Investment analysis and portfolio management 11th edition free download

The discussion on relative valuation follows that of absolute or intrinsic valuation. It is defined as the present value of all expected cash flows to the company. The estimation of intrinsic value is what we would be dealing with in details in this chapter. However, the market forms an expectation of the future dividends and the value of a share is the present value of expected future dividends of the company.

Otherwise, the present value of the growing perpetuity will reach infinite. This is even true in real world. It can only be for a limited number of years. This model is not applicable in such cases. Example: RNL has paid a dividend of Rs. The value of growth opportunities is positive if the firm and the market believes that the firm has avenues to invest which will generate a return that is more than the market expected rate of return. The 47 PDF created with pdfFactory trial version www.

We first determine the value of the enterprise and then value the equity by deducting the debt value from the firm value. It is simple to calculate the debt value since the payments to be made to debt holders is predetermined and certain. However, the real problem lies with determining the value of the firm.

As per the discounted free cash flow model, the value of a firm is the present value of the future free cash flow of the firm. The discounting rate is the firms weighted average cost of capital WACC and not the market expected rate of return on equity investment. WACC is the cost of capital that reflects the risk of the overall business and not the risk associated with the equity investment alone. The free cash measures the cash generated by the firm that can be distributed to the equity shareholders after budgeting for capital expenditure and working capital requirements.

We start with EBIT since we do not consider cash outflow in the form of interest payments. Depreciation lowers the EBIT but is added back since it is a non-cash expenditure does not result in cash payments. Since the firm has to incur any planned capital expenditure and has to finance any working capital requirement before distributing the profits to the shareholders the same is deducted while calculating the free cash flows. Various valuation multiples such as price-earning ratio, enterprise value multiples, etc.

Most of these models are generally used for evaluation purpose as to whether a particular stock is overvalued or undervalued and less for actual valuation of the shares. As discussed in the first chapter, the face value or nominal value of a share is the price printed on the share certificate. The price at which a company issues shares may be more or less than the face value.

The issue price is generally more than the face value and the difference between the issue price and the face value is called as share premium. Market price is the price at which the share is traded in the market. It is determined by the demand and supply of the share in the market and depends on the market buyers and sellers estimation of the present value of all future cash flows to the company.

In an efficient market, we assume that the market is able to gather all information about the company and price accordingly. Market capitalization of a company is the total value of all shares of the company and is calculated by multiplying the market price per share with the number of shares outstanding in the market. For assets, the value is based on the original cost of the asset less any depreciation, amortization or impairment costs made against the asset.

Book value per share is calculated by dividing the net assets of the company with the number of shares outstanding.

The net asset of the company is the values of all assets less values of all liabilities outstanding in the books of accounts. The firm may not distribute the entire income to the shareholders, but decide to retain some portion of it for financing growth opportunities.

Alternatively, a firm may pay dividends from past years profit during years where there is insufficient income. In this case, the dividends amount will be higher than the earnings. The dividend per share is the amount that the firm pays as dividend to the holder of one share i.

The dividend payout ratio DPR measures the percentage of income that the company pays out to the shareholders in the form of dividends. It is nothing but 1-DPR. E xample: Th e f ol lowi ng i s t he f igu re f or A sh a In t ern ati on al duri ng t he year Net Income: Rs. Sometimes, we also calculate the PE ratio using the expected future one-year return. In such case, we call forward PE or estimated PE ratio.

What is the price to earnings ratio for XYZ? A higher PE ratio implies that the investors are paying more for each unit of net income, which implies that the investors are optimistic about the future performance or future growth rate of the company. Stocks with higher PE ratio are also called growth firms and stocks with lower PE ratio are called as income firms. Calculate the return on equity of XYZ company for the year The second component, called the asset turnover ratio, measures the efficiency in usage of assets by the firm and the third component measures the financial leverage of the firm through the equity multiplier.

It shows that the firm could improve its RoE by a combination of profitability higher profit margins , raising leverage by raising debt , by using its assets better higher asset turn or a combination of all three. The ratio could also be used with the forward dividend yield instead— expected dividends, for either the next 12 months, or the financial year. Calculate the dividend yield for ABC stock.

The investment amount is equal to the market price of the share at the beginning of the year. The company paid a dividend of Rs.

Calculate the return for a shareholder of PQR Company in the year We have already learned in the previous chapter about the factors that affect the expected rate of returns and how one can calculate the expected rate of returns e. Now the question arises what determines the next year price P1 of a share.

