PB601 INVESTMENT MANAGEMENT for Polytechnic and Diploma Level

CHAPTER 3: RISK & RETURN

2015-01-16T10:32:00.006+08:00

CHAPTER 3

RISK AND RETURN

Return in Investment

Components of Investment Return

Return and Risk Calculation

Historical Rate of Return

- Holding Period Return

- Holding Period Yield

- Mean Historical Return

Expected Rate of Return

Risk Calculation for Single Asset

Risk & Return for Portfolio

Asset Correlation

Diversification Concept

Capital Asset Pricing Model (CAPM)

Required Rate of Return, Risk Free Rate & Beta

Market Premium

3.0 INTRODUCTION

The decision making process in investment strongly depends on the risk and return offered by instruments. The exposure of risk also differ based on the financial market itself. For example, normally capital market instruments are riskier as compared to money market instruments. Therefore, to compensate the risk, capital market will offer higher return relatively to money market.

3.1 RETURN IN INVESTMENT

In investment, return refers to income or money that a person or company earns as a percentage of total value that has invested for a particular period of time. In a simple words, return means how much investors earn or profit they make from their initial investment in any investment.Besides, Risk is often understood as the possibility of loss. In financial terms, risk also refers to a range of possibilities and the variability of returns and degrees of uncertainty.

For example, Nur Aini has invested RM 1000.00 in unit trust early 2011 and the value increased to RM 1200.00 in January 2012. The return of the investment should be RM200.00 (RM1200-1000); or; the Holding Period Return (HPR) will be;

Return on investment for HPR =

3.2 COMPONENTS OF INVESTMENT RETURN

There are two types of return in investment:-

i. Dividend Income /Yield/ Coupon Rate / Interest – Periodical income over investment period.

ii. Capital Incomewhich is refers to the differnces between purchasing and selling price of intruments.

For example; Assume that Mr.Ali has bought 50 lot of Zero to Hero Corporation stock in early 2007 at RM2.00 per share. He intended to sell those stocks at the end of year 2011(right after the dividend declaration). Based on the information given, compute the total income of Mr. Ali’s investment.

The dividend declared are as follows:-

End of Year	%Dividend (Yield)	Share Price
2007	10%	2.00
2008	12%	2.50
2009	5%	1.50
2010 2011	10% 15%	1.80 2.30

* 1 Lot = 100 shares

Therefore, the total income of investment in Zero to Hero Corporation would be:-

End of Year	Dividend (%)	No. Of Shares	Dividend earnings	Buying Price	Selling Price
2007	10%	5000	500	2.00
2008	12%	5000	600
2009	5%	5000	250
2010	10%	5000	500
2011	15%	5000	750		2.30
	Dividend Income		RM2600
	Capital Income: [(2.30 -2.00)*5000]				RM1500

Total Income = Dividend Income + Capital Income

(RM2600+RM1500) =RM4100

3.3 RETURN CALCULATIONS

The return on investment can be measuredin two different method using historical and expected data to derive Historical Rates of Return and Expected Rates of Return.

3.3.1 Historical Rates of Return

Investors use this method to compute their rates of return for the investment that they have made in previous year/s to calculate their Holding Period Return (HPR) and Holding Period Yield (HPY).

i. Holding Period Return (HPR)

Holding period return is a very basic calculation to measure how much return investors have gained on a particular investment. HPR is the total return from an investment, including all sources of income for a given period of time.

Example1: Assume that you have invested RM350.00 at begining of the year and at the end of the year, the value of investment increased to RM400.00. in this example the HPR is 1.142, calculated as follows:-

HPR = 400/350

HPR = 1.142

Example 2: Mr. Y has invested RM250 in year 2009 and now the investment worth RM350 after being held for two years, compute:-

a) the HPR = 350/250

=1.40

n = numbers of years the investment is held.

b) the Annual HPR

= HPR^1/n

=1.40^1/2

= 1.1832

Note that HPR value will always be zero or greater and cant never be a negative value.

*HPR*	*Indicator*
HPR > 1	Increase in asset value Increase in investors wealth
HPR< 1	Decrease in asset value Decrease in investors wealth
HPR = 0	Loss all the money in investment
HPR= 1	The value of investment did not change

HPR is one of useful tool for investors to track their investment performance from time to time as well as to evaluate the value of investment.

ii. Holding Period Yield (HPY)

HPY is a return of investment in percentage terms on an annual basis. HPY is derived from HPR minus 1.

(using the same example 1, the HPY of your investment would be = 14.2%)

HPY = HPR -1

= 1.142 -1

= 14.2%

For any investment which has longer period more than one year, investor can use Annual HPY to compare their performace for any particular year.

Annual HPY= Annual HPR - 1 ;

Where, Annual HPR= HPR^1/n

Annual HPY = HPR^1/n – 1

Refer to Example 2: Mr. Y has invested RM250 in year 2009 and now the investment worth RM350 after being held for two years, compute:-

Annual HPY= 350.00^½- 1

250.00

= 1.18 - 1

= 18%

Tips 1

Assume the HPY of an investment is 15%, what is the HPR?

HPY = HPR-1 ; HPR = HPY + 1

HPR = 0.18 + 1

HPR = 1.18

iii. Mean Historical Return

Investor also can evaluate series of past performance of a security or index to predic future returns or to estimate how securities might react to any particular situation in the future using both Arithmethic Mean (AM) and Geometric Mean (GM).

a) Arithmethic Mean (AM)

Also known as Arithmetic Average Return. AM is a measure of mean annual rates of return equal to the sum of annual holding period rate of return devided by numbers of years.

where = the sum of annual HPY.

b) Geometric Mean (GM)

Known as Geometric Mean Return. GM is used to determine the performance results of an investment or portfolio.

Where; = the product of annual HPR as follows:

= (HPR₁) x (HPR₂) x (HPR₃) x.....x (HPR_n)

Example: Table below shows the data of investment in Security A in year

1, 2 and 3:

Year	Beginning	Ending	HPR	HPY
1	200	250	250/200 =1.25	0.25
2	250	230	230/250 =0.92	-0.08
3	230	280	280/230 =1.22	0.22

AM =

= [(HPY₁) + (HPY₂) + (HPY₃)] / 3

= [(0.25) + (-0.08) + (0.22)] / 3

= 0.13 = 13%

GM = ^1/n-1

= [(1.25) x (0.92) x (1.22)]^1/3 - 1

= 1.403^1/3 – 1

= 0.119 = 11.9%

Tips 2

GM is considered as a superior measure of the long-term mean rate of return because it indicate compounded annual return based on the ending value of investment versus the begining or initial investment.

3.3.2 Calculating Expected Rates of Return

In the situation which investors did not have any historical data on the investment, they can use the expected rate of return to decide whether to invest or not to invest in particular asset. The Expected Rates of Return (ERR) is a projected percentage return on an investment, based on the weighted probability of all possible future rates of return. This rate will be the basis of investor’s expectation toward the performance of an asset in the future.

ERR is calculated by the following formula:

The following example illustrates the principle that the formula expresses:

Example 1: Assume the current price of ABM, Inc. stock is trading at RM10. The economic conditions and returns are as follows:

Economic Condition	Probability	Return (%)
Strong	0.25	30
Weak	0.50	20
Not Change	0.20	30

To find the expected rate of return, simply multiply the percentages by their respective probabilities and add the results:

Example 2: Table below shows the investment return of 3 assets/markets based on different economic situations, compute the ERR for each asset.

