-text citations and reference list are completed correctly, both in support of your
subsequent work, but also to demonstrate that you have a serious, scientific and methodical
approach to your work. See how to use references correctly in the lesson of the same name
in the module: Writing process.
At the beginning of your thesis period, your synopsis will be limited in scope and detail, but as
you work your way deeper into your topic and you get a clearer picture of your objectives,
methods and references, the more complete and detailed your synopsis will become.
A rule of thumb is that the length of your synopsis can vary from two to five pages, but the
precise length and exact requirements of your synopsis can vary from institute to institute and
from supervisor to supervisor.
Most study programmes will require that you present a final synopsis before starting data
collection. However, the first version of your synopsis for discussion with your supervisor should
not be an informal draft. Carefully performed work creates respect and motivation and saves a lot
of you and your supervisors time.
A good approach from the very beginning is to establish a practice of how to write headings,
references, names of species, etc. And be consistent. This will help you save time and
importantly, lead to a better overall assessment of your final work.
- See more at: http://betterthesis.dk/getting-started/synopsis#sthash.sfLOEw8C.dpuf
.
Concept of working capital includes meaning of working capital and its nature. Working capital is
the investment in current assets. Without this investment, we can not operate our fixed assets
properly. For getting good profits from fixed assets, we need to buy some current assets or pay
some expenses or invest our money in current assets. For example, we keep some of cash
which is the one of major part of working capital. At any time, our machines may need repair.
Repair is revenue expense but without cash, we can not repair our machines and without
machines, our production may delay. Like this, we need inventory or to invest in debtors and
other short term securities.
On the basis of Concept, we can divide our working capital into two parts:
activities. This concept is also used for preparation of balance sheet. In the vertical form of
balance sheet, we show excess of current assets over current liabilities.
Operating Cycle Concept of Working Capital
In this concept of working capital, we make the operating cycle. In this cycle,
we calculate inventory conversion period. To know this, we can estimate when we need cash for
buying our inventory. We also calculate debtor or receivable conversion period. To know this, we
can estimate when we receive cash from our debtors.
If inventory conversion period is less than debtor conversion period, we have to manage other
sources for buying our inventories. If we buy good on credit, we also take care creditors'
conversion period.
Meaning
Of
Working
Capital
Business organization require adequate capital to establish business and operate their activities.
The total capital of a business can be classified as fixed capital and working capital. Fixed capital
is required for the purchase of fixed assets like building, land, machinery, furniture etc. Fixed
capital is invested for long period, therefore it is known as long-term capital.Similarly, the capital,
which
is
needed
for
investing
in current
assets,
is
called
working
capital.
The capital which is needed for the regular operation of business is called working capital.
Working capital is also called circulating capital or revolving capital or short-term capital. Working
capital is used for regular business activities like for the purchase of raw materials, for the
payment of wages, payment of rent and of other expenses. Working capital is kept in the form of
cash, debtors, raw materials inventory, stock of finished goods, bills receivable etc.
Concept
Of
Working
Capital
Generally, there are two concepts of working capital i.e. gross concept and net concept.
1.Gross
Concept
Of
Working
Capital
According to gross concept, working capital refers to all the current assets and represents the
amount of funds invested in current assets. Thus, gross working capital is the capital invested
incurrent assets. Current assets are those assets which can be converted into cash within the
short-time
Gross
period.
Working
Capital
Total current
assets
In this way, gross working capital refers to the firm's investment in current assets. Gross working
capital represents total of current assets which includes cash in hand, cash at bank,
2.Net
Concept
Of
Working
Capital
According to the net concept, working capital is the excess of current assets over current
liabilities. In other words, the difference between current assets and current liabilities is called net
working
Net
capital.
Working
Capital
= Current
Assets -
Current
liabilities
In this way, net working capital is the difference of current assets and current liabilities.
more at http://www.citeman.com/4897-concept-of-working-capital.html#ixzz44RtdmxcK
Advertisements:
The main components of working capital are :
2.
A reader sheet, filled out by you and signed by your advisor -- original signature
required
3.
A second reader sheet with your name, ID, and department added, but the rest left
blank (Draper provides the second reader)
4.
5.
Guidelines
To receive a masters degree, the Draper Program and GSAS require that you successfully
complete 32 points of course work and write a thesis. Please read the below thoroughly;
these guidelines explain the thesis-writing process and related graduation
requirements. Draper also offers periodic workshops for thesis writers, listed on our News
and Events page. If you then have further questions, please call the office at (212) 998-8070
or email draper.program[at]nyu.edu. To download a pdf of the thesis guidelines, please
click here.
What is a masters thesis?
The masters thesis is a carefully argued scholarly paper of approximately 12,000 13,000
words (roughly 50 pages). It should present an original argument that is carefully documented
from primary and/or secondary sources. The thesis must have a substantial research
component and a focus that falls within arts and science, and it must be written under the
guidance of an advisor. As the final element in the masters degree, the thesis gives the
student an opportunity to demonstrate expertise in the chosen research area.
When should I start thinking about the thesis?
You should be thinking about your thesis, if only abstractly, from your first enrollment in the
Draper Program. At the latest, you should have a clear idea of your topic and have found an
advisor by the end of the semester before the one in which you will complete the thesis (see
the timetable and deadlines chart, below).
Who can be my advisor?
Any regular NYU faculty member can be your thesis advisor, although individual faculty are
not required to advise masters theses. It is your responsibility to find an advisor. Your advisor
will provide general guidance, and will help you refine your topic and develop your argument.
Most students choose faculty members they have worked with in courses. Thesis advisors
must be approved by the Program (along with the thesis topic).
What is the process and protocol?
After doing the initial research on your topic, prepare a 1-2 paragraph abstract, a preliminary
bibliography (approximately ten to fifteen books or journal articles), and a brief outline before
approaching a possible advisor. These will help you to convince your future advisor of the
value and interest of your project. Once a faculty member has agreed to advise you, discuss
your anticipated graduation date and agree on a timetable for meetings and submission of
drafts. It is your responsibility to keep your advisor apprised of your progress.
After you have refined your topic and your advisor has approved it, complete the Application
for Approval of Masters Thesis Topic, have your advisor sign it, and submit it to the Draper
offices. This form must be submitted by the thesis due date for the semester before the one in
which you intend to graduate (e.g., December 16 for May graduation; see the chart, below).
We will notify you via email when your topic has been approved by Draper. Do not start
writing the thesis until you have an advisor who has approved your topic.
In most cases, students and advisors need to meet three or four times: initially, to finalize a
topic, and to review the first or second draft. Keep in mind that your advisor must have
enough time to read and evaluate your work before returning it to you with comments, and
that you must have time to incorporate those comments. Dont expect your advisor to return
your thesis in a day or two, whether it is an early draft or the final copy. It is appropriate to
ask your advisor when you can expect comments, but not to pressure her or him to respond
quickly. You should also be prepared for the possibility that your advisor will request
substantial changes in the thesis. Do not expect that your draft will require only minor
corrections, or that the proposed final version you submit will necessarily be approved without
further changes. It is your responsibility to see that the final copy is free from spelling and
grammatical errors; your advisor is not responsible for line-by-line editing.
