INVESTMENT

Instructor Ahmed gillani

 The field of investment has been divided into 2 categories Security analysis Portfolio management The heart of security analysis is the valuation of financial assets Value in turn is a function of risk and return Realized return is called ex post return Component of return It has 2 components 1) Yield 2) capital gain

 Yield

the income component of a security return

It is the periodic cash flow on the investment either interest or dividends here issuer makes he payment in cash to the h older of asset CAPITAL GAIN The change in price of a security over some period of time Particular of common stock This component is the appreciation or depreciation in the price of the asset commonly called capital gain ( loss)

 in case of long position It is the difference between the purchase price and the price at which the asset is sold In case of short position It is the difference between the sale price and the subsequent price at which the short position is closed out. TR = yield + Price change Yield can be zero or + Price change can be zero ,, + or negatiive

SOURCES OF RISK
Interest rate risk the variability in a security return resulting from changes in interest rates, is referred as interest rate risk. These changes affect securities inversely it means securities prices move inversely to interest rates. Interest rate affect bonds directly than common stock MARKET RISK The variability in a security return s resulting from fluctuations in the aggregate market. All securities face market risk it affects normally common stock market risk can be in the shape of war,, economy changes and changes in consumer preference

 INFLATION RISK a factor affecting all securities is purchasing power risk or it is the chance that purchasing power of invested rupees will be decline. With uncertain inflation the real return involve even if the nominal return is safe e.g. T Bill interest rate generally rise as the inflation rise. Because lenders demand additional inflation premiums to compensate for the loss of purchasing power BUSINESS RISK The risk of doing business in a particular industry or environment is called business risk. Investment in textile sector where there is shortage of electricity and gas.

 FINANCIAL RISK It is associated with the use of debt financing by companies. The larger the proportion of asset financed by debt , the larger the variability in the returns other things being equal. It involves the concept of financial leverage LIQUIDITY RISK It is the risk associated with the particular secondary market in which a security trades. An investment that can be sold or bought quickly without the significance price concession is considered to be liquid More uncertainty about the time element and price concession the greater the liquidity risk.

EXCHANGE RISK The variability in returns on securities caused by currency fluctuations. It affects international mutual funds , global mutual funds , closed end single country funds foreign stocks and foreign bonds COUNTRY RISK it is also referred to as political risk is an important risk for investor today it is more important today's than past when investor invest internationally via directly or indirectly the political , economic stability is also considered.

TYPES OF RISK
it has 2 general types Those that are pervasive in nature such as market risk or interest rate risk Those that are specific to a particular security issue such as business or financial risk Total risk = General risk + Specific risk = Market risk + Issuer risk = systematic risk + non systematic risk

 SYSTEMATIC RISK Variability in a security total returns that is directly associated with overall movements in the general market or economy is called systematic( market ) risk Virtually all securities have some systematic risk whether bonds or stocks because systematic risk directly encompasses the interest rate , market and inflation risks the investor can not escape this part of risk because no matter how well he or she diversifies the risk of the overall market can not be avoided .

 UN SYSTEMATIC RISK The variability in a security total returns not related to overall market variability is called non systematic ( non market) risk. This risk is unique to a particular security and is associated with such factors such as business and financial risk and as well as liquidity risk .

TOTAL RETURN
The total return for a given holding period is a percentage number relating all the cash flows received by an investor during any designated time period to the purchase price of the asset. TR = CF + ( Pe _Pb) ------------------------------- Pb CF = cash flows during the measurment period Pe = price at the end of the period or sale price Pb = price at the beginning of the period or purchase price

RETURN RELATIVE
The total return on an investment for a given time period stated on the basis of 1 RR = TR in decimal form + 1 TR in decimal form = RR -- 1

CUMULATIVE WEALTH INDEX

CWIn=WI( 1 + TR1) ( 1 + TR2) ( 1 + TR3) ---- ( 1 + TR n )

Risk premiums
RISK PREMIUM the additional compensation for assuming risk is called risk premiums EQUITY RISK,,, The difference between the returns on stocks and the risk free rate is called equity risk premiums