State of Economy	Probability	Return
State of Economy	Probability	Money Market	Derivatives market	Government Bond
Deep Recession	0.05	6.0%	-27.0%	10.0%
Mild Recession	0.20	3.0%	-5.0%	6.0%
Typical Economy	0.50	2.0%	9.0%	4.0%
Mild Boom	0.20	1.0%	23.0%	2.0%
Strong Boom	0.05	-2.0%	45.0%	-2.0%
Therefor; ERR =
Expected Rate of Return =		2.0%	9.0%	4.0%

Calculations:

- FURTHER READING: Refer to-------

CHAPTER 2: MALAYSIAN EQUITY MARKETS & TRANSACTIONS

2015-01-16T09:36:00.000+08:00

CHAPTER 2

MALAYSIAN EQUITY MARKETS AND TRANSACTIONS

Types of Market and Financial Instrument

Initial Public Offerings (IPOs)

Bursa Malaysia and MESDAQ

Securities Commission

Trading on Bursa Malaysia and MESDAQ

On-line Investing

2.1 INTRODUCTION

In accordance to understand on types of market and financial instrument, we have have to familarise with the term of financial system. A Financial system can be defined as a set of institutional units and markets that play a role in mobilizing funds for investment by providing facilities in a complex commercial activities.

2.2 TYPES OF MARKET AND FINANCIAL INSTRUMENTS

Financial markets can be divided into three main categories: - Money Market, Capital Market and Derivatives Market in which there are various fractions of assets based on level of the risks, the period of maturity and different characteristics.

2.2.1 Money Market

Money market basically consists of the securities or financial instruments that are short-term nature, low risk and marketable. Given below are the financial instruments in the money market:

Treasury bill

Certificates of Deposit

Commercial Paper

Bankers Acceptance

Repo & Reverse

Eurodollar

Federal Fund

LIBOR / KLIBOR

A. Treasury Bill

The government will issue Treasury bills to the public and corporate sectors as their short-term financing. It is a very marketable financial instruments and highest in demand. This is because the treasury bills is highly liquid, which are easily converted into cash and has low risk. Apart from that, the interesting features are the profits on purchases of treasury bills for some of the government is exempt from tax. Investors who are interested to buy the bills are sold at a discounted price which the purchase price is lower than the face value / par. Treasury bills will be sold or handed over to the government when they reach maturity at par. The difference between the selling price and buying price is the profits earned on these investments.

The maturity of treasury bills was 91 days, 182 days and 52 weeks. Treasury Bills 91 and 182 days are offered by the government on a weekly basis, while Treasury Bills 52 days is offered every month. The selling method of the bills is by auctioning the bills; the highest bidder will get the contract. Individual investors who are interested can get directly through the Treasury bill auction session or make a purchase from the secondary market. The purchase can be requested through the authorised financial dealer / broker.

Suppose you are invested in Treasury Bills with face value of RM10,000.00 at a discounted price RM 9,500.00. The bills are due in 6 months from today (Maturity period of Treasury bills 182 days). As the result, the earnings of those instrumentswere:

Profit = Selling Price – Cost Price

= RM10, 000 - RM9, 500

= RM500

Effective Rate = Total Profit__

Amount invested

= 500

9,500

= 0.0526% @ 5.26% within 6 months.

B. Certificates of Deposit

Certificate of deposit is similar to fixed deposit in the bank. It is different from the regular deposits (saving accounts) because the certificate of deposit has a specific maturity date as agreed between investors and bankers. During maturity period, the investor will gain return on principal and interest of the certificate of deposit. This certificate can be transferred or sold to other investors if those investors need to cash their certificate before it reached maturity.

C. Commercial Paper

The large companies (blue chip Company) will usually produce short-term debt notes called commercial paper as collateral for loans to avoid making loans directly from financial companies. Commercial paper is a note which will be supported by any bank to ensure the company which issued the note will be able to make payment on the maturity of the promissory note.

Usually, the maturity of commercial paper is 270 days while the promissory notes will have longer maturity period and it should register at the Securities Commission. Nevertheless, the promissory notes with more than 270 days maturity period are rarely issued. The commercial paper is one of the most reliable financial assets because of their short maturity which allows investors to evaluate the performance of its issuer.

International rating companies like Moody's Investor Services, Standard & Poor's Corporation, Finch, and Solomon Brothers Investor Services are those who are graded and rated the level of trade paper which available in the market. Rating is very important because it acts as an indicator on the performance of the companies issuing the promissory notes.

D. Banker's Acceptance

The customer of the bank will order the bank to make a specified sum of money on a specified date to a named person or the bearer of the draft. Usually the customer will order the bank to pay the banker’s acceptance at a future date, typically within six months. At this stage, it is like a post-dated check. When the bank endorses the order for payment as "accepted", it becomes a liability to the bank to pay the holder of the acceptance. Normally, these notes are sold at a discounted value just like a treasury bills and available in the secondary market.

E. Repo & Reverse

A repo is quite similar to a secured loan, where it has a short term of maturity period and involves government securities. Usually it has a one-day maturity transaction, thus the investors will gain the profit overnight when the government will pay at a higher price for the next day. By the way of explanation, the purchase of this instrument with the agreement to sell them at a higher price at a specific future dates in order to raise short-term capital.

As for 30 days of loan, term repo will be issued by the government. Both types of these repo instruments are reliable financial instruments because they are secured and guaranteed by the government securities.

F. Eurodollar

Eurodollar deposits refer to the denomination (currency) of certain country which available at foreign banks or local bank branches in the foreign countries. Consequently, this type of deposits is subject to comply with that country's central bank. Investors will receive interest on these deposits as savings in the fixed deposit account or a Certificate Of Deposit.

G. Federal Fund

Every bank which operates in an economy is required to make the reserve deposit (savings) in the Central Bank or the Federal Reserve System. The total reserves that imposed on a bank aredepending on the amount of deposits of the customers. The purpose for this reserve is to protect the interests of customers in the event of an undesirable risk to the bank.

Furthermore, this accumulated deposit known as the Federal Fund shall be used as a loan by any bank that has insufficient funds to avoid an overdraft of their reserve account, hence to cover their deficiencies in the short-term period and available for immediate spending. Normally, these loans are made for one day only, that is overnight and the rate is known as the Federal Funds Rate.

H. LIBOR / KLIBOR

LIBOR is the acronym for London Interbank Offered Rate (Interbank Lending Rates at London) and KLIBOR refers to the Kuala Lumpur Inter Bank Offered Rate (Interbank Lending Rates in Kuala Lumpur). The Kuala Lumpur Interbank Offered Rate is the average interest rate at which term deposits are offered between prime banks in the Malaysian wholesale money market or interbank market. It can best described as a benchmark for the short-term interest rate on loans that set by the major banks to their borrowers (other banks) that need funding. In other words, any bank that needs to raise their capital may borrow from any bank and the interest on loan is based on LIBOR or KLIBOR (if in Malaysia).

Rate of Return in Money Market Instruments.

As mention above, the instruments in the Money Market is a low risk investment. Though, it does not mean that the instruments are free from any risk. Therefore, investors should make thorough and wise judgement and attention in making decisions on investments of the securities that are discussed earlier. As for rate of return on investment in these instruments, it is lower than the rate of return on investment in the Capital Market instruments.

2.2.2 Capital Markets

As we discussed earlier, the money market instruments have a short-term investment period as compared to capital market instruments, which have a long-term investment period. Therefore, it relatively exposed to the highest risk, and offers higher rate of return than money markets.

Respectively, capital markets give a significant contribution to the economic and industrial development. This is because the existence of long-term funding to enable the surplus can be transferred to those in need of additional funds. Given below are the examples of capital market instruments such as bond and share.

A. Bonds

Bonds are long-term debt securities issued either by governments or large companies in order to obtain funds without making any bank loans or issuing new shares. Bond offers benefits to those who publish them because there are no monthly installment payments such as bank loans. In addition, it provides the issuer with the external funds to finance long-term investments for a company and for government, to finance current expenditure. The bondholders do not have any right to vote or act as a proxy in an organisation or a company.