HUMAN SUBJECT RESEARCH
Theses involving interviews, surveys, or other research on human subjects often require prior
approval. Because approval can take time, you should begin the application process as early
as possible. Further information is available at http://www.nyu.edu/ucaihs/ or from the Office
of Sponsored Programs, 212-998-2121.
The cover page must include the thesis title, your name, and your student ID number;
your advisors name and a space for her or his approval signature; the month and year the
degree will be conferred (not the month in which the thesis is submitted); and the statement:
A thesis in the John W. Draper Interdisciplinary Masters Program in Humanities and Social
Thought in partial fulfillment of the requirements for the degree of Master of Arts at New York
University (a sample cover page can be found here).
All sources for quotations and paraphrases must be documented. You may use any of
the standard citation styles (MLA, Chicago, social science, etc.), subject to your advisors
approval, provided you consistently follow a single style throughout the thesis.
We prefer unbound theses -- a simple binder clip is sufficient. If you decide to bind
your thesis, please make sure that your original, signed cover page is unbound.
What are the administrative requirements to graduate?
You must be enrolled in the semester in which you graduate, which means you must either
take a course or maintain matriculation. Matriculation is not required during the summer
term. You must also apply for graduation (set your graduation date) using Albert
(www.albert.nyu.edu) within the period the Registrar has specified for that semester
(seehttp://www.nyu.edu/registrar/graduation/apply.html).
How do I submit the thesis?
You must first give a clean copy of the finished thesis to your advisor. After your advisor has
read and approved the thesis, it is your responsibility to submit the final copy, signed by your
advisor on the cover page, to the Draper Program by the deadline listed below. You must also
submit two Thesis Reader Sheets (one signed by your advisor, one blank), a thesis abstract,
and the Draper Exit Questionnaire. Your advisor is the first reader and the Program will
provide a second reader, usually the director or associate director. Students must have met all
graduation requirements, including timely submission of the thesis, to participate in
commencement ceremonies.
What happens after that?
Draper will assign your second reader, generally one of our directors. Once your thesis has
been countersigned by the second reader, we will file the necessary paperwork with the
registrar's office and they will process your graduation. This series of steps takes
approximately one month. Once your degree has been conferred, you will see it appear at the
top of your online transcript. Eight weeks after that, the registrar will mail your diploma to
you, so please be sure that your mailing address is correct in Albert. If you do not receive your
diploma and request a new one, it will incur a fee.
What is a typical thesis-writing timetable?
September - October
October - November
November - December
By December 16th
February - March
April 1
April 16th
Thesis abstract
* Schedule for submission of drafts and approval of the final version is at the advisors
discretion.
Thesis and Graduation Deadlines
Graduation Date Apply for Topic Approval
January
May
September
December 16*
April 16*
August 16*
August 16*
December 16*
April 16*
*Or the next day on which the Draper office is open, should these dates fall on a weekend or holiday.
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Inventory management system is a package of hardware and software tools that helps in
better management of the inventory. It essentially deals in efficiently tracking the item flow in
& out of the inventory, tracking the location of items in the inventory and automating the
bookkeeping responsibilities of warehouses. Though, different inventory management
systems can vary a lot, depending on the functionalities they offer to the users, almost all
such systems must have the following four key constituents:
1. Barcode printer: Barcodes greatly simplify the item automating process. Different
items in the inventory are assigned different items. These barcodes are printed on the
item cover on their arrival in the inventory with the help of barcode printers. These
printers are available in different sizes to adhere to varying printing needs of differentsize organizations. For example, a small company will have lower barcode printing
needs due to less volume of products, whereas a larger organization will have more
printing needs due to a higher volume of items.
2. Barcode scanner: To scan the barcodes printed on items it is imperative to have
barcode scanners. Independent of the application type & the business environment,
scanners are used for reading the barcode printed on the items. The read value is
entered directly to the computer system for further processing.
3. Inventory management software solution: This is the heart of any automated
inventory management system. The software maintains a database of all the items
available in the stock, updating it, real-time with every new stock entry and dispatch.
It is very important that the business owner is sure about the management software
he/she chooses as there are many such solutions available, all of which might not
integrate with an organization that well. It is advisable that one selects an inventory
management software tool from a reliable vendor only. GOIS-Pro, Inventoria,
Fishbowl are a few reputed inventory management software solutions.
4. Mobile computers: Computers are required to host the management solutions, and
display the inventory data to the managers. However, usual computers cannot perform
the task that well because mobility is a key criterion for warehouse management
computers. Hence, mobile computers with Wi-Fi accessibility are a must for every
good inventory management system. Some management solutions also offer inventory
access through mobile devices like iPhone, iPads, Android smartphones & tablets, etc.
You can opt for these devices if you have such solutions; this will add to the mobility
attribute and allow you access to vital inventory data even when you are on the move.
The four constituents mentioned above are by no means the complete list of constituents for a
good inventory management system; instead they are only the main constituents that every
good system must possess. Additionally, advanced management systems may include
constituents like barcode labels, Automated Replenishment Routines, Inter-Warehouse &
Inter-Company Transfers, Backorder Management systems, etc. for enhancing their
efficiency as inventory management system.
PORTFOLIO MANAGEMENT
All investors:
Aim to maximize economic utilities (Asset quantities are given and fixed).
Can lend and borrow unlimited amounts under the risk free rate of interest.
Assumptions of CAPM[edit]
All investors:[7]
1. Aim to maximize economic utilities (Asset quantities are given and fixed).
2. Are rational and risk-averse.
3. Are broadly diversified across a range of investments.
4. Are price takers, i.e., they cannot influence prices.
5. Can lend and borrow unlimited amounts under the risk free rate of interest.
6. Trade without transaction or taxation costs.
7. Deal with securities that are all highly divisible into small parcels (All assets are perfectly
divisible and liquid).
8. Have homogeneous expectations.
9. Assume all information is available at the same time to all investors.
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Instructor: Jay Wagner
Learn about the Capital Asset Pricing Model (CAPM), one of the foundational models in finance.
We'll look at the underlying assumptions, how the model is calculated, and what it can do for you.
1. Investors are wealth maximizers who select investments based on expected return and
standard deviation.
2. Investors can borrow or lend unlimited amounts at a risk-free (or zero risk) rate.
3. There are no restrictions on short sales (selling securities that you don't yet own) of any
financial asset.
4. All investors have the same expectations related to the market.
5. All financial assets are fully divisible (you can buy and sell as much or as little as you like)
and can be sold at any time at the market price.
6. There are no transaction costs.
7. There are no taxes.
8. No investor's activities can influence market prices.
9. The quantities of all financial assets are given and fixed.
Obviously, some of these assumptions are not valid in the real world (most notably no transaction
costs or taxes), but CAPM still works well, and results can be adjusted to overcome some of
these assumptions.