Technical analysis involves making trading decisions by studying records or charts of past stock prices and volume, and in the case of futures, open interest. Technical analysts use statistical tools like time series analysis in particular trend analysis , relative strength index, moving averages, regressions, price correlations, etc.

The field of technical analysis is based on the following three assumptions. Therefore, what is important is an analysis of the price movement that reflects the demand and supply of a stock in the short run.

Technical analysts believe that once trends are established in the prices, the price moves in the same direction as the trends suggests. There are various concepts that are used by technical analysts like support prices, resistance levels, breakouts, momentum, etc. These concepts can be heard very often in business channels and business newspapers.

Supports refer to the price level through which a stock price seldom falls and resistance is the price level through which a stock seldom surpasses. Breakout refers to situation when the price actually falls below the support level or rises above the resistance level.

Once a breakout occurs, the role is reversed. If the price increases beyond the resistance level, the resistance level becomes the support level and when the price falls below the support level, the support level becomes the new resistance level for the stock. Momentum refers to the rate at which price of a stock changes. While it is understandable that price movements are caused by the interaction of supply and demand of securities and that the market assimilates this information as mentioned in the first assumption , there is no consensus on the speed of this adjustment or its extent.

In other words, while prices may react to changes in demand-supply and other market dynamics, the response could easily differ across securities, both in the time taken, and the degree to which prices change.

Other objections to technical analysis arise from Efficient Markets Hypothesis, which we have seen in Chapter 4. Proponents of the EMH aver that market efficiency would preclude any technical trading patterns to repeat with any predictable accuracy, rendering the profitability of most such trading rules subject to chance.

Further, the success of a trading rule could also make it crowded, in the sense that most technical traders follow a small set of rules albeit with possibly different parameterizations , speeding up the adjustment of the market, and thus reducing the potential gains. Finally, technical analysis involves meaningful levels of subjectivity-interpretations may vary widely on the same pattern of stock, or index prices-which also hinders systematic reasoning and extensibility across different securities.

This understanding is mostly developed through the analysis and generalization of the behaviour of individual investors in the market under certain assumptions. The two building blocks of this analysis and generalization are i theory about the risk-return characteristics of assets in a portfolio portfolio theory and ii generalization about the preferences of investors buying and selling risky assets equilibrium models.

Both these aspects are discussed in detail in this chapter, where our aim is to provide a brief overview of how finance theory treats stocks and other assets individually, and at a portfolio level.

We first examine the modern approach to understanding portfolio management using the trade-off between risk and return and then look at some equilibrium asset-pricing models. Such models help us understand the theoretical underpinning and hopefully predict the dynamic movement of asset prices. Portfolio risk generally defined as the standard deviation of returns is not the weighted average of the risk standard deviation of individual assets in the portfolio. This gives rise to opportunities to eliminate the risk of assets, at least partly, by combining risky assets in a portfolio.

To give an example, consider a hypothetical portfolio with say, ten stocks. Each of these stocks has a risk profile, a simple and widely used indicator of which is the standard deviation of its returns. Intuitively, the overall risk of the portfolio simply ought to be an aggregation of individual portfolio risks, in other words, portfolio risk simply ought to be a weighted average of individual stock risks. Our assertion here is that the risk of the portfolio is usually much lower.

As we shall see in the discussion here, this is largely due to the interrelationships that exist between stock price movements. These so-called covariances between stocks, could be positive, negative, or zero. An example of two IT services stocks, reacting favourably to a depreciation in the domestic currency—as their export realizations would rise in the domestic currency—is one of positive covariance.

If however, we compare one IT services company with another from the metals space, say steel, which has high foreign debt, then a drop in the share price of the steel company as the falling rupee would increase the debt-service payments of the steel firm and rise in share price of the IT services company, would provide an example of negative covariance.

It follows that we would expect to have zero covariance between stocks whose movements are not related. Assume that we have the following two stocks, as given in table 6. When A gives high returns, B does not and vice versa. We know this is quite possible, as in our earlier comparison of a software company with a commodity play. Although the two stocks involved were risky indicated by the standard deviations , a portfolio of the two stocks with a certain weight may become totally risk-free.

The table below shows a portfolio of the two stocks with weight of Stock A W being 0. Table 6. Intuitively, the negative deviation in the returns of one stock is getting offset by the positive deviation in the other stock. Let us examine this in a somewhat more formal and general context. The proportional investments in each of the stocks are as below, 57 PDF created with pdfFactory trial version www. It is this third term that denotes the interrelationship between the two stocks.