Since the government is refrain from issuing shares (as the government is not a company), then issuing bonds is one of the alternative used by the government to obtain source of long-term fund other than bank loans or the International Monetary Fund (IMF). However for the investors, they will get the return or fixed interest rate every year for the duration of bond holdings. Payment of interest on the bonds may be just once a year, 2 times a year or every quarter of the year, depending on the terms stated in the contract. Interest rates on bonds are known as the coupon rate.

The bonds that available in the market today are government bonds, corporate bonds, municipal bonds, international bond, convertible bond, mortgage bonds and loans from federal agencies.

I) Treasury Bonds :Usually Treasurybond that issued and sold by the government has a maturity period between 10 to 30 years with a minimum face value of RM1, 000.00 or higher. Investors will receive a coupon rate once or more in a year. Normally, the government will make an early call for repayment of the bonds at face or par value, for example 5 years earlier than the maturity date. With this, the government did not have to pay the coupon rate for the next 5 years. Since these bonds are issued by the government of a country, then the risk is relatively lower as compared to other bonds. In order to attract investors, there is some countries offer tax exemption on income from investments in treasury bonds.

ii. Corporate Bonds :Issued by private companies or large corporations as a direct source of long-term financing from the households’ investor. Corporate bonds are more risky as compared to government bonds. Corporate bonds can be divided into three categories namely secured bonds, debentures and subordinate debentures.

iii. Municipal Bond: Bonds are issued by state or local government. Some of the bonds offer tax exemption on revenue and profits on investments. Other features of the bond are similar to treasury bonds as we discussed earlier.

iv. Convertible Bond: Convertible Bond is the only bond that allows the issuer to change the status of the bond. Thus, investors who previously bought the bond will become a shareholder of the company and entitled to receive an annual dividend.

B. Shares

Investment in shares is a long-term investment. This is because the shares have no maturity period, and it continues to exist as long as the companies still exist. Shares can be divided into two types: ordinary shares and preference shares. Ordinary share is a financial instrument that represents ownership of a company.

Common stockholders are the true owners of the company and have the right to vote and determine the direction of the company in the future. Apart from having the right to vote, they are also entitled to earn any dividends or profits of the company, however, the dividends of ordinary shares is flexible due to profit arise. Therefore if the company suffered a loss, the liability of shareholders is limited to the number of shares they invested in.

The ordinary shareholders will have the right to make a claim on company’s property when all the debts have been settled. Although common shareholders bear more risk than preference shareholders, they have more control and can reap greater benefits in the form of dividends (the dividend of ordinary shares is not fixed) and increase in the value of shares.

Preference shares have different characteristics as compared to ordinary shares, in terms of dividends; preference shares receive fixed dividend payments during the holding period. At the same time, if the company experienced bankruptcy, property claims will be paid to ordinary shareholders. The preference shareholders entitled to namely fixed dividends and also able to receive an additional dividend at the specified rate after dividend to ordinary shareholders is amortised. This type of shares entitled to be paid its dividend twice.

Today, the ordinary shares in public limited companies can be traded in the open market at the worldwide stock exchange and it is growing rapidly. In Malaysia, the stock market traded at the Kuala Lumpur Stock Exchange (KLSE)

2.2.3 Derivatives Market

One of the markets that are blooming in today’s environment of investment is the Derivatives Market. Derivatives markets can be described as where a financial instrument is pegged to the value of an asset or commodity basis. These markets have been introduced since 1975 and are very useful as a way to safeguard the value of commodity price changes dramatically. These positive market developments will encourage more assets to be traded including stocks, bonds, commercial papers and, etc. The return on this investment is depending on the performance of the movement of underlying asset price. The basic instruments in the Derivatives Market are the Option, Forward and Futures. (Further discussion in Chapter 7)

Types of Markets and instruments available.

2.2.4 Differentiate between Money Market and Capital Market

Based on early discussion, the Money Market and Capital Marketcan be distinguished on the basis as follows:-

1. Maturity Period:

The money market instruments deals in the lending and borrowing or investing of short-term finance (i.e., for one year or less), while the capital market deals in the lending and borrowing or investing of long-term finance (i.e., for more than one year).

2. Credit Instruments:

The main credit instruments of the money market are certificates of deposits, bankers' acceptance, repurchase agreements, commercial paper and bills of exchange. On the other hand, the main instruments used in the capital market are stocks, shares, debentures, bonds, securities of the government.

3. Risk and Return Exposure:

There are more speculations in the capital market as compare to the money market because capital market offers longer maturity periods on the credit instruments. Moreover, higher returns are paid on the securities traded in thecapital market to compensate the higher risk.

Risk is slightly lower in Money market hence the maturity of one year or less gives little time for a default to occur.

4. Purpose of Loan:

In terms of financing purposes, the money market meets the short-term credit needs of business especially to provide working capital to cover short term operating cost for the business but, the capital market, on the other hand, caters the long-term credit needs of the industrialists and provides fixed capital to buy land, machinery, etc.

Dimension	Money Market	Capital Market
Maturity Period	Short-term financing (one year or less)	Long-term financing
Credit Instrument	T-bill, Bankers Acceptance, Certificate of Deposit, Repo & Reverse, etc.	Stock, Share, Debenture, Bond
Risk and Return Exposure	Low	High
Purpose of Loan	Financing for working capital	To finance fixed capital

Table: The differences between Money Market and Capital Market.

2.3 INITIAL PUBLIC OFFERING (IPO)

Initial Public Offerings (IPOs) is refers to the process of selling stock by a private company to the public at the first time. Normally, IPOs are often issued by smaller or younger companies seeking for additional capital to expand their business. In investment, IPO also known as ‘going public’.

In an IPO, the issuer obtains the assistance of an underwriting firm which is investment bank, which helps the company to determine what type of security to issue (common or preferred).

At the same time, this institution will determine the best offering price and the right time for the shares to enterthe market.

2.3.1 The Procedure involved in IPO

The listing procedure in Bursa Malaysia can be divided into two different categories, Main Market and ACE Market. These two new markets were introduced by Bursa Malaysia on 3^rd August 2009 as a replacement of Main Board, Second Board and MESDAQ Market in Bursa Malaysia.

MAIN MARKET – merging of Main Board and Second Board

ACE MARKET – revamp of MESDAQ Market

This new framework for listings and equity fund-raisings is aimed at allowing efficient access to capital and investments, as well as making Bursa Malaysia a more attractive platform for Malaysian and foreign companies.
There is a significant shift in the regulatory approach with regards to listings and equity fund-raisings. This shift to a more market-based regulatory approach is to ensure greater efficiency and competitiveness without compromising on investor protection. At the same time it will help the Security Commission in terms of monitoring the corporate governance.

Main Market application requires:-

i. The Company’s prospectus to be registered with the SC and the commission will generally complete its assessment and register the IPO prospectus within 60 working days from the date of a full and complete application. (As stated under Section 212 of the Capital market and Service Act 2012).

ii. Comply with the Equity Guidelines and the applicant’s directors and substantial shareholders are free from any adverse records and corporate governance issues.

iii. The IPO prospectus will be reviewed for adequacy of disclosure and compliance with Prospectus Guidelines- Equity and Debt.

2.3.2 The reasons for IPO

i. Alternative source of financing

An alternative financing option from conventional bank loans, which are costly & require fixed terms of repayment. Capital from new shareholders at minimal/ no cost (save for administrative cost).

ii. Ability to grow

Growth opportunities with new capital outlay generated from shares.

iii. Enhanced image and status of company

Preference often given to listed companies in awarding major projects as they are generally viewed to be more stable and financially viable than private held companies.

iv. Enhanced Liquidity

Liquidity of securities greatly enhanced since quoted securities are easily tradable & potentially trades at premium. Quoted securities tend to be accepted by lenders as collateral.

v. Ability to attract and retain quality employees

Companies are able to attract and retain quality staff & professionals.