The capital asset pricing model (CAPM) is a widely-used finance theory that
establishes a linear relationship between the required return on an investment
and risk. The model is based on the relationship between an asset's beta,
the risk-free rate (typically the Treasury bill rate) and the equity risk
premium (expected return on the market minus the risk-free rate).
At the heart of the model are its underlying assumptions, which many criticize
as being unrealistic and might provide the basis for some of the major
drawbacks of the model.
Advantages
Despite the aforementioned drawbacks, there are numerous advantages to the
application of CAPM.
Ease-of-use: CAPM is a simplistic calculation that can be easily stresstested to derive a range of possible outcomes to provide confidence
around the required rates of return.
Diversified Portfolio: The assumption that investors hold a diversified
portfolio, similar to the market portfolio, eliminates unsystematic
(specific) risk.
Systematic Risk (beta): CAPM takes into account systematic risk, which
is left out of other return models, such as the dividend discount
model (DDM). Systematic or market risk is an important variable
because it is unforeseen and often cannot be completely mitigated
because it is often not fully expected.
Business and Financial Risk Variability: When businesses investigate
opportunities, if the business mix and financing differ from the current
business, then other required return calculations, like weighted average
cost of capital (WACC) cannot be used. However, CAPM can.
CAPM ASSUMPTIONS
The CAPM is often criticised as being unrealistic because of the assumptions on which it is based, so it is
important to be aware of these assumptions and the reasons why they are criticised. The assumptions are as
follows (Watson D and Head A, 2007, Corporate Finance: Principles and Practice, 4th edition, FT Prentice Hall,
pp2223):
Investors hold diversified portfolios
This assumption means that investors will only require a return for the systematic risk of their portfolios, since
unsystematic risk has been removed and can be ignored.
Single-period transaction horizon
A standardised holding period is assumed by the CAPM in order to make comparable the returns on different
securities. A return over six months, for example, cannot be compared to a return over 12 months. A holding
period of one year is usually used.
Investors can borrow and lend at the risk-free rate of return
This is an assumption made by portfolio theory, from which the CAPM was developed, and provides a minimum
level of return required by investors. The risk-free rate of return corresponds to the intersection of the security
market line (SML) and the y-axis (see Figure 1). The SML is a graphical representation of the CAPM formula.
Perfect capital market
This assumption means that all securities are valued correctly and that their returns will plot on to the SML. A
perfect capital market requires the following: that there are no taxes or transaction costs; that perfect information
is freely available to all investors who, as a result, have the same expectations; that all investors are risk averse,
rational and desire to maximise their own utility; and that there are a large number of buyers and sellers in the
market.
While the assumptions made by the CAPM allow it to focus on the relationship between return and systematic
risk, the idealised world created by the assumptions is not the same as the real world in which investment
decisions are made by companies and individuals.
For example, real-world capital markets are clearly not perfect. Even though it can be argued that well-developed
stock markets do, in practice, exhibit a high degree of efficiency, there is scope for stock market securities to be
priced incorrectly and, as a result, for their returns not to plot on to the SML.
The assumption of a single-period transaction horizon appears reasonable from a real-world perspective,
because even though many investors hold securities for much longer than one year, returns on securities are
usually quoted on an annual basis.
The assumption that investors hold diversified portfolios means that all investors want to hold a portfolio that
reflects the stock market as a whole. Although it is not possible to own the market portfolio itself, it is quite easy
and inexpensive for investors to diversify away specific or unsystematic risk and to construct portfolios that track
the stock market. Assuming that investors are concerned only with receiving financial compensation for
the business activities of the investment project are similar to the business activities currently
undertaken by the investing organisation
the financing mix used to undertake the investment project is similar to the current financing mix (or
capital structure) of the investing company
existing finance providers of the investing company do not change their required rates of return as a
result of the investment project being undertaken.
These assumptions essentially state that WACC can be used as the discount rate provided that the investment
project does not change either the business risk or the financial risk of the investing organisation.
If the business risk of the investment project is different to that of the investing organisation, the CAPM can be
used to calculate a project-specific discount rate. The procedure for this calculation was covered in the second
article in this series (Project-specific discount rates, Student Accountant, April 2008).
The benefit of using a CAPM-derived project - specific discount rate is illustrated in Figure 2. Using the CAPM will
lead to better investment decisions than using the WACC in the two shaded areas, which can be represented by
projects A and B.
Project A would be rejected if WACC was used as the discount rate, because the internal rate of return (IRR) of
the project is less than that of the WACC. This investment decision is incorrect, however, since project A would be
accepted if a CAPM - derived project-specific discount rate were used because the project IRR lies above the
SML. The project offers a return greater than that needed to compensate for its level of systematic risk, and
accepting it will increase the wealth of shareholders.
Project B would be accepted if WACC was used as the discount rate because its IRR is greater than the WACC.
This investment decision is also incorrect, however, since project B would be rejected if using a CAPM-derived
project-specific discount rate, because the project IRR offers insufficient compensation for its level of systematic
risk (Watson and Head, pp2523).
It considers only systematic risk, reflecting a reality in which most investors have diversified portfolios
from which unsystematic risk has been essentially eliminated.
It generates a theoretically-derived relationship between required return and systematic risk which has
been subject to frequent empirical research and testing.
It is generally seen as a much better method of calculating the cost of equity than the dividend growth
model (DGM) in that it explicitly takes into account a companys level of systematic risk relative to the stock
market as a whole.
It is clearly superior to the WACC in providing discount rates for use in investment appraisal.
Beta values are now calculated and published regularly for all stock exchange-listed companies. The problem
here is that uncertainty arises in the value of the expected return because the value of beta is not constant, but
changes over time.
Using the CAPM in investment appraisal
Problems can arise when using the CAPM to calculate a project-specific discount rate. For example, one common
difficulty is finding suitable proxy betas, since proxy companies very rarely undertake only one business activity.
The proxy beta for a proposed investment project must be disentangled from the companys equity beta. One way
to do this is to treat the equity beta as an average of the betas of several different areas of proxy company activity,
weighted by the relative share of the proxy company market value arising from each activity. However, information
about relative shares of proxy company market value may be quite difficult to obtain.
A similar difficulty is that the ungearing of proxy company betas uses capital structure information that may not be
readily available. Some companies have complex capital structures with many different sources of finance. Other
companies may have debt that is not traded, or use complex sources of finance such as convertible bonds. The
simplifying assumption that the beta of debt is zero will also lead to inaccuracy in the calculated value of the
project-specific discount rate.
One disadvantage in using the CAPM in investment appraisal is that the assumption of a single-period time
horizon is at odds with the multi-period nature of investment appraisal. While CAPM variables can be assumed
constant in successive future periods, experience indicates that this is not true in reality.
CONCLUSION
Research has shown the CAPM to stand up well to criticism, although attacks against it have been increasing in
recent years. Until something better presents itself, however, the CAPM remains a very useful item in the financial
management toolkit.
expected return over the risk-free rate. This measure is done by dividing the premium with
the portfolio-standard deviation. This implies that one is left with the premium that is
independent of the portfolio risk. This suggests that one can compare two portfolios
performances even though they have different standard deviation or risk. A portfolio that is
very risky or volatile might give better return.