As discussed before, such a relation could be positive, negative or zero. In cases with negative covariance, portfolio variance would actually be lower than the weighted sum of stock variances! In other words, since variance or standard deviation is the primary metric of risk measurement, then we can say that the risk of the portfolio would be lower than individual stocks considered separately.

Therefore, if the correlation is positive and the stocks have high standard deviations, then the covariance would be positive and large. It would be negative if the correlation is negative. Let us examine the insights from expression 4 for the variance of combinations of stocks or any other asset with varying level of correlations.

Given the nature of the return relationship between the A and B in Table 6. The variances of the individual stocks are offset by their covariance in the portfolio as shown in Table 6. When the correlation between the two stocks is 1. This implies that a portfolio with two perfectly positively correlated stocks cannot reduce risk.

The minimum portfolio standard deviation would always correspond to that of the stock with the least standard deviation. It is possible to choose a value for W in such a way, so that the portfolio risk can be brought down below that of the least less risky stock involved in the portfolio.

It is very straightforward to understand that the variance of portfolios with stocks having correlation in the 0 to 1 range would certainly be lower than those with stocks having correlation 1. At the same time, the variance of these portfolios shall be higher than those with uncorrelated stocks. Let us examine if we can reduce the portfolio variance by combining stocks with correlation in the range of 0 to 1. Consider the two stocks, ACC and Dr.

As given in the following table, for a unique combination, the total variance standard deviation of the portfolio is less than that of ACC, the least risky stock. The details of the risk of this portfolio are provided in the following table.

A comparison of the behaviour return-variance of portfolios made with stocks of varying correlation is given in the following figure: 60 PDF created with pdfFactory trial version www.

The portfolios are created by using actual return data and assumed correlations, except 0. With these insights we can now examine the behaviour of portfolios with a larger number of assets. The double summation sign in the second part indicates that the covariance would appear for all possible combinations of i and j, except with themselves.

For i nst ance, if th ere are 3 st ocks, th ere woul d be six covarian ce t erms , , , , , Then, The expression just above gives the following insights: 1. As N becomes a large number, the portfolio variance would be dominated by the covariances rather than variances.

The variance of the individual stocks does not matter much for the total portfolio variance. This is one of the most powerful arguments for portfolio diversification. Even by including a large number of assets, the portfolio variance cannot be reduced to zero except when they are perfectly negatively correlated.

The part of the risk that cannot be eliminated by diversifying through investments across assets is called the market risk also called the systematic risk or non-diversifiable risk.

This is something all of us commonly experience while investing in the market. If you consider the exposure to IT industry alone is troubling, you can also spread your investment to other industries like Banking, Telecom, Consumer products and so on. Going further, you can even invest across different markets, if you do not like to be exposed to anyone economy alone.

But even after international diversification a certain amount of risk would remain. This is the market risk or systematic risk or non-diversifiable risk. Given the above, it appears that the relevant risk of an asset is what it contributes to a widely-held portfolio, in other words, its covariance risk. This along with the other insights obtained from the analysis would help us to understand the pricing of risky assets in the equilibrium for any asset in the capital market, under certain assumptions.

This implies that investors are concerned only about the mean and variance of asset returns. Investors would either prefer portfolios which offer higher return for the same level of risk or prefer portfolios which offer minimum risk for a given level of return the indirect assumption of mean-variance investors is that all other characteristics of the assets are captured by the mean and variance.

The well-organized financial markets have remarkable ability to digest information almost instantaneously largely reflected as the price variation in response to sensitive information. Given these assumptions, it is not impossible to see that substantive arbitrage opportunities would not exist in the market.

For instance, if there is a portfolio which gives a higher return for same level of risk, investors would prefer that portfolio compared to the existing one. In light of the behaviour of portfolio risk and the above assumptions, let us try to visualize what would be the relationship between risk and return of assets in the equilibrium. Evidently, all the assets in the market can be mapped on to a return-standard deviation space as follows. Figure 6.

Therefore, their combination could theoretically be characterized as given in figure 6. Obviously, a mean-variance investor would prefer portfolio A to B, given that it has lower risk for the same level of return offered by B. Similarly, portfolio A would be preferred to portfolio C, given that it offers higher return for the same level of risk. D is the minimum variance portfolio among the entire feasible set. A close examination of the feasible set of portfolios reveals that portfolios that lie along D-E represent the best available combination of portfolios.