Table shows the IPO’s in Bursa Malaysia in year 2012

NAME OF COMPANY (Stock Code / Stock Short Name)	OFFER PERIOD	ISSUE PRICE (Per Ordinary Share)	NO OF SHARES			LISTING SOUGHT	DATE OF LISTING
NAME OF COMPANY (Stock Code / Stock Short Name)	Opening	ISSUE PRICE (Per Ordinary Share)	Public Issue (Mil)	Offer For Sale (Mil)	Private Placement (Mil)	LISTING SOUGHT	DATE OF LISTING
Astro Malaysia Holdings Berhad - Retail Offering - Institutional Offering (6399/ASTRO)	21-09-12	RM 3.00	259.8 214.4	- 1,044	-	Main Market (Trading / Services)	19-10-2012
IGB REAL ESTATE INVESTMENT TRUST (5227/IGBREIT)	27-08-12	RM 1.25	-	670	-	Main Market (REITS)	21-09-2012
Datasonic Group Berhad (5216/DSONIC)	03-08-12	RM 2.00	20	up to 7.9	1.85	Main Market	03-09-2012
Pasukhas Group Berhad (0177/PASUKGB)	02-08-12	RM 0.12	90	-	55	ACE Market (Trading / Services)	29-08-2012
Felda Global Ventures Holdings Berhad (5222/FGV)	31-05-12	RM 4.55	980	1,208	N/A	Main Market	28-06-2012

Source: Bursa Malaysia; Initial Public Offering; Last updated: 13 Dec 2012

CHAPTER 1: INTRODUCTION TO INVESTMENT

2015-01-16T09:25:00.004+08:00

CHAPTER 1

INTRODUCTION TO INVESTMENT

Introduction

Definition of Investment

The Differences between Investment Concept and Speculations

Financial System’s Users

1.0 INTRODUCTION

Investment:

The purchase of a financial assets with an expectation of favourable future returns. In general terms, investment means the use of money in the hope of making more money in the future.

Investment is an important aspect to nourish and strengthen the economy either individually, small groups and national level of management resources. In this matter, we often see that the investment will be associated with the ability among individuals on returns they made based on potential risks for each investment or portfolios that are formed.

Although we tend to measure the wealth of economy by referring to the capacity of national production, infrastructure development, services andsophisticated technology wealth, where all of these are focused on physical assets. However, indirectly, it cannot be denied that the financial assets also make a contribution in physical assets existing. For example, in the establishment of a national car production, require a large allocation of funds to finance the project. Therefore, companies should consider the alternatives whether using existing capital provision, issuing new shares, issuing bonds or by using financial instruments available in the market. This shows that financial assets play a significant role in the existence of visible assets.

In addition, financial assets will also allow the distribution of wealth and profits in the economy became more extensive and not confined to certain groups. Most of us may not be able to have their own car factory; hence, we can still enjoy the benefits and take part in business activities if we own the shares in that car company. This example shows that the existence of financial assets not only helps the existence of physical assets, also giving space and opportunity to individuals in the economy to enjoy the benefits from whichever industry they are invested in.

1.1 DEFINITION OF INVESTMENT

Investors are advised to make a wise decision in making an assessment of risks and returns on investment that may be encountered by them.

Return or profit on the investment may consist of dividends, capital gains or interest (financial assets) and cost of an asset. In other words, investment is an activity for earning the future profits or increased in future value of money based on the current monetary value.

Most people are actually involved with an investment during their life; we will make savings to enable us to withdraw money in the near future or during emergencies. We also may purchase houses or land hoping in the future we can sell them at a higher price. If you are interested in the equity markets, you may consider of buying shares of companies that have the potential to grow, and will sell the shares back after reaching your desired price. Or, you may consider of buying insurance or make a deposit in savings account hoping that the money will grow and can be used after your retirement. Mention above is some examples of good investment in real assets and financial assets.

1.2 INVESTMENT VS SPECULATION

Examples of the most common speculation are managing the sale and purchase of foreign currency or FOREX Market. Today, the speculators are not really interested in the financial assets; they just wanted to make profit as we can see today in options and futures commodity markets. In addition, speculation aimed at making a profit in the short term than the concept of a long-term investment.

Table 1: The differences between Investment and Speculation

	Investment	Speculation
Exposure of Risk	Reasonable – base on analysis	High Risk/Unexpected
Return	Moderate	High Return
Period	Medium and Long-Term	Short Term
Instrument	T-Bill/Bond/Stock	Derivative Market/ Speculative Bond/ Stock

1.3 FINANCIAL SYSTEM’S USERS/CLIENTS

We can divide the customers of the financial system to the three categories, namely: -

i. Household Sector

Notwithstanding, some of them are also more interested in stocks, bonds and financial instruments that have higher return with higher risk unit trusts. Thus, this situation depends on the consideration of household willingness to accept risk on their investments. Hence, there are so many financial instruments either conventional or Islamic with various features today as to attract households to make fair judgments on investment.

ii. Business Sectors

In the company's efforts to get their capital, they have a number of approaches which - to borrow capital from a finance company / bank or issue a mortgage. Another method is to issue shares by taking new partners.

The objective for issuance of shares by the company is to get the best price for the securities issued and also has a lower cost of capital as compared to bank loan or financialinstitutions.

iii. Government Sector

It should be remembered that, the government cannot issue shares as common practice as companies. They are also not recommended to print a large amount of money (even though they are basically able to do so) because this action could lead to inflation and the government usually refrain from doing so. Thus, the best that could be adopted by the government for long-term funding is through the issuance of government bonds. As for short-term financing, the government may offer treasury bills to any interested party.

Table 1 shows the components of assetsand liabilitiesof USA Government by Board Governors of The Federal Reserve System, Jun 2000.

ASSETS $ Billion		% Total	LIABILITIES $ Billion		% Total
Deposit, currency			Currency	25	0.6
&gold	98	18.05786	Government securities	3653.6	81.8
Mortgages	76.8	14.15146	(Treasury Bonds)
Loan	182.9	33.70186	(Treasury Bills)
			Insurance &Reserves Pension	708.2	15.9
			Miscellaneous	76.8	1.7
Total	542.7	100	Total	4463.6	100

Refers to table 1, which consists of Government Securities Treasury bonds and Treasury bills are among the largest financial contributor to the United States in 2002. A total of 81% state funding is derived from debt instruments.

Summary:

• Investment refers to the commitment of financial resources that we have today hoping to earn a profit / benefit in the future.

• Investment can occurs either own/invest in the financial assets or physical assets.

• Investments are made based on consideration of a reasonable amount of return and risk rather than speculative activities that addresses the high-risk investment with the higher expected rate of return. Speculative actions would expose investors to a higher risk.

• Customers of the financial system are divided into three main sectors, namely household sector, corporate sector and government.

• The financial market consists of three main categories: Money Market, Capital Market and Derivatives Market.

• Money market refers to the short-term securities or financial instruments, where it has a lower risk and marketable.

• Capital Markets comprise of along-term financial instruments, where it bears ahigher risk and relatively difficult to convert into cash and transferred the ownership. The rate of return offered is higher than the money market instruments.

• Derivatives Markets is a market where a financial instrument is pegged to the value of an asset or commodity basis. This market is very useful as a way to protect the value of commodity price changes dramatically.

• The development of derivatives markets encourages more traded assets in the Market, which, include stocks, bonds, commercial papers and etc. The return on this investment is depends on the movement of performance of the underlying asset price.

Discussion:

Part A: True / False.

1. The government may seek funding through the issuance of Treasury bills,Treasurybonds, including shares to finance development expenditure.

2. Investment refers to ownership of financial and physical assets.

3. The true speculator is not interested in financial assets that are purchased but they have a profit making motive in their mind.