Comparing Treynor Measure and Sharpe Measure
Treynor and Sharpe measures are pretty much similar performance measures with very few
differences. While one uses the relative market risk or beta to normalize the performance the
other uses the standard deviation or the absolute risk. While Sharpe ratio is applicable to all
portfolios, Treynor is applicable to well-diversified portfolios. While Sharpe is used to
measure historical performance, Treynor is a more forward-looking performance measure.
Thus, both these performance measures work in different ways towards better representation
of the performance. To know more about Treynor measure and Sharpe measure, you can
explore our training courses on Financial Risk Manager exam preparation. Simplilearn offers
both online and classroom training courses on FRM Part 1 Exam prep.
The Sharpe ratio and the Treynor ratio (both named for their creators, William
Sharpe and Jack Treynor), are two ratios utilized to measure the risk-adjusted
rate of return on either an investment portfolio or an individual stock. They
differ in their specific approaches to evaluating investment performance.
The Sharpe ratio aims to reveal how well an equity investment portfolio
performs as compared to a risk-free investment. The common benchmark
used to represent a risk-free investment is U.S. Treasury bills or bonds. The
Sharpe ratio calculates either the expected or the actual return on investment
for an investment portfolio (or even an individual equity investment), subtracts
the risk-free investment's return on investment, and then divides that number
by the standard deviation for the investment portfolio. The primary purpose of
the Sharpe ratio is to determine whether you are making a significantly greater
return on your investment in exchange for accepting the additional risk
inherent in equity investing as compared to investing in risk-free instruments.
The Treynor ratio also seeks to evaluate the risk-adjusted return of an
investment portfolio, but it measures the portfolio's performance against a
different benchmark. Rather than measuring a portfolio's return only against
the rate of return for a risk-free investment, the Treynor ratio looks to examine
how well a portfolio outperforms the equity market as a whole. It does this by
substituting beta for standard deviation in the Sharpe ratio equation, with beta
defined as the rate of return that is due to overall market performance. For
example, if a standard stock market index shows a 10% rate of return, that
constitutes beta; an investment portfolio showing a 13% rate of return is then,
by the Treynor ratio, only given credit for the extra 3% return that it generated
over and above the market's overall performance. The Treynor ratio can be
viewed as determining whether your investment portfolio is significantly
outperforming the market's average gains.
QUESTION 5
us a lot about the psychological aspects of the market by analyzing past market
movements in the companys stock to forecast future movement. You can buy a
position in a fundamentally sound company, but if its shares have already run up a
lot, you could still find yourself in a losing position on a pullback, something you
could have potentially avoided through the use of technical analysis.
Fundamental Analysis
If you use fundamental analysis to decide where to invest your money, there are
many different metrics you can use. Here are a few of the basics:
Revenue
This is just the amount of sales a company has taken in over a set period of time,
usually reported on a quarterly and annual basis. The key here is to look at the
direction of revenues. Obviously, rising sales are a good thing. If sales have fallen,
its important to note why that might be. Does it look like the drop is a one-time glitch,
or is it possible that sales could continue to fall due to the success of a competitor, or
decreasing demand for the companys products? Does a rise in sales in the fourth
quarter necessarily mean the companys prospects are looking up, or is it simply a
seasonal uptick due to the holiday season.
Earnings Per Share (EPS)
While revenue is important, earnings are really the bread and butter of corporate
success. If a companys sales are increasing, but they are not able to retain those
revenues due to excessive expenses or poor management, thats a red flag. You
want to invest in companies with rising margins, and therefore rising EPS. You can
find historical EPS for most companies as well as EPS estimates for future quarters
on most investing websites.
P/E Ratio
The price to earnings ratio of a company is simply the current stock price divided by its
annual earnings per share. So if company XYZ is trading at $27 and it earned $1.50 per share
during the past 12 months, its P/E ratio would be 18. That means its trading at 18 times its
annual earnings.
When analysts refer to a companys valuation, they are often referring to its P/E
ratio. Whats a good P/E ratio? That can depend on who you ask, and it can also
vary by sector. For example, high growth stocks like those of technology companies
often trade at much higher P/E ratios whereas stable, lower growth companies trade
at lower valuations. This should make sense intuitively because if a company has
huge growth prospects, then one should be willing to pay a much higher price
relative to its current earnings. Analysts often disagree on what constitutes a cheap
stock because there is so much debate about what a specific P/E ratio actually
means for a given company or industry. There is no one size fits all when it comes
to P/E ratios.
Sector Fundamentals
A single companys performance can be heavily influenced by the sector in which it operates.
During economic slowdowns, for example, defensive sectors like consumer staples and
utilities tend to do better, whereas technology, transportation and financials do better when
the economy is on an upswing.
The Big Picture
Its always a good idea to keep the macroeconomic climate in mind when choosing
your asset allocation as well as your specific investments. Where are we in the
economic cycle? Are we at the beginning, middle, or end of a recession or boom? I
like to think about the macro view like the weather; it may not change what you need
to do, but it should affect how you do it.
Technical Analysis
While fundamental analysis is much more qualitative and involves more subjectivity,
charts are the main tool of technicians. Here are a few chart-watching basics:
Price Trends
Is the price of the stock moving higher or lower? How long has it been doing so?
Many chartists will only buy securities that are in uptrends. They may wait for a
short-term downtrend to enter, but wont even consider the stock if the longer-term
trend is lower.
Volume
Ive often said that charts are like a Rorschach (ink blot) test for the market, but
volume is its lie detector. Volume can tell us how strong the prevailing trend might
be. Decreasing volume can be a sign that the trend might be on the verge of a
reversal.
Moving Averages
Adding moving average lines to a chart can help determine the overall trend direction. A
moving average line simply plots the average price of a security over a set period of time. For
example, the 50-day moving average indicates the average price over the past 50 days.
Technicians like to buy when the moving average is trending upward and the price pulls back
a touch to allow for a good entry point into the stock.
Indicators
You will often see a variety of technical indicators above or below a chart. These can
indicate whether a security is overbought or oversold as well as the strength of its
momentum. There are too many indicators out there to follow all of them. A few of the
most common are: stochastics, Moving Average Convergence-Divergence (MACD),
and Relative Strength Index (RSI).
Which Is Better?
For decades, fundamental analysis was the only investment method that was given
any credibility. That has changed as the advent of high-speed computing has made
technical analysis easier and more widely available. Many large investment firms use
black box trading, or computer modeling, to determine their entry and exit points.
That means that many of the largest market players are making their trading
decisions based on computer algorithms. In fact, some estimate that computerized
trading represents up to 70% of the volume on exchanges today. Like it or not, your
investments are moving based on technical factors as much as fundamental ones.
The markets have changed, and we need to change our strategies with them.
The best approach to investing likely involves some combination of fundamental and
technical analysis. I like to choose stocks or sectors that have strong fundamentals
and then use technical analysis to help me decide when to buy or sell them.