Investors with various risk tolerance levels can choose one of these portfolios. These portfolios offer the maximum return for any given level of risk. Therefore, these are called the efficient portfolios and the set of all such portfolios, the efficient frontier , as represented in Figure 6. Practically, this could be a bank deposit, treasury bills, Government securities or Government guaranteed bonds.

With the availability of a risk-free security, the choice facing the mean-variance investor can be conveniently characterised as follows: Figure 6. This would imply that the investor could partly put the money in the risky security and the remaining in any of the risky portfolios.

Apparently, the portfolio choice of the mean-variance investor is no more the securities along the efficient frontier D-E. If an investor prefers less risk, then rather than choosing D by going down the efficient frontier, he can choose G, a combination of risky portfolio M and the risk-free asset. G gives a higher return for the level of risk of D.

In fact, the same applies for 65 PDF created with pdfFactory trial version www. This gives the powerful insight that, with the presence of the risk-free security, the most preferred portfolio along the efficient frontier would be M portfolios to the right of M along the straight line indicates borrowing at the risk-free rate and investing in M. An investor who does not want to take the risk of M, would be better off by combining with the risk-free security rather than investing in risky portfolios with lower standard deviation that lie along the M-D.

Identification of M as the optimal portfolio, combined with the assumptions 1 that all investors have the same information about mean and variance of securities and 2 they all have the same investment horizon, suggest that all the investors would hold only the following portfolios depending on the risk appetite.

The portfolio purely of risky assets, which would be M. The portfolio of risky assets and risk-free asset, which would be a combination of M and RF. All other portfolios are inferior to these choices, for any level of risk preferred by the investors.

Let us examine what would be the nature of the portfolio M. If all investors are mean-variance optimizers and have the same information, their portfolios would invariably be the same. Then, all of them would identify the same portfolio as M. Obviously, it should be a combination of all the risky stocks assets available in the market somebody should be willing to hold all the assets available on the market.

This portfolio is referred to as the market portfolio. Practically, the market portfolio can be regarded as one represented by a very liquid index like the NIFTY. All points along the CML have superior risk-return profiles to any portfolio on the efficient frontier. With the understanding about the aggregate behaviour of the investors in the securities market, we can estimate the risk premium that is required for any asset.

Understanding the risk premium dramatically solves the asset pricing problem through the estimation of the discounting factor to be applied to the expected cash flows from the asset. With the expected cash flows and the discounting rate, the price of any risky asset can be directly estimated. From Figure 6. If investors have the opportunity to hold a well-diversified portfolio, the only risk that matters in the individual security is the incremental risk that it contributes to a well-diversified portfolio.

Therefore, the risk relevant to the prospective investor or firm is the covariance risk. This measures the sensitivity of the security compared to the market. A beta of 2. Therefore, we would expect twice the risk premium as compared to the market. This implies that the minimum expected return on this stock is 2 x Rm — Rf. Obviously, the market portfolio will have a beta of 1.

If CAPM holds in the market, all the stocks would be priced according to their beta. This would imply that the stock prices are estimated by the market by discounting the expected cash flows by applying a discounting rate as estimated based on equation 7. Hence, all the stocks can be identified in the mean return-beta space, as shown below and relationship between beta and return can be estimated.

Prices returns which are not according to CAPM shall be quickly identified by the market and brought back to the equilibrium. For instance, stocks A and B given in the following figure 6. This works as follows. Stock A, currently requires a lower risk premium required rate of return than a specified by CAPM the price is higher. Sensing this price of A as relatively expensive, the mean-variance investors would sell this stock.

The decreased demand for the stock would push its price downwards and restore the return back to as specified by CAPM will be on the line. The reverse happens in case of stock B, with increased buying pressure. Practically, the beta 68 PDF created with pdfFactory trial version www. The beta of an existing firm traded in the market can be derived directly from the market prices.

However, on many occasions, we might be interested to estimate the required rate of return on an asset which is not traded in the market. For instances like, pricing of an IPO, takeover of another firm, valuation of certain specific assets etc.. In these instances, the required rate of return can be estimated by obtaining the beta estimates from similar firms in the same industry. The beta can be related to the nature of the assets held by a firm. If the firm holds more risky assets the beta shall also be higher.

Now, it is not difficult to see why investors like venture capitalists demand higher return for investing in start-up firms. Evidently, these are strong assumptions about the market structure and behaviour of investors. A more general framework about asset pricing should allow for relaxation of these strong and somewhat counterfactual assumptions.