4. Commercial paper is a medium-term debt notes which serve as collateral on a loan as to avoid a direct loan from the bank.

5. Business and government sectors are the main customers of the financial system.

6. Investors are encouraged to invest in cyclical industries during the economic downturn.

7. The option entitles the holder to buy or sell assets at determined prices during or before maturity.

8. The contribution on financial assets isnot much helped as compared to physical assets in developing a country's economy.

Part B: Essay

Describe the relationship that exists between the physical assets and financial assets. In your opinion which of the assets to give better returns?
In your opinion, why individuals should make the investment, whether in physical assets or financial assets?
Define the investment. Why does every individual and organization should give serious consideration in decision making on investment? Discuss.
Speculation is one of the branches of the investment. Explain why investors are not encouraged to engage in speculative activities. Differentiate between Money and Capital Markets.
State four (4) of Money Market instruments and two (2) ofCapital Market instruments.
Derivatives Market is among the fastest growing market in Malaysia, and elaborates on the market along with the instruments in it.
Give three (3) Derivative Market advantages to investors who are involved in processing of the crude oil industry.
A company that wants to raise and require additional capital funds can have several alternative ways to increase their capital. Please describe the methods or financial instruments that can be adopted for the long-term financing. A financial instrument is most suitable for a long term financing? Give your reasons.

2013-12-05T22:56:00.002+08:00

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2013-07-29T17:01:00.003+08:00

CHAPTER 1

INTRODUCTION TO INVESTMENT

Introduction

Definition of Investment

The Differences between Investment Concept and Speculations

Financial System’s Users

1.0 INTRODUCTION

In general, investment may be referred to the ownerships of physical and financial assets. The physical assets may consist of investment and ownership of property (including buildings), machinery, technology and any forms of visible sources. Meanwhile, financial assets are comprised of shares, bonds, trade notes’ ownership and other ownership of financial assets. Although we tend to measure the wealth of economy by referring to the capacity of national production, infrastructure development, services and sophisticated technology wealth, where all of these are focused on physical assets. However, indirectly, it cannot be denied that the financial assets also make a contribution in physical assets existing. For example, in the establishment of a national car production, require a large allocation of funds to finance the project. Therefore, companies should consider the alternatives whether using existing capital provision, issuing new shares, issuing bonds or by using financial instruments available in the market. This shows that financial assets play a significant role in the existence of visible assets.

1.1 DEFINITION OF INVESTMENT

Investment is the commitment of financial resources that we have today hoping to gain profit/benefit in the near future. Investment can occur by managing systematically and making decision based on specific analysis on the financial assets or physical assets. Investors are advised to make a wise decision in making an assessment of risks and returns on investment that may be encountered by them. Return or profit on the investment may consist of dividends, capital gains or interest (financial assets) and cost of an asset. In other words, investment is an activity for earning the future profits or increased in future value of money based on the current monetary value.

1.2 INVESTMENT VS SPECULATION

If we make a comparison between investment and speculation, the main element that distinguishes both of them is the exposure to risk and expected return on the sum of investment. In the area of investment, as discussed earlier, the decision was based on a reasonable assessment of risk to the accessibility and specific analysis which gives a reasonable profit. This contrasts with the high-risk speculative activity and provide a high return rate. Here, the possibility of making a large profit or loss is very high. Examples of the most common speculation are managing the sale and purchase of foreign currency or FOREX Market. Today, the speculators are not really interested in the financial assets; they just wanted to make profit as we can see today in options and futures commodity markets. In addition, speculation aimed at making a profit in the short term than the concept of a long-term investment.

1.3 FINANCIAL SYSTEM’S USERS/CLIENTS

We can divide the customers of the financial system to the three categories, namely: -

i. Household Sector

Household sector is among the consumers and a major contributor in the financial system. In general, household’s investments are not only focused on owning the physical assets such as houses, land and cars but they also invested in financial assets that have potential and attractive according to their financial capability. At the same time, households also make financial planning for their retirement by allocating part of their income that set up by government or corporate to invest in the units trust in the market. Notwithstanding, some of them are also more interested in stocks, bonds and financial instruments that have higher return with higher risk unit trusts. Thus, this situation depends on the consideration of household willingness to accept risk on their investments. Hence, there are so many financial instruments either conventional or Islamic with various features today as to attract households to make fair judgments on investment.

ii. Business Sectors

If the household sector is more focused on the question of where and how to invest their money, businesses are more focused on how and where they can obtain financial resources to fund their business. Capital funding is needed to build factories, buy machinery and equipment, paying wages and salaries of workers and allow their business operations running smoothly. In the company's efforts to get their capital, they have a number of approaches which - to borrow capital from a finance company / bank or issue a mortgage. Another method is to issue shares by taking new partners.The objective for issuance of shares by the company is to get the best price for the securities issued and also has a lower cost of capital as compared to bank loan or financial institutions.

iii. Government Sector

As business institutions, governments usually require funding to manage public expenditure. Most of the government revenue is comprises of tax collection, and if the generating revenue is not enough to cover the expenditure, the government should consider other methods to meet their needs. It should be remembered that, the government cannot issue shares as common practice as companies. They are also not recommended to print a large amount of money (even though they are basically able to do so) because this action could lead to inflation and the government usually refrain from doing so. Thus, the best that could be adopted by the government for long-term funding is through the issuance of government bonds. As for short-term financing, the government may offer treasury bills to any interested party.

-to be continued - happy readings.....

PB601 INVESTMENT MANAGEMENT - available now with CD

2013-07-19T11:33:00.004+08:00

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2013-07-15T11:49:00.002+08:00

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2012-02-17T12:04:00.002+08:00

4.2 KELEBIHAN DAN KEKURANGAN PELABURAN DALAM SAHAM BIASA

Oleh kerana saham biasa merupakan salah satu daripada instrument pelaburan, secara umumnya instrument ini mempunyai kelebihan kepada pihak pelabur serta syarikat yang menerbitkan saham tersebut. Walau bagaimanapun, terbitan serta pelaburan di dalam saham biasa turut boleh mengundang kepada risiko tertentu sekiranya tidak diuruskan dengan baik dan berkesan.

4.2.1 Kelebihan dan kekurangan terbitan saham kepada syarikat.

Dalam usaha meningkatkan daya saing serta keupayaan syarikat untuk bersaing di peringkat global, faktor penting yang perlu dititik beratkan adalah saiz sesebuah perniagaan yang digambarkan melalui jumlah modal berbayar yang dimiliki oleh syarikat. Semakin besar saiz modal syarikat, maka secara relatifnya mereka mempunyai kuasa pasaran yang lebih tinggi serta berkeupayaan untuk memastikan setiap projek, usahasama, aktiviti pengeluaran, pemasaran serta promosi yang lebih baik. Pada masa yang sama akan dapat mempertingkatkan kepercayaan pelanggan dalam berurusniaga.

Jadual di bawah menunjukkan kedudukan syarikat-syarikat utama dalam industri kewangan dan perbankan dunia yang dikuasai oleh Citigroup dengan jumlah aset syarikat sebanyak $1,494 billion dan nilai pasaran $230 billion dollar pada tahun 2011. Penguasaan aset amat berkait rapat dengan jumlah modal yang dimiliki oleh sesebuah sayrikat dan kebiasaannya syarikat yang mempunyai modal yang kukuh berupaya untuk menjana jumlah aset yang lebih besar jika dibandingkan dengan syarikat yang memiliki modal yang lebih keciI.

Jadual: Kedudukan Syarikat Industri Kewangan dan Perbankan Dunia 2011.