Technical Analysis
Technical analysis is the forecasting of the future price of a financial asset
using primarily historical price and volume data. Technical analysts believe
that all information is reflected in the price; making fundamental analysis
unnecessary. Information from the analysis of price is used to predict
what the future price will be.
There are several different popular schools of technical analysis, including
Elliott Wave Theory, Dow Theory, and Candlestick Charting. All attempt to
use price patterns and price trends to make forecasts of future prices. The
central idea is to estimate the likelihood of price movements and make
trades based on those with the best risk/reward ratio.
When evaluating price, technicians frequently use overall trend, areas of
support and resistance on the charts, price momentum, volume to
determine buy/sell pressure, and relative strength compared to the
market. They would also look for price patterns, study moving averages,
and examine indicators such as put/call ratios.
A major difference between both the stock analysis methods is the time frame
over which they are conducted. Fundamental analysis looks at a companys
balance sheet, cash flow statement and income statement whereas technical
analysts believe that all the available information is already priced in which
leaves further analysis about the financial information superfluous.
Fundamental analysts read the quarterly statements which are released
quarterly and hence have to look at a longer time frame of a couple months or
years to see how the company is performing. Technical analysts simply look at
the price and volume fluctuations which can be done on a weekly, daily or
even minute by minute basis. Hence any investment through fundamental
analysis would be a longer term commitment whereas technical analysts are
known to close their trades within a week.
Differences In Terminology
The difference in timeframe has also given different terms to how market
views their work. A fundamental analyst would generally recommend an
investment for a given stock after thorough investigation and for a period of
at least couple of months to several years. A technical analyst after going
through the charts and other tools can give recommendation for a trade in a
particular instrument. Although the end objective of both the investment or
trade is to profit from the mispricing of the underlying instrument, both are
done in a completely different manner with a different time horizon.
So what are the major differences between the two? Lets do some comparisons:
then becomes a buy, sell, hold type rating. But technical analysis? There are
no such things as buy, sell, and hold ratings.
QUESTION 4
I would simply say that in order to make a wise investment, one needs to
know in what they are investing. When buying stock, it is important to know
the competitive position of a company and their products so that future
decisions can be made. For example, will there be future purchasing of
stock in larger volume or quantity? Is there an significant growth potential
to the company in terms of their products? These are but a few of the
questions that have to be assessed before purchasing stock. Part of
knowing this comes from the fact that everyone involved in the game of
investment and venture capital analysis is there to make money for
themselves. This self-interest sometimes precludes full disclosure. For
example, stock brokers are thrilled to facilitate a sale of a large volume of
stock. They might assert that they would like to see you, as the investor,
make a pot of money. However, in the end, they are not going to cover the
losses nor will they explain to one's spouse how Junior's college fund just
disappeared as a company declared bankruptcy. I seem to be in a movie
suggesting mood, but I would suggest that you watch the film, "Boiler
Room" for a great depiction of how painful this world can be. Had Harry
Renard done some level of homework in understanding the competitive
Investing in a stock isn't throwing your money into a poker pot and betting you'll magically
become rich overnight.
When you "buy" a stock, you're not buying a piece of paper -- you are becoming an owner of the
company that stock represents.
If you buy, for example, stock in Apple (NASDAQ: APPL(link is external)) and profits grow for
the next few years, you'll be treated to a rising share price and grow wealthier along with your
fellow owners. But if you invest in Apple and the company does poorly over the next few years,
your shares will lose value -- and you'll lose money on your investment.
While this concept may sound simple, it's surprising how many investors overlook key indicators
about a company before they invest. As a result, they become owners of lousy companies that
lose money year after year.
You want to be an owner of a successful company that gives you a return, so why wouldn't you
take some time to research it first?
Don't worry, it's easier than you think. Using just eight key termsand spending 15 minutes to
analyze a company can mean the difference between reaping healthy investment gains
and losing your shirt.
Straight from the InvestingAnswers Financial Dictionary -- the industry's most investor-friendly
resource used by hundreds of thousands of investors every month -- here are eight key financial
terms that will make you a more successful stockinvestor.
And for a more detailed explanation of each term -- including examples, formulas and more -just click on it.
1. Chief Executive Officer (CEO)
Like a ship captain, a company's executive officer steers, rights and can sometimes sink the
ship, so it's important to know a company's CEO before you buy.
What to look for: You don't need the CEO's biography, just a brief overview of their business
background (Morningstar can help with this -- here's Apple CEO Tim Cook's overview(link is
external), for example). Ask yourself things like: Do you believe the CEO has the right experience
to run a car company for the next 10 years if he ran a retail chain before for the last 10 years? Is
the company's success heavily tied to this person like Steve Jobs was to Apple or Warren
Buffett is toBerkshire-Hathaway (NYSE: BRK-B(link is external))? And if so, do you feel
comfortable that the business can do well after that person leaves the company?
2. Business Model
A business model is essentially the strategy that a company uses to maximize its profit in its
industry.
Wal-Mart (NYSE: WMT(link is external)), for example, offers the lowest possible price so it can
sell more products. By contrast, another retailer like Coach (NYSE: COH(link is external)) sells
fewer, higher-quality items but earns a larger profit per product sold.
What to look for: While there is no "right" strategy, be sure you understand and agree with the
company's business model. Think about how well the company's business model might work in
recessions or economic booms. Dollar Tree's (NASDAQ: DLTR(link is external)) business
model of selling products for just $1 in a sluggish economy has given the company recordbreaking profits each year from 2007 through 2012 -- and a stock price that has soared 352%
over the same period.
[Note: Some companies' business models are more difficult to pinpoint. Sound, unbiased
financial newsletters (such as the financial newsletters offered by our parent
company, StreetAuthority(link is external)) can give you great insight on how a company profits
and rewards shareholders, but you can find brief outlines of a company's business model on
Morningstar -- as an example, here's Dollar Tree's profile(link is external).]
3. Competitive Advantage
Sometimes called an economic moat, a competitive advantage is when a company has a leg up
over its competitors through its superior products, patents, brand power, technology or operating
efficiency.
What to look for: Be sure the company you're thinking about buying has a competitive
advantage. For example, Wal-Mart offers super-low product prices that are hard for competitors
to beat. Coca-Cola (NYSE: KO(link is external)) has strong brand name recognition and sells a
popular product that's hard for competitors to replicate. A competitive advantage is the wall that
keeps competitors from taking market share and keeps that company more profitable -- and
makes it a betterinvestment for you -- over the long term.
4. Revenue
Revenue is simply the raw amount of money the company made from sales of its product or
service. Revenue is sometimes called a company's "top line" as it's always listed as the first line
of every company's income statement. [See where to find an income statement and an example
of one here.]
What to look for: A company with its revenue trending up each year for the past few years. While
it's not realistic to expect a company to increase its sales every single year (especially in a
struggling economy), a company with a trend of falling annual revenues signals it has trouble
selling its products and services or finding other sources of revenue.
