‭CT-2‬ ‭ ‬‭)‬ ‭Define‬ ‭a‬‭primary‬ ‭and‬ ‭secondary‬ ‭market‬‭for‬ ‭securities‬‭and‬‭discuss‬‭how‬

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‭they‬‭differ.‬‭Discuss‬‭how‬‭the‬‭primary‬‭market‬‭is‬‭dependent‬‭on‬‭the‬‭secondary‬
‭1) Define investment. As a student, are you saving or borrowing? Why?‬ ‭market.‬
‭ An‬‭investment‬ ‭is‬ ‭the‬‭current‬ ‭commitment‬‭of‬ ‭funds‬‭for‬‭a‬‭period‬‭of‬‭time‬‭in‬‭order‬
> ‭The‬ ‭primary‬‭market‬‭in‬‭securities‬‭is‬‭where‬‭new‬‭issues‬‭are‬‭sold‬‭by‬‭corporations‬‭to‬
‭to‬ ‭derive‬ ‭a‬ ‭future‬ ‭flow‬ ‭of‬ ‭funds‬ ‭that‬ ‭will‬ ‭compensate‬ ‭the‬ ‭investor‬ ‭for‬‭the‬ ‭time‬ ‭acquire‬ ‭new‬ ‭capital‬‭via‬‭the‬‭sale‬‭of‬‭bonds,‬‭preferred‬‭stock‬‭or‬‭common‬‭stock.‬‭The‬
‭value‬‭of‬ ‭money,‬ ‭the‬‭expected‬‭rate‬‭of‬‭inflation‬‭over‬‭the‬‭life‬‭of‬‭the‬‭investment,‬‭and‬ ‭sale‬ ‭typically‬‭takes‬ ‭place‬‭through‬ ‭an‬‭investment‬ ‭banker.‬‭The‬‭secondary‬‭market‬
‭provide a premium for the uncertainty associated with this future flow of funds.‬ ‭is‬ ‭simply‬ ‭trading‬ ‭in‬ ‭outstanding‬ ‭securities.‬ ‭It‬ ‭involves‬ ‭transactions‬ ‭between‬
‭Students‬ ‭in‬ ‭general‬ ‭tend‬ ‭to‬ ‭be‬ ‭borrowers‬ ‭because‬ ‭they‬ ‭are‬ ‭typically‬ ‭not‬ ‭owners‬ ‭after‬ ‭the‬ ‭issue‬ ‭has‬ ‭been‬ ‭sold‬ ‭to‬ ‭the‬ ‭public‬ ‭by‬ ‭the‬ ‭company.‬
‭employed‬‭so‬ ‭have‬ ‭no‬‭income,‬ ‭but‬‭obviously‬ ‭consume‬‭and‬‭have‬‭expenses.‬‭The‬ ‭Consequently,‬ ‭the‬‭proceeds‬ ‭from‬‭the‬ ‭sale‬‭do‬ ‭not‬ ‭go‬ ‭to‬‭the‬ ‭company,‬‭as‬ ‭is‬‭the‬
‭usual‬ ‭intent‬ ‭is‬ ‭to‬ ‭invest‬ ‭the‬ ‭money‬ ‭borrowed‬ ‭in‬ ‭order‬ ‭to‬ ‭increase‬‭their‬‭future‬ ‭case‬ ‭with‬ ‭a‬‭primary‬ ‭offering.‬‭Thus,‬ ‭the‬ ‭price‬‭of‬ ‭the‬‭security‬ ‭is‬‭important‬‭to‬‭the‬
‭income‬ ‭stream‬ ‭from‬ ‭employment‬‭-‬ ‭i.e.,‬ ‭students‬‭expect‬‭to‬ ‭receive‬ ‭a‬‭better‬ ‭job‬ ‭buyer‬ ‭and‬ ‭seller.‬ ‭The‬ ‭functioning‬ ‭of‬ ‭the‬ ‭primary‬ ‭market‬ ‭would‬ ‭be‬ ‭seriously‬
‭and higher income due to their investment in education.‬ ‭hampered‬ ‭in‬ ‭the‬ ‭absence‬ ‭of‬ ‭a‬ ‭good‬ ‭secondary‬ ‭market.‬ ‭A‬ ‭good‬ ‭secondary‬
‭2)‬ ‭Briefly‬ ‭discuss‬ ‭the‬ ‭five‬ ‭fundamental‬ ‭factors‬ ‭that‬ ‭influence‬ ‭the‬ ‭risk‬ ‭market‬‭provides‬‭liquidity‬‭to‬‭an‬‭investor‬‭if‬‭he‬‭or‬‭she‬‭wants‬‭to‬‭alter‬‭the‬‭composition‬
‭premium of an investment.‬ ‭of‬ ‭his‬ ‭or‬ ‭her‬ ‭portfolio‬ ‭from‬ ‭securities‬ ‭to‬ ‭other‬ ‭assets‬ ‭(i.e.,‬ ‭house,‬ ‭etc).‬ ‭Thus,‬
‭The‬ ‭five‬‭factors‬ ‭that‬ ‭influence‬ ‭the‬ ‭risk‬ ‭premium‬‭on‬ ‭an‬ ‭investment‬‭are‬‭business‬ ‭investors‬‭would‬‭be‬‭reluctant‬‭to‬‭acquire‬‭securities‬‭in‬‭the‬‭primary‬‭market‬‭if‬‭they‬‭felt‬
‭risk, financial risk, liquidity risk, exchange rate risk, and country risk.‬ ‭they‬ ‭would‬ ‭not‬ ‭subsequently‬ ‭have‬ ‭the‬ ‭ability‬‭to‬ ‭sell‬‭the‬ ‭securities‬ ‭quickly‬‭at‬ ‭a‬