World Rank	Name	Country	Sales ($Bil)	Profit ($Bil)	Assets ($Bil)	Market Value ($Bil)
1	Citigroup	USA	120.32	24.64	1494.04	230.93
3	Bank of America	USA	85.39	16.47	1291.80	184.17
5	HSBC Group	UK	76.38	12.36	1274.22	193.32
9	JPMorgan Chase	UK	79.90	8.48	1198.94	106.41
14	Royal Bank of Scotland	UK	55.05	8.66	1118.90	106.41
17	BNP Paribas	France	60.90	6.33	1227.95	77.73
19	Banco Santander	Spain	44.81	8.54	956.39	91.34
20	Barclays	UK	47.87	5.92	1587.06	75.99
24	HBOS	UK	51.74	5.87	850.06	71.25
26	Wells Fargo	USA	40.41	7.67	481.74	107.80
39	Wachovia	USA	35.91	6.64	520.76	88.42
41	ABN-Amro Holding	Netherland	50.03	5.18	1,041.14	54.74

Source: (Sumber:FORBES: www.forbes.com 2012)

Financial Times 2012 turut menyenaraikan kedukan terkini konglomerat-konglomerat utama dunia dari pelbagai industri yang menunjukkan jumlah penguasaan modal dan aset sebagaimana yang ditunjukkan di dalam jadual di bawah:-

Jadual: Kedudukan Syarikat Terbesar Dunia Tahun 2011

World Rank	Name	Country	Sector	Market Value ($Mil)	Profit ($Mil)	Assets ($Mil)

1	Exxon Mobil	USA	Oil & Gas	417,166	30,460	298,983
2	PetroChina	China	Oil & Gas	326,199	21,239	251,279
3	Apple	USA	Technology	321,072	14,013	75,183
4	Industrial & Commercial Bank of China	China	Banks	251,078	25,059	2,042,093
5	Petrobras	Brazil	Oil & Gas	247,417	21,198	309,336
6	BHP Billiton	Aust/UK	Mining	247,079	12,148	83,835
7	China Construction Bank	China	Banks	232,608	20,460	1,640,236
8	Royal Dutch Shell	UK	Oil & Gas	228,128	20,411	317,199
9	Chevron	USA	Oil & Gas	215,780	19,024	183,918
10	Microsoft	USA	Software	213,336	18,760	86,113

Sumber: Financial Times 2012

Selain daripada itu, penerbitan saham biasa oleh syarikat juga turut memberikan kelebihan-kelabihan seperti berikut:-

§ Mengurangkan Kekangan Hutang (Leveraj) Syarikat

Sekiranya pihak syarikat menggunakan instrumen hutang sama ada hutang jangka sederhana atau jangka panjang bagi membiayai perniagaan syarikat, mereka akhirnya perlu memikirkan untuk membuat pembayaran faedah yang merupakan kos ke atas pinjaman yang telah dibuat. Bayaran atau caj faedah merupakan kos wajib yang perlu ditanggung oleh pihak syarikat bermula dari pinjaman dibuat sehinggalah keseluruhan prinsipal berjaya dilangsaikan. Secara tidak langsung komitmen ke atas pembayaran kos pinjaman ini akan menjejaskan alir tunai syarikat. Pada masa yang sama, caj kadar faedah tetap perlu dibayar walaupun situasi kewangan syarikat berada dalam kegawatan. Ini berlainan jika syarikat memilih untuk menjana modal tambahan melalui penerbitan saham, dimana, mereka mempunyai opsyen untuk menangguhkan, mengurangkan atau tidak membayar apa-apa dividen sekiranya prestasi kewangan tahun semasa dalam keadaan yang tidak mengizinkan.

§ Peningkatan Alir Tunai

Pihak syarikat boleh menggunakan strategi belian balik (buy-back/repurchase) saham mereka di pasaran apabila harga saham syarikat menurun, dan bertindak menjual semula di pasaran apabila nilai saham mula meningkat. Strategi ini sesuai digunakan bagi meningkatkan alir tunai syarikat hanya sekiranya pihak syarikat menjangkakan bahawa nilai intrinsik saham akan terus mencatatkan pertumbuhan pada masa yang akan datang. Selain daripada itu, aktiviti belain balik bertujuan untuk mengurangkan jumlah saham syarikat dipasaran bagi menstabilkan harga saham syarikat termasuklah mengurangkan aktiviti-aktiviti pelabur yang boleh memberikan impak negatif terhadap syarikat seperti spekulasi, kawalan ke atas saham dan sebagainya.

.......Sambungan......

Saham Biasa (Malay Version)

2012-02-16T11:35:00.001+08:00

4.0 PENGENALAN

Saham biasa (common stock/common share) merupakan salah satu intrumen pelaburan yang terawal diperkenalkan bagi menjana modal perniagaan syarikat disamping memberikan peluang pelaburan kepada para pelabur yang terlibat di dalam pasaran tersebut. Pada asasnya, saham biasa membawa maksud pelaburan berbentuk ekuiti yang memberikan pemilikan kepada pemegang saham terhadap asset sesebuah perniagaan. Pada masa yang sama, para pemegang saham turut memiliki kuasa mengundi serta berhak menentukan hala tuju syarikat pada masa sekarang dan masa hadapan. Sehubungan dengan itu, para pemegang saham biasa adalah bertanggungjawab sepenuhnya terhadap kejayaan ataupun kegagalan sesebuah perniagaan atau syarikat.

Sebagai imbuhan kepada modal yang telah disumbangkan, mereka berhak untuk menerima dividend seandainya prestasi kewangan syarikat dalam keadaan yang baik dan mengizinkan. Begitu juga sebaliknya, apabila syarikat mengalami kerugian, maka para pelabur akan berkemungkinan besar untuk dinafikan dividen malahan dalam sesetengah keadaan yang lebih teruk apabila syarikat muflis, maka para pelabur bakal kehilangan keseluruhan pelaburan yang telah mereka buat ke atas saham berkenaan. Ini adalah kerana tuntutan pemegang saham hanya akan dibayar sekiranya ada lebihan setelah semua hutang-hutang syarikat telah berjaya dilangsaikan.

4.1 CIRI-CIRI SAHAM BIASA

Oleh kerana pemilikan saham biasa merujuk kepada pemilikan sesebuah perniagaan dan berbeza dengan sekuriti-sekuriti hutang yang lain maka saham memberikan beberapa keistimewaan dan kelebihan kepada para pelabur, antaranya ialah:-

§ Hak untuk menerima dividend daripada perolehan perniagaan syarikat setelah mendapat kelulusan daripada ahli lembaga pengarah syarikat.

§ Hak untuk menjual semula saham (liquidity right) serta memperolehi keuntungan modal sama ada di dagangkan semula di pasaran terbuka/saham ataupun kepada pemegang saham sedia ada.

§ Hak mengundi serta memilih ahli lembaga pengarah syarikat disamping menyuarakan persetujuan atau bantahan dalam kes-kes berkaitan penggabungan syarikat, penjualan asset, perubahan kepada memorandum dan artikel syarikat serta dissolutions.

§ Preemptive Right atau hak membeli terlebih dahulu, sekiranya syarikat bercadang untuk menerbitkan saham-saham baru, maka pemegang saham sedia ada berhak melanggan saham tersebut pada harga yang lebih rendah dari nilai pasaran sebelum ditawarkan kepada bakal pelabur-pelabur baru.

§ Hak untuk mendapatkan kembali sumbangan modal sekiranya perniagaan telah ditamatkan atau dicairkan bergantung kepada keputusan lembaga pengarah syarikat. Walaubagaimanapun, tuntutan ini hanya akan dibuat setelah kesemua liability syarikat telah dilunaskan. Dengan lain perkataan hutang-hutang syarikat, terbitan bon, pinjaman berjangka serta hutang pembekal akan diselesaikan terlebih dahulu, sebelum lebihan tersebut diagihkan kepada pemegang saham biasa.