5. Net Income
More casually called profit, earnings or "the bottom line," net income is simply the amount
of money a company earned from sales after expenses and taxes have been paid. As its
nickname suggests, you can find a company's net income listed on the bottom line of the
company's income statement.
What to look for: Net income growth from year to year. A company with growing net income each
year shows that the company knows how to effectively sell its products, slash or control its
business operating costs or a combination of both. Companies like AutoZone (NYSE: AZO(link
is external)) and Ross (NASDAQ: ROST(link is external)) have managed to grow their net
incomes for the past three years, and both stocks have returned well over 100% during the same
period.
6. Profit Margin
Profit margin (sometimes referred to as net profit margin) is simply the percentage of revenue the
company takes in as profit (after expenses, interest and taxes have been paid). Apple, for
example, has a profit margin of 26% -- for every $100 iWidget it sells, it makes $26 profit. A
company's profit margin is net income divided by total revenue.
What to look for: A company with steady or growing profit margins every year, even during
a recession. Companies with growing profit margins signal that the company can command
higher prices because consumers are willing to pay for their product (Apple enjoys healthy profits
because it can sell its devices for a much higher price than competitors). Companies that can
maintain steady profit margins show the company can effectively control its operating costs,
keeping the company efficient (Wal-Mart has been able to keep its product prices low and its
profit margins steady even through recessions). Steady or growing profit margins ensure that a
company is profitable and can reward shareholders with returns.
7. Debt-to-Equity Ratio
With the debt-to-equity ratio, you can find out how much debt a company carries compared to the
amount of equityshareholders have in the company.
What to look for: A company with a low amount of debt in relation to its equity (total debt levels
that are no higher than the company's total equity levels; a ratio of 1:1 or lower). Used as a
safety measure, it tests how well the company can repay its debt obligations in the event that the
company runs into serious financial problems. Generally, the lower the debt-to-equity ratio a
company has, the less risky it is to you as an investor.
8. Price-to-Earnings Ratio (P/E)
Finding a company with strong financials is not enough. Just like you can pay too much for a
great car, you can pay too much for a great company -- and that
can mean limited upside potential on your gains (and even a loss). With a stock's price-toearnings ratio (P/E), you can find out if a stock is overpriced. The P/E ratio compares a stock's
price to the amount of profit per stock share (earnings per share) the company generated.
What to look for: A company with a P/E ratio that is on par with or lower than the
overall market's P/E ratio (which has historically been between 14 and 17) and the company's
peers in the industry. In general, a well-run company with a relatively low P/E ratio signals that
the company's stock is trading at a fair price or even a bargain. [Warren Buffett uses this
"value" investing approach and has been wildly successful. Learn more about this strategy
in Warren Buffett's Golden Rule of Investing.]
The Investing Answer: While these terms won't guarantee success with stock investing every
time, they will help you avoid the pitfalls that less experienced and even sometimes veteran
investors run into. Find companies that a) you understand and agree with from a leadership and
business perspective, b) operate with strong management and financial health and c) are trading
at a good value. These will be key to your investing success.
Happy Investing!
QUESTION 3
In words, this means that you multiply each price you paid by the number of shares
you bought at that price. Then, add up all of these results. Finally, divide by the total
number of shares you purchased.
This may sound a little complicated, so let's look at an example to illustrate how it
works.
An example
Let's say that you own 500 shares of Microsoft, and you acquired your shares in
three separate transactions. You bought the following number of shares at each of
the following price points.
150 shares at $100
250 shares at $200
100 shares at $300
In order to calculate your weighted average price per share, simply multiply each
purchase price by the amount of shares purchased at that price, add them together,
and then divide by the total number of shares. Written as an equation, it looks like
this:
as $15,978 more... each year! Once you learn how to take advantage of all these
loopholes, we think you could retire confidently with the peace of mind we're all
after. Simply click here to discover how you can take advantage of these
strategies.
Dollar cost averaging (DCA) is an investment strategy for reducing the impact of volatility on
large purchases of financial assets such as equities. By dividing the total sum to be invested in
the market (e.g. $100,000) into equal amounts put into the market at regular intervals (e.g. $1000
over 100 weeks), DCA reduces the risk of incurring a substantial loss resulting from investing the
entire "lump sum" just before a fall in the market. Dollar cost averaging is not always the most
profitable way to invest a large sum, but it minimises downside risk.
In essence, the technique works in markets undergoing temporary declines because it exposes
only part of the total sum to the decline. The technique is so-called because of its potential for
reducing the average cost of shares bought. As the amount of shares that can be bought for a
fixed amount of money varies inversely with their price, DCA effectively leads to more shares
being purchased when their price is low and fewer when they are expensive. As a result, DCA
can lower the total average cost per share of the investment, giving the investor a lower overall
cost for the shares purchased over time.[1]
Dollar cost averaging is also called the constant dollar plan (in the US), pound-cost
averaging (in the UK), and, irrespective of currency, as unit cost averaging or the cost
average effect.[2]
Contents
[hide]
1Parameters
2Return
3Criticism
4Confusion
5References
6Further reading
7External links
Parameters[edit]
In dollar cost averaging, the investor decides on two parameters: the fixed amount of money
invested each time, and the time horizon over which all of the investments are made. With a
shorter time horizon, the strategy behaves more like lump sum investing. One study has found
that the best time horizons when investing in the stock market in terms of balancing return and
risk have been 6 or 12 months.[3]
One key component to maximizing profits is to include the strategy of buying during a
downtrending market, using a scaled formula to buy more as the price falls. Then, as the trend
shifts to a higher priced market, use a scaled plan to sell. Using this strategy, one can profit from
the relationship between the value of a currency and a commodity or stock. [citation needed]
Return[edit]
Assuming that the same amount of money is invested each time, the return from dollar cost
averaging on the total money invested is[4]
where
is the final price of the investment and
is the harmonic mean of the purchase
prices. If the time between purchases is small compared to the investment period, then
can
be estimated by the harmonic mean of all the prices within the purchase period.
Criticism[edit]
The pros and cons of DCA have long been a subject for debate among both commercial and
academic specialists in investment strategies.[5] While some financial advisors such as Suze
Orman[6] claim that DCA reduces exposure to certain forms of financial risk associated with
making a single large purchase, others such as Timothy Middleton claim DCA is nothing more
than a marketing gimmick and not a sound investment strategy.[7] The financial cost and benefit of
DCA have also been examined in many studies using real market data. [8][9][10]
Recent research has highlighted the behavioural economic aspects of DCA, which allows
investors to make a trade-off between the regret caused by not making the most of a rising
market and that caused by investing into a falling market, which are known to be asymmetric.
[11]
Middleton claims that DCA helps investors to enter the market, investing more over time than
they might otherwise be willing to do all at once. Others supporting the strategy suggest the aim
of DCA is to invest a set amount; the same amount you would have had you invested a lump
sum.[12]
Confusion[edit]
Dollar cost averaging is not the same thing as continuous, automatic investing. This confusion of
terms is perpetuated by some articles (AARP,[13] Motley Fool[14]) and specifically noted by others
(Vanguard[15]). The argued weakness of DCA arises in the context of having the option to invest a
lump sum, but choosing to use DCA instead. If the market is expected to trend upwards over
time,[16] DCA can conversely be expected to face a statistical headwind: the investor is choosing
to invest at a future time rather than today, even though future prices are expected to be higher.