‭=>Business‬ ‭risk‬ ‭is‬ ‭a‬ ‭function‬ ‭of‬ ‭sales‬ ‭volatility‬ ‭and‬ ‭operating‬ ‭leverage.‬ ‭The‬ ‭known price.‬
‭combined‬ ‭effect‬ ‭of‬ ‭these‬ ‭two‬ ‭variables‬ ‭can‬ ‭be‬ ‭quantified‬ ‭in‬ ‭terms‬ ‭of‬ ‭the‬
‭coefficient‬‭of‬ ‭variation‬ ‭of‬ ‭operating‬ ‭earnings.‬ ‭Operating‬‭leverage‬‭occurs‬‭when‬‭a‬ ‭CT-2‬
‭firm has fixed costs that are to be met regardless of sales volume.‬
‭=>‬‭Financial‬‭risk‬ ‭is‬ ‭a‬‭function‬ ‭of‬‭the‬‭uncertainty‬‭introduced‬‭by‬‭the‬‭financing‬‭mix.‬ ‭ )‬ ‭What‬ ‭is‬ ‭MARKOWITZ‬ ‭PORTFOLIO‬ ‭THEORY?‬ ‭What‬ ‭are‬ ‭the‬ ‭assumptions‬
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‭The‬ ‭inherent‬ ‭risk‬ ‭involved‬ ‭in‬‭the‬ ‭inability‬‭to‬ ‭meet‬‭future‬ ‭contractual‬ ‭payments,‬ ‭regarding investor behavior as per.‬
‭such‬ ‭as‬ ‭interest‬ ‭on‬ ‭bonds,‬ ‭etc.,‬ ‭or‬ ‭the‬ ‭threat‬ ‭of‬ ‭bankruptcy.‬ ‭Financial‬ ‭risk‬ ‭is‬ ‭Markowitz‬ ‭Portfolio‬ ‭Theory,‬ ‭developed‬ ‭by‬ ‭Harry‬ ‭Markowitz‬ ‭in‬ ‭the‬ ‭1950s,‬ ‭is‬‭a‬
‭measured‬ ‭in‬ ‭terms‬ ‭of‬ ‭a‬ ‭debt‬ ‭ratio‬ ‭(e.g.,‬ ‭debt/equity‬ ‭ratio)‬‭and/‬‭or‬ ‭the‬‭interest‬ ‭cornerstone‬ ‭of‬ ‭modern‬ ‭portfolio‬ ‭management.‬ ‭It‬ ‭provides‬ ‭a‬ ‭mathematical‬
‭coverage‬ ‭ratio.‬ ‭=>‬‭Liquidity‬ ‭risk‬‭is‬‭the‬ ‭uncertainty‬‭an‬ ‭individual‬ ‭faces‬ ‭when‬‭he‬ ‭framework‬ ‭for‬ ‭constructing‬ ‭an‬ ‭optimal‬ ‭investment‬ ‭portfolio‬ ‭that‬ ‭balances‬
‭decides‬ ‭to‬ ‭buy‬‭or‬‭sell‬‭an‬‭investment.‬‭The‬‭two‬‭uncertainties‬‭involved‬‭are:‬‭(1)‬‭how‬ ‭expected return with risk.‬
‭long‬‭it‬ ‭will‬‭take‬‭to‬‭buy‬‭or‬ ‭sell‬‭this‬‭asset,‬‭and‬‭(2)‬‭what‬‭price‬‭will‬‭be‬‭received.‬‭The‬ ‭The‬ ‭key‬ ‭concept‬ ‭of‬ ‭Markowitz‬ ‭Portfolio‬ ‭Theory‬ ‭is‬ ‭diversification.‬ ‭Markowitz‬
‭liquidity‬ ‭risk‬‭on‬‭different‬ ‭investments‬ ‭can‬‭vary‬ ‭substantially‬‭(e.g.,‬‭real‬‭estate‬‭vs.‬ ‭demonstrated‬ ‭that‬ ‭by‬ ‭investing‬ ‭in‬‭a‬ ‭combination‬‭of‬ ‭assets‬‭with‬ ‭uncorrelated‬‭or‬
‭T-bills).‬ ‭negatively‬ ‭correlated‬ ‭returns,‬‭investors‬‭can‬‭reduce‬‭the‬‭overall‬‭risk‬‭(measured‬‭by‬
‭=>‬ ‭Exchange‬ ‭rate‬ ‭risk‬ ‭is‬ ‭the‬‭uncer­tainty‬‭of‬ ‭returns‬ ‭on‬‭securities‬ ‭acquired‬ ‭in‬‭a‬ ‭portfolio‬ ‭variance)‬ ‭of‬ ‭their‬ ‭investment‬ ‭portfolio‬ ‭without‬ ‭sacrificing‬ ‭expected‬
‭different‬ ‭currency.‬ ‭The‬ ‭exchange‬ ‭rate‬ ‭risk‬ ‭is‬ ‭caused‬ ‭by‬ ‭fluctuations‬ ‭in‬ ‭the‬ ‭return.‬
‭investor's‬ ‭local‬ ‭currency‬ ‭compared‬ ‭to‬‭the‬ ‭foreign-investment‬‭currency.‬ ‭The‬ ‭risk‬ ‭=>The‬ ‭Markowitz‬ ‭model‬ ‭is‬ ‭based‬ ‭on‬ ‭several‬ ‭assumptions‬ ‭regarding‬ ‭investor‬
‭applies to the global investor or multinational corporate manager who must‬ ‭behavior:-‬ ‭1.‬ ‭Investors‬ ‭consider‬ ‭each‬ ‭investment‬ ‭alternative