Investment Management Software

2012-02-07T23:34:00.002+08:00

Investment Management Software: Self-learning. Features include: All calculation part in investment, such as:-

1.Risk and Return Calculation:-

Expected Rate of Return
Required Rate of Return
Beta Single Asset
Beta Portfolio
Min Arithmetic
Geometric Arithmetic
Holding Period Return
Holding Period Yield
Annual Holding Period Yield
Security market Line (SML)

2. Stock/Share Valuation:-

Preferred Stock
Common Stock (Dividend Discounted Model)

One Year Holding Period return
Multiple Holding period Return

Zero Growth
Constant/Normal Growth
Supernormal Growth

3. Bond Valuation

Intrinsic Value for Bond
Yield To Maturity

Try and Error Method
Estimation Method

Other Features:-

Lecturers Presentation
Security Industry Act (pdf)
Exercise with full answer scheme
Final exam question and answer

(more than 100 copies sold this month in POLITEKNIK SULTAN SALAHUDDIN ABDUL AZIZ SHAH; hurry - limited offer RM30.00 (postal charges include).

MUST READ: MORAL ISSUE :Cry Over Spilt Milk

2011-01-23T00:31:00.002+08:00

Dear P4122 students,

I believed many of you have ever heard the phase 'Never Bite The Hand That Feeds You.' Meaning to say, we must give our full respect to person who help us and made who we are today. They could be our parents, siblings, immidiate family as well as our teachers and lecturers since they sacrifice a lot for us.

Dear students, one way of showing our respect to them is by never CHEAT them... as for lecturers, they would feel very dissapointed and insulted to find that their students cheat during exams, tests or quizes. Cheating is generally considered as unethical, express laziness and serious misconduct among students. It's a form of dishonesty and likely comparable to stealing and lying.

As for me I can not tolerate with this matter since the exams, tests or quizes are very important tools to measure my students' performance. The result of those test will lead me to the broad picture of our teaching and learning progress. Finally, the results will be used to improve any part of our learning process.

Dear students, there is no easy way for success, as life never promise straight path for success. One needs to work hard and of course commited in what ever they do. Cheating brings you no good at all, and much more than that, you must be prepared to accept the consequences of cheating. It's a big risk, and if you get caught, take full responsibility for your actions. Nothing to proud of even if you get straight A's from cheating (since, you don't DESERVE it at all). You may pass your exams, but forever you will be shamed of yourself for your dishonest.

People who like to cheat mostly end-up with lose their self-confident (and forsure, people do not trust them anymore) and will carry this bad attitude in their daily life. Even, to some extend will keep on continue cheating in their future carreer. Just think about the impact of it. So, no matter what ever reasons you have in your mind, never cheat, do the best you can instead of mess arround. The most important thing is always be honest since...HONEST IS THE BEST POLICY.

STUDY HARD AND SMART...NEVER CHEAT. &. don't Cry Over Spilt Milk.

p/s: Spread the message to your friends.
TQVM
Sincerely yours.
P4122 Lecturer.

NOTES FOR CHAPTER 3 (BM VERSION)

2011-01-18T16:56:00.018+08:00

IMPORTANT ANNOUNCEMENT FOR GROUP ASSIGNMENT 1

2011-01-17T09:13:00.004+08:00

Dear students,

1. All groups need to present the assignment using MS Power Point. The hardcopy must be submit 3 days before presentation (16th Feb 2011). The date of presentation ~~yet to be decided~~ is on Saturday 19 Feb 2011...as a replacement class-4 hours.

2. Group No. 3: Plot Bar Chart & Candle Stick Chart for MUDAJAYA & QSR
....guys you need to get/find the ~~prince~~ price info about both stocks start by today 16th Jan 2011 until ~~20 February 2011~~ 16 Feb 2010. Just log on to Bursa Malaysia web site to collect the info.

3. Any problems regarding to assignment, please come and see me for futher clarification. Don't do it at last minutes.

4. All the related references must be properly quoted and attached with your report. Students are encourage to get the info from books or articles.

TQVM.

LECTURER NOTE : CAPITAL ASSET PRICING MODEL

2011-01-06T21:49:00.000+08:00

CAPM...one of the popular investment theory to compute the rate of return (Required Rate of Return, but sometimes also refer to Expected Rate of Return). Hence, the minimum requirement to invest is when RRR=ERR or ERR=RRR.

CAPM derived from RRR=RFR + (RM-RFR)Beta i
             where: RRR = Required Rate of Return
                         RFR = Risk Free Rate ...e.g instrument like Treasury Bill
                         RM = Market Risk or Market Return
                               (RM-RFR) = Risk Premium
                         Beta i = degree of tendency in risk or return of asset i as compared to the market

Assume, Stock CMC has beta 0.5, risk free rate is 10%, the market risk 12%, so the required rate of return for Stock CMC = 10% + (12% - 10%)0.5 =11%.
Let say, if the Expected Return for CMC is 8%, the investor should not buy the stock since it is over-valued.

As a conclution, the CAPM is designed to help investor to derive their required rate of return before make any investment decisions. Always remember that, the best situation to invest is when ERR is bigger than RRR or at least ERR equal to RRR.

Key Words:      ERR > RRR            Under-value        GOOD
                         ERR = RRR           Fair-value             GOOD
                         ERR < RRR           Over-value           NOT GOOD

The same CAPM theory also apply to portfolio, in this case the formula is;

RRRp = RFR + (RM - RFR) Beta portfolio
where;   Beta portfolio = sum of Wi X Bi     ; Wi = weighted allocation for asset i, Bi = Beta asset i.

Assume that, you have a portfolio consist of two assets, Stock A and Stock B, the information shown bellow.
                                     Weighted       Beta asset
       Stock A                    0.3                              1
       Stock B                    0.7                          0.5
Therefor, Beta portfolio = (0.3)(1) + (0.7)(0.5) = 0.65
if, risk free rate is 12% and market risk at 16%, the RRR for your portfolio will be 14.6%.

                [RRRp = 12% + (16% -12%)0.65 = 14.6%]

EXERCISE;
1. Find RRR and make the decision for Stock A, Stock B, Stock C and Sock D based on the information given
    bellow.
                            ASSET                          BETA             ERR
                          Stock A                           0.5                  10%
                          Stock B                           0.7                  12%
                          Stock C                          1.2                  20%
                          Stock D                           1.0                  15%
the required rate of return is 10% and market risk is 14%.

2. Now you are about to form a portfolio based on information in question 1. The weighted ratio for each asset is 0.2:0.2:0.4 and 0.2. Find the RRRportfolio.

End of lesson...TQVM see ya again.

ASSIGNMENT 2: RISK & RETURN

2011-01-04T22:03:00.000+08:00

Instruction: Print out the questions and attach with your answers. Please answer with your own handwriting.
Submit on Tuesday, 11 Jan 2011.

Part A:
Question: true / false.

1. The government may seek funding through the issuance of Treasury bills,Treasury bonds, including shares to finance development expenditure.
2. Investment refers to ownership of financial and physical assets.
3. The true speculator is not interested in financial assets that are purchased but they have a profit making motive in their mind.
4. Commercial paper is a medium-term debt notes which serve as collateral on a loan as to avoid a direct loan from the bank.
5. Business and government sectors are the main customers of the financial system.
6. Investors are encouraged to invest in cyclical industries during the economic downturn.
7. The option entitles the holder to buy or sell assets at determined prices during or before maturity.
8. The contribution on financial assets are not much helped as compared to physical assets in developing a country's economy.