But most individual investors, especially in the context of retirement investing, never face a
choice between lump sum investing and DCA investing with a significant amount of money. The
disservice arises when these investors take the criticisms of DCA to mean that timing the market
is better than continuously and automatically investing a portion of their income as they earn it.
For example, stopping one's retirement investment contributions during a declining market on
account of the argued weaknesses of DCA would indicate a misunderstanding of those
arguments.
The weakness of DCA investing applies when considering the investment of a large lump sum,
and DCA would postpone investing most of that sum until later dates. Given that the historical
market value of a balanced portfolio has increased over time, starting today tends to be better
than waiting until tomorrow. However, for the average retirement investor's situation where only
small sums are available at any given time, the historical market trend would support a policy of
continuous, automatic investing without regard to market direction.
3. You are incurring huge opportunity costs by executing the dollar cost
averaging strategy
Lets explore in details the above points before you judge for yourself if this
strategy is worth pursuing.
Cant believe that this could happen to you? Just check out how Enrons stock
price kept plunging way before the fraud was finally discovered!
As the stock started to recover, you slowly broke even and before you know it,
you were holding on to a gain of 10% by the end of the year!
This annualized return of 10% on Stock A seems to suggest that you have
made the right decision to dollar average this stock at the start of the year.
But hold on!
Has it ever occurred to you that during the first six months of the year, while
you were averaging down on this Stock A as its price falls, there could be ten
other stocks which climbed 30% within the same period?
Can you imagine how much more annualized returns you would have gotten if
you had invested in any of those ten other stocks for the first half of the year,
took your profit and switch your investment to Stock A during the middle of the
year after it has showed signs of bottoming?
Source: July 2012 Vanguard study Dollar-cost averaging just means taking risk
later. Vanguard calculations based on benchmark data. See page 7 of Vanguard
study for a list of the benchmarks used.
The result was that the lump-sum method delivered higher returns about 66% of the
time compared with the 12-month dollar-cost averaging method, regardless of
whether an all-equities, all-bond, or 60% equity/40% bond allocation was used (See
Figure 1). The authors also note that the longer the dollar-cost averaging time frame,
the greater the chance of the lump-sum method outperforming. For example, dollarcost averaging over 36 months underperformed the lump-sum method 90% of the
time for U.S. markets.
In terms of dollars, the difference can significantly impact a portfolio. The authors
calculated the average ending values for a $1 million portfolio invested all at once in
a mix of 60% stocks and 40% bonds turned into $2,450,264 on average, compared
to $2,395,824 when dollar-cost averaged over the course of a year a difference of
more than $54,000.
One last factor to consider is investing costs, which can also be a disadvantage for
the DCA method. For example, using DCA could require paying multiple brokerage
fees to buy shares of a stock in several lots rather than just once, which would
further diminish your returns as compared with the lump-sum method.
ASSIGNMENT B QUESTION 1
Immunization (finance)
From Wikipedia, the free encyclopedia
2Duration matching
3Calculating immunization
4Immunization in practice
5Difficulties
6History
7See also
8References
9External links
10Recommended reading
$100. Thus, the firm's expected cash inflows would exactly match its expected cash outflows,
and a change in interest rates would not affect the firm's ability to pay its obligations.
Nevertheless, a firm with many expected cash flows can find that cash flow matching can be
difficult or expensive to achieve in practice. That meant that only institutional investors could
afford it. But the latest advances in technology have relieved much of this difficulty. Dedicated
portfolio theory is based on cash flow matching and is being used by personal financial advisors
to construct retirement portfolios for private individuals. Withdrawals from the portfolio to pay
living expenses represent the stream of expected future cash flows to be matched. Individual
bonds with staggered maturities are purchased whose coupon interest payments and
redemptions supply the cash flows to meet the withdrawals of the retirees.
Duration matching[edit]
See also: Duration gap
A more practical alternative immunization method is duration matching. Here, the duration of
the assets is matched with the duration of the liabilities. To make the match actually profitable
under changing interest rates, the assets and liabilities are arranged so that the total convexity of
the assets exceed the convexity of the liabilities. In other words, one can match the first
derivatives (with respect to interest rate) of the price functions of the assets and liabilities and
make sure that the second derivative of the asset price function is set to be greater than or equal
to the second derivative of the liability price function.
Calculating immunization[edit]
Immunization starts with the assumption that the yield curve is flat. It then assumes that interest
rate changes are parallel shifts up or down in that yield curve. Let the net cash flow at time t be
denoted by Rt, i.e.:
Rt = At - Lt ; t = 1,2,3,...,n
where At and Lt represent cash inflows (At) and outflows or liabilities (Lt)
We will assume that the present value of cash inflows from the assets is equal to the present
value of the cash outlfows from the liabilities. Thus, we have:
P(i) = 0
[1]
Immunization in practice[edit]
Immunization can be done in a portfolio of a single asset type, such as government bonds, by
creating long and short positions along the yield curve. It is usually possible to immunize a
portfolio against the most prevalent risk factors. A principal component analysis of changes along
the U.S. Government Treasury yield curve reveals that more than 90% of the yield curve shifts
are parallel shifts, followed by a smaller percentage of slope shifts and a very small percentage
of curvature shifts. Using that knowledge, an immunized portfolio can be created by creating long
positions with durations at the long and short end of the curve, and a matching short position with
a duration in the middle of the curve. These positions protect against parallel shifts and slope
changes, in exchange for exposure to curvature changes.[citation needed]
Difficulties[edit]
Immunization, if possible and complete, can protect against term mismatch but not against other
kinds of financial risk such as default by the borrower (i.e., the issuer of a bond).
Users of this technique include banks, insurance companies, pension funds and bond brokers;
individual investors infrequently have the resources to properly immunize their portfolios.
The disadvantage associated with duration matching is that it assumes the durations of assets
and liabilities remain unchanged, which is rarely the case.
History[edit]
Further information: Dedicated Portfolio Theory History
Immunization was discovered independently by several researchers in the early 1940s and
1950s. This work was largely ignored before being re-introduced in the early 1970s, whereafter it
gained popularity. See Dedicated Portfolio Theory#History for details.
TWEET
A:
When people talk about market efficiency they are referring to the degree to
which the aggregate decisions of all the market's participants accurately reflect
the value of public companies and their common shares at any moment in
time. This requires determining a company's intrinsic value and constantly
updating those valuations as new information becomes known. The faster and
more accurate the market is able to price securities, the more efficient it is said
to be.
This principle is called the efficient market hypothesis, which asserts that the
market is able to correctly price securities in a timely manner based on the
latest information available and therefore there are no undervalued stocks to
be had since every stock is always trading at a price equal to their intrinsic
value. However, the theory has its detractors who believe the market
overreacts to economic changes, resulting in stocks becoming overpriced or
underpriced, and they have their own historical data to back it up.