A number of alternative equilibrium asset pricing models, including the general arbitrage pricing theory APT , attempt to relax these assumptions to provide a better understanding about asset pricing.

The arbitrage pricing theory assumes that the investor portfolio is exposed to a number of systematic risk factors. Arbitrage in the market ensures that portfolios with equal sensitivity to a fundamental risk factor are equally priced. It further assumes that the risk factors which are associated with any asset can be expressed as a linear combination of the fundamental risk factors and the factor sensitivities betas.

Arbitrage is then assumed to eliminate all opportunities to earn riskless profit by simultaneously selling and buying equivalent portfolios in terms of risk which are overpriced and underpriced. Hence, APT relaxes the assumption that all investors in the market hold the same portfolio. Again, as compared to CAPM, which has only one risk dimension, under the APT characterization of the assets, there will be as many dimensions as there are fundamental risks, which cannot be diversified by the investors.

In the lines of the assumptions of arbitrage pricing theory, a number of multifactor asset pricing models have been proposed. One such empirically successful model is the so-called Fama-French three-factor model.

The Fama-French model has two more risk factors, viz. The size risk factor is the difference between the expected returns on a portfolio of small stocks and that of large stocks. And the book-to-market ratio is the difference in the expected return of the portfolio of high book-to market-ratio stocks and that of low book-to market-ratio stocks.

Theoretical and empirical evidence suggests that in the real market, expected returns are probably determined by a multifactor model. Against this evidence, the most popular and simple equilibrium model, CAPM, could be regarded as a special case where all investors hold the same portfolio and their only risk exposure is the market risk. These underlying securities are usually shares or bonds, although they can be various other financial products, even other derivatives.

The buyer of such a product gets the right to buy the common share by a future date. The price at which she can buy the underlying is called the strike price, and the date after which this option expires is called the strike date. In other words, the buyer of a call option has the right, but not the obligation to take a long position in the underlying at the strike price on or before the strike date.

Call options are further classified as being European, if this right can only be exercised on the strike date and American, if it can be exercised any time up and until the strike date.

Derivatives are amongst the widely traded financial securities in the world. Turnover in the futures and options markets are usually many times the cash underlying markets.

Our treatment of derivatives in this module is somewhat limited: we provide a short introduction about of the major types of derivatives traded in the markets and their pricing.

The agreed rate is called forward rate and the difference between the spot rate, the rate prevailing today, and the forward rate is called the forward margin. The party that agrees to buy the asset on a future date is referred to as a long investor and is said to have a long position. Similarly, the party that agrees to sell the asset in a future date is referred to as a short investor and is said to have a short position. Here counter-party risk refers to the default risk that arises when one party in the contract defaults on fulfilling its obligations thereby causing loss to the other party.

Futures contracts are also agreements to buy or sell an asset for a certain price at a future time. Unlike forward contracts, which are traded in the over-the-counter market with no standard contract size or delivery arrangements, futures contracts are standardized contracts and are 71 PDF created with pdfFactory trial version www. They are standardized in terms of contract sizes, trading parameters and settlement procedures, and the contract or lot size no.

Since futures contracts are traded through exchanges, the settlement of the contract is guaranteed by the exchange or a clearing corporation through the process of novation and hence there is no counter-party risk.

Exchanges guarantee execution by holding a caution amount as security from both the parties buyers and sellers. This amount is called as the margin money, and is adjusted daily based on price movements of the underlying till the contract expires. Compared to forward contracts, futures also provide the flexibility of closing out the contract prior to the maturity by squaring off the transaction in the market. Occasionally the fact forward contracts are bilateral comes in handy—two parties could suit a contract according to their needs; such a futures may not be traded in the market.

Primary examples are long-term contracts—most futures contracts have short maturities of less than a few months.

The table here draws a comparison between a forward and a futures contract. Table 7. Final Settlement date is Pre-specified in the fixed by the exchange. In contract. Risk Counterparty risk exists, Exchange provides the no independent guarantee.

As explained in the introduction, an option contract is a contract written by a seller that conveys the buyers a right, but not an obligation to either sell put option or buy call option a particular asset at a specified price in the future. In case of call options, the option buyer has a right to buy and in case of put options, the option buyer has a right to sell the security at the agreed upon price called strike rate or exercise price.

In return for granting the option, the party seller granting the option collects a payment from the other party. Options are like insurance contracts.