Part B:

Essay:
1. Describe the relationship that exists between the physical assets and financial assets. In your opinion which of the assets to give better returns?
2. In your opinion, why individuals should make the investment, whether in physical assets or financial assets?
3. Define the investment. Why does every individual and organization should give serious consideration in decision making on investment? Discuss.
4. Speculation is one of the branches of the investment. Explain why investors are not encouraged to engage in speculative activities. Differenciate between Money and Capital Markets.
5. State four (4) of Money Market instruments, and two (2) of Capital Market instruments.
6. Derivatives Market is among the fastest growing market in Malaysia, and elaborate on the market along with the instruments in it.
7. A company that wants to raise and require additional capital funds can have several alternative ways to increase their capital. Please describe the methods or financial instruments that can be adopted for the long-term financing. A financial instrument is most suitable for a long term financing? Give your reasons.

TQVM.

CHAPTER 2: PART III: CAPITAL ASSET PRICING MODEL

2011-01-02T23:22:00.000+08:00

The Capital Asset Pricing Model (CAPM) relates the expected return on an asset to its systematic risk. The relationship is known as the Security Market Line (SML). The measure of systematic risk in the CAPM is refered to Beta.

An asset's total risk = systematic risk + unsystematic risk
....Systematic risk (market risk/undiversifiable risk) is the portion of an asset's risk that cannot be eliminated even using diversification. Its refer as Beta
.....Unsystematic risk (firm-specific/diversifiable risk) is the portion of an asset's total risk that can be eliminated via diversified portfolio.

BETA ASSET AND BETA PORTFOLIO
Beta (β) of a stock or portfolio refer to the degree of tendency on return or risk as compared to return/risk of the financial market as a whole.
               IF;    Beta asset or portfolio = 0; returns/risks of the asset or portfolio change independently
                                                                               of changes in the market's returns/risk.
                            Beta asset or portfolio POSITIVE = The asset's/portfolios' returns/risks generally follow
                                                                                      the market's returns.
                             Beta asset or portfolio NEGATIVE = The asset's/portfolios' returns/risk generally move
                                                                                     opposite the market's returns/risk.

Assume that,

By using CAPM; the ERR(RRR) for stock Sykt. 1, Sykt.2 and Sykt.3 are:-

                                    Sykt. 1: ERR(RRR) = 5% + (10%-5%)0.85 = 9.25%
                                    Sykt. 2: ERR(RRR) = 5% + (10%-5%)0.7   = 8.50%
                                    Sykt. 3: ERR(RRR) = 5% + (10%-5%)1.5   = 12.50%

                   Beta Portfolio = sumWiBi
                                         = 0.2(0.85) + 0.4(0.7) + 0.4(1.5) = 1.05
                                            (which means, the portfolio returnd/risks generally follow the market returns/risks)

Refer to P4122 Learning Kit Tool for further explaination on CAPM; Supposed students should know how to plot SML and make decision on the acceptance and rejected area.

Thank you.

Announcement: P4122 students

2011-01-02T21:43:00.000+08:00

CLASS FOR P4122 WILL BE POSPONED FOR A WEEK.
TQVM.

Reading Material for P4122 students

2010-12-29T12:08:00.000+08:00

MODERN PORTFOLIO THEORY

Harry Markowitz received the Nobel Prize for Economics in 1990, along with William Sharp and Merton Miller, for their contributions to financial economics and investment field. Modern Portfolio Theory, has been developed by Markowitz in 1950s which illustrates how investment risks in the financial market can have a maximized return.

His first article on “Portfolio Selection,” which explains his theory in early 1952. Markowitz utilized mathemetics and computer methods applied to realistic problems, such as uncertainty in business decisions. In 1989, he was awarded the Von Neumann Prize in Operations Research Theory by the Operations Research Society of America and The Institute of Management Sciences.

Modern portfolio theory (MPT) is a theory of investment that attempts to maximize portfolio expected return for a given amount of portfolio risk, and minimizing risk for a given level of expected return, by carefully choosing the proportions of various assets thats available in the market. His idea normally proposed inventors should select portfolios as their investment strategy intead of invest in individual securities/stock.

Efficient Frontier: Refers to the optimal portfolios plotted along the curve with the highest expected return possible for the given amount of risk. (the set of all portfolios that will give the highest expected return for each given level of risk.) These concepts of efficiency were essential to the development of the Capital Asset Pricing Model to find the Security Market Line.

Figure 1

Figure 1
As shown in this graph, the best investment option for investor to make is when the efficient frontier touch the market line. Any combination of investments below the market line or below efficient frontier may give higher risk, since the instruments are 'over valued'. Therefor, portfolio's below the curve are not efficient, because at the same risk level, investor could achieve a greater return, e.g. invest in Risk-Free Asset.

Figure 2:

Figure 2: Figure shown the relationship between risks and returns for every portfolio combinations. The higher the returns, will expose investors to higher levels of risk.

As a conclusion, portfolio will give advantages to the investors to eliminate some risks in their investment, but they have to make sure that the combination of portfolio is well diversified, meaning to say, investors should invest in various industries and avoid the over-valued assets as shown in the above Figure.

QUIZ 1 : SAMPLE

2010-12-28T12:22:00.004+08:00

Dear students, attached here with, sample for the Quiz 1. All the best.

Quote of the day:
"The relationship between risk and return can be classified as a "positive" or "direct" relationship, by this mean; investors will set a higher return to compensate the higher level of risk in their portfolio. Alternatively, if an investment offers relatively lower level of risk, then, investors should satisfied with a lower returns.

Since the level of risk and return are based on expectation, so the proper analysis needs to be done. Normally, investors will look into both past year return/risk and the expected economic conditions in the future.
Comparison between various instruments in the market is one of the crucial factor to determine the best asset/s to be invested in. Investors also have to consider about setting up a well-diversified portfolio to minimize the unsystematic risk, since the market risk is beyond their control."

TQVM

CHAPTER 2 - RISK & RETURN

2010-12-27T15:13:00.041+08:00

I N V E S T O R S' P R O F I L E

When we discuss on investment, investors have to consider the RISK! Or the uncertainty of income/profit on their investment. But, is it not to invest is the best way to avoid risk? Actually, not investing your money is also risky. For instance, keeping your money under the mattress may invite losing money, and it might reduced our purchasing power when there is inflation in economic.

Risk and return have a direct relationship between them. Normally, the higher the risk, the higher the potential return. Hence, investing all your money in valuables that carry large returns, it may leads you to a financial trap if something doesn’t go as what you have planned.
Understanding the risks is useless unless you know what type of investor you are. The risk you can tolerate depends on many factors such as your:-

i. investment objectives- long/short term or the maturity period.

ii. the amount of money you have to invest.

iii. the size of your portfolio.

iv. and the time left for your investments.

Figure 1: Investors’ Profile / Type of Investor

Different instrument will expose investors to different level of risks, invest in stock market will lead to higher risk as compared to unit trust. But, normally it will compensate with higher return (even sometimes lost).
The best way to eliminate risk is by performing portfolio which mean, invest in different assets rather than put all your money in single asset for example, investors may invest both in capital and money market in order to profit from any economic changes they might have to face.

LEARNING KIT

2010-12-25T23:50:00.000+08:00

GOOD NEWS and GREAT DEALS to all P4122 students, the software will available by this TUESDAY (28 December 2010) complete with student's handbook and lectures' notes, include with CD's with no extra cost.

TQVM

CHAPTER 2: PART 2 (EXPECTED RATE OF RETURN)

2010-12-23T20:46:00.000+08:00

Chapter 2: Risk & Return

Expected Rate of Return for Single Asset
Standard Deviation (Risk) for Single Asset

CHAPTER 2 - PART 1 (ARITHMETIC & GEOMETRIC MEAN)

2010-12-23T10:53:00.001+08:00

Chapter 2: Arithmetic & Geometric Mean

For further explaination, refer to lecturers note (will be update soon...come back again guys).TQVM

EXERCISE: CHAPTER 2 - PART 1 (HPR, HPY, annual HPY)

2010-12-22T14:19:00.000+08:00

All the best....

TO ALL P4122 STUDENTS

2010-12-21T13:16:00.001+08:00

Please