For example, consider the boom (and subsequent bursting) of the
dotcom bubble in the late nineties and early noughties. Countless technology
companies (many of which had not even turned a profit) were driven up to
unreasonable price levels by an overly bullish market. It was a year or two
before the bubble burst, or the market adjusted itself, which can be seen as
evidence that the market is not entirely efficient, at least not all of the time. In
fact, it is not uncommon for a given stock to experience an upward spike in a
short period, only to fall back down again (sometimes even within the same
trading day). Surely, these types of price movements do not entirely support
the efficient market hypothesis.
It is reasonable to conclude that the market is considerably efficient
most of the time. However, history has proved that the market can
overreact to new information (both positively and negatively). As an
individual investor, the best thing you can do to ensure you pay an
accurate price for your shares is to research a company before
purchasing their stock, and analyze whether or not the market appears
to be reasonable in its pricing.
Read more: What is an efficient market and how does it affect individual investors? |
Investopedia http://www.investopedia.com/ask/answers/05/marketefficiency.asp#ixzz46S
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EMH Tenets and Problems with EMH
First, the efficient market hypothesis assumes that all investors perceive all available
information in precisely the same manner. The numerous methods for analyzing
and valuing stocks pose some problems for the validity of the EMH. If one investor looks
for undervalued market opportunities while another investor evaluates a stock on the
basis of its growth potential, these two investors will already have arrived at a different
assessment of the stock's fair market value. Therefore, one argument against the EMH
points out that, since investors value stocks differently, it is impossible to ascertain what
a stock should be worth under an efficient market.
Secondly, under the efficient market hypothesis, no single investor is ever able to attain
greater profitability than another with the same amount of invested funds: their equal
possession of information means they can only achieve identical returns. But consider
the wide range of investment returns attained by the entire universe of investors,
investment funds and so forth. If no investor had any clear advantage over another,
would there be a range of yearly returns in the mutual fund industry from significant
losses to 50% profits, or more? According to the EMH, if one investor is profitable, it
means the entire universe of investors is profitable. In reality, this is not necessarily the
case.
Thirdly (and closely related to the second point), under the efficient market hypothesis,
no investor should ever be able to beat the market, or the average annual returns that all
investors and funds are able to achieve using their best efforts. (For more reading on
beating the market, see the frequently asked question What does it mean when people
say they "beat the market"? How do they know they've done so?) This would naturally
imply, as many market experts often maintain, that the absolute best investment strategy
is simply to place all of one's investment funds into an index fund, which would increase
or decrease according to the overall level of corporate profitability or losses. There are,
however, many examples of investors who have consistently beat the market - you need
look no further than Warren Buffett to find an example of someone who's managed to
beat the averages year after year. (To learn more about Warren Buffett and his style of
investing, see Warren Buffett: How He Does It and The Greatest Investors.)
Qualifying the EMH
Eugene Fama never imagined that his efficient market would be 100% efficient all the
time. Of course, it's impossible for the market to attain full efficiency all the time, as it
takes time for stock prices to respond to new information released into the investment
community. The efficient hypothesis, however, does not give a strict definition of how
much time prices need to revert to fair value. Moreover, under an efficient market,
random events are entirely acceptable but will always be ironed out as prices revert to
the norm.
It is important to ask, however, whether EMH undermines itself in its allowance for
random occurrences or environmental eventualities. There is no doubt that such
eventualities must be considered under market efficiency but, by definition, true
efficiency accounts for those factors immediately. In other words, prices should
respond nearly instantaneously with the release of new information that can be
expected to affect a stock's investment characteristics. So, if the EMH allows for
inefficiencies, it may have to admit that absolute market efficiency is impossible.
ASSIGNMENT B 3
Postulated hypothesised
Markowitz postulated that diversification should not only aim at
reducing the risk of a security by reducing Its variability or
LESSON 29: MARKOWITZ MODEL
156 11.621.3 Copy Right: Rai University
SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT
standard deviation, but by reducing the covariance or interactive risk
of two or more securities in a portfolio. As by combination of different
securities, it is theoretically possible to have a range of risk varying
from zero to infinity. Markowitz theory of portfolio diversification
attaches importance to standard deviation, to reduce it to zero, if
possible, covariance to have as much as possible negative interactive
effect among the securities within the portfolio and coefficient of
correlation to have - 1 (negative) so that the overall risk of the
portfolio as a whole is nil or negligible. Then the securities have to be
combined in a m3nner that standard deviation is zero
The Theory of Active Portfolio Management
1.
Treynor-Black portfolio weights are sensitive to large alpha values, which can result in
practically infeasible long/short portfolio positions.
2.
Benchmark portfolio risk, the variance of the return difference between the portfolio and
the benchmark, can be constrained to keep the TB portfolio within reasonable weights.
3.
Alpha forecasts must be shrunk (adjusted toward zero) to account for less-than-perfect
forecasting quality. Compiling past analyst forecasts and subsequent realizations allows
one to estimate the correlation between realizations and forecasts. Regression analysis can
be used to measure the forecast quality and guide the proper adjustment of future
forecasts. When alpha forecasts are scaled back to account for forecast imprecision, the
resulting portfolio positions become far more moderate.
4.
The Black-Litterman model allows the private views of the portfolio manager to be
incorporated with market data in the optimization procedure.
5.
The Treynor-Black and Black-Litterman models are complementary tools. Both should be
used: the TB model is more geared toward security analysis while the BL model more
naturally fits asset allocation problems.
6.
Strong-form: Technicians
of
stock
prices.
company's
financial
reports,
and
non-financial
General Strategy
To a fundamentalist, the market price of a stock tends to
move towards it's real value or intrinsic value. If the
intrinsic/real value of a stock is above the current
market price, the investor would purchase the stock
because he knows that the stock price would rise and
move
towards
its
intrinsic
or
real
value
value.
is? Once you know this, you will be able to compare this
price to the market price of the company and decide
whether you want to buy it (or sell it if you already own
that
stock).
health
of
the
economy
as
whole.
such
as
management
experience,
history
of
and
their
products.
that
puts
them
ahead
of
all
the
other
firms?
and
fighting
for
market
share?
After you understand the company & what they do, how
they relate to the market and their customers, you will be
in a much better position to decide whether the price of
the
companies
stock
is
going
to
go
up
or
down.
go
into
some
more
details.
stock
prices
are
going
to
rise
fast?
Some stocks are cheap and some are costly. Some are
worth Rs.500 and some are even worth 50paise. But the
price of the stock is not important. The price of the stock
does not make a stock good to buy. What is important is
how much the price of the stock is likely to rise.
profit
of
Rs.500.
If you understand this, you can see that the price of the
stock is not important. What is important is the rise in the
stocks price. More specifically the percentage rise in
the
stock
price
is
important.
Rs.500.
percentage.
get
into
them.
If
you try
to compare
two companies
in different
are
in
or
what
they
do!
Next let us get into the tools and ratios that tell us about
the companies and their comparison...