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Concepts in investment analysis and portfolio management

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  1. Introduction
  2. International historical perspective
  3. Risk vs return
  4. Determining risk
  5. Risk pyramid
  6. Types of risks
  7. Diversification and risk management
  8. Debt ? fixed income securities
  9. Market segments
  10. Characteristics of debt and debt valuation
  11. Valuation of bonds
  12. Investments and measuring returns
  13. Risk measurement
  14. Relationship between risk and return
  15. Market portfolio risk
  16. Securities and capital markets
  17. Tests and results of semi-strong-form EMH
  18. Conclusions on strong-form EMH

Making money is easy however loosing it is easier. One look at the chart for the Indian Stock Market would reveal that the markets are cyclical going up and down from time to time. Markets are also very volatile, something you will realize if you look at the last 3 days of trading and you see that the market has moved between 8522 and 8122 points, which is a difference of 400 points! Anytime, you invest money, you run a risk of not receiving all that was promised or expected but the fact is that the more you invest the more you get in terms of returns. Equity markets, on average, give higher returns than bonds and government securities. however these higher returns have a higher associated probability of losses too. Risk is essentially the volatility of the returns and in turn, you have an expectation of return that is proportionately higher, if higher a level of risk is assumed. There are two factors that determine risk. One of these factors is the Time Horizon. In this shorter time periods limit your ability to take risks however if you need money in the long term it becomes possible for you to take bigger risks. The other factor is wealth wherein people with more wealth can afford to take more risks.

[...] ( 1.13 ( 1.13 )10 t = 1 = 120 ( 1.13 + 1000 ( 0.13 ) ( 1.13 )10 Price = Rs 651.1 + Rs295 = Rs 946.1 Price to Yield and Time A basic property of a bond is that the price varies inversely with yield. As the required yield increases present value of the cash flows reduces and hence the prices of the bonds reduce. Its converse is also true. Also earlier mentioned that the price of a bond moves to its par value as it gets closer to maturity. [...]


[...] Characteristics of Debt Price at which you buy securities Par Value face value of the bond payable on redemption Clean Price quoted price Dirty price clean price plus accrued interest Income Current Income coupon rate Capital Gains price moves to par value Price changes inversely to interest rate changes Bond prices vary due to Inversely with changes in interest rate prevalent Discounted bond prices move up Changes in credit ratings (default risk) Changes in spread between a bond-class yield versus T-bills / G-secs Bonds with changes in embedded options Risks in Debt Market Interest rate risk or market risk affects the price of bonds and income Inflation risk or purchasing power risk Real interest rate risk Default risk or credit risk Other risks including specific risks call risk etc. [...]


[...] There are bonds that do not mature in a fixed time frame and give a specified interest every year or quarter or some other time period. Growing Perpetuity is a cash flow that is expected to grow at a constant rate forever. If CF1 is assumed to be the cash flow next period (usually year and r is the discount rate, then CF1 PV of Growing perpetuity = DCF Approach When cash flows at various periods are different such as CF1, CF2, CFn etc. [...]

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