Unlike futures, where the parties are denied of any favorable movement in the market, in case of options, the buyers are protected from downside risks and in the same time, are able to reap the benefits from any favorable movement in the exchange rate. The buyer of the option has a right but no obligation to enforce the execution of the option contract and hence, the maximum loss that the option buyer can suffer is limited to the premium amount paid to enter into the contract.

The buyer would exercise the option only when she can make some profit from the exercise, otherwise, the option would not be exercised, and be allowed to lapse.

Recall that in case of American options, the right can be exercised on any day on or before the expiry date but in case of a European option, the right can be exercised only on the expiry date.

Options can be used for hedging as well as for speculation purposes. An option is used as a hedging tool if the investor already has or is expected to have an open position in the spot market. For example, in case of currency options, importers buy call options to hedge against future depreciation of the local currency which would make their imports more expensive and exporters could buy put options to hedge against currency appreciation.

There are other methds of hedging too—using forwards, futures, or combinations of all three—and the choice of hedging is determined by the costs involved.

The cost of carry model calculates the fair value of futures contract based on the current spot price of the underlying asset. The fair value of a one-month futures contract on ABB is calculated as follows: 1 0. If the futures price is less than the fair value, one can profit by holding a long position in the futures and a short position in the underlying. Alternatively, if the futures price is more than the fair value, there is a scope to make a profit by holding a short position in the futures and a long position in the underlying.

It is usually represented as a percentage of the spot price. Generally, for most investment, we consider the risk-free interest rate as the cost of carry. In case of commodities contracts, cost of carry also includes storage costs also expressed as a percentage of the spot price of the underlying asset until maturity.

Futures prices being lower than spot price backwardation is also explained by the concept of convenience yield. It is the opposite of carrying charges and refers to the benefit accruing to the holder of the asset.

For example, one of the benefits to the inventory holder is the timely availability of the underlying asset during a period when the underlying asset is otherwise facing a stringent supply situation in the market. Convenience yield has a negative relationship with inventory storage levels and storage cost. The cost of carry model expresses the forward future price as a function of the spot price and the cost of carry and convenience yield.

Keynes in The theory suggests that the futures price is a biased estimate of the expected spot price at the maturity. The underlying principle for the theory is that hedgers use the future market to avoid risks and pay a significant amount to the speculators for this insurance.

When the future price is lower than the current spot price, the market is said to be backwarded and the opposite is called as a contango market. Since future and spot prices have to converge on maturity this is sometimes called the law of one price , in the case of a backwarded market, the future price will increase relative to the expected spot price with passage of time, the process referred to as backwardation.

In case of contango, the future price decreases relative to the expected spot price. Backwardation and contango is easily explained in terms of the seasonal nature of commodities. Commodity futures with expiration dates falling in post harvest month would face backwardation, as the expected spot price would be lower.

View as Instructor. Whether you need access offline or online, in print or on your mobile device, we have cost saving options. Tell me about Cengage eTextbooks. Best value! Access your book immediately! ISBN: Tell me about Rentals. Free eTextbook while your book ships Contract starts on the date of product shipment, not on date of purchase. What was your annual holding period yield? What was your annual holding period yield Annual HPY? What was your arithmetic mean annual yield for the investment in XMen Industries?

Chapter 01 - The Investment Setting What was your geometric mean annual yield for the investment in XMen? What is your expected rate of return [E Ri ] for next year? Compute the standard deviation of the rate of return for the one-year period. Copyright Cengage Learning. Compute the coefficient of variation for your portfolio. Government T-bills U. Long-term bonds. What are the real rates of return for each of these securities?

Chapter 01 - The Investment Setting d. If next year the real rates all rise by 10 percent while inflation climbs from 1. You are provided with the following information on your holdings: Stock 1 2. Calculate the HPY for stock 1.

Calculate the HPY for stock 2. Calculate the market weights for stock 1 and 2 based on period t values. Calculate the HPY for the portfolio. Exhibit 1. Compute the arithmetic mean annual rate of return for Stock Z. Compute the standard deviation of the annual rate of return for Stock Z.

Compute the coefficient of variation for Stock Z. Compute the geometric mean rate of return for Stock Z. Which of the following is not a component of the required rate of return? Which of the following is NOT a component of the risk premium? The ability to sell an asset quickly at a fair price is associated with a.

The variability of operating earnings is associated with a. The uncertainty of investment returns associated with how a firm finances its investments is known as a. The total risk for a security can be measured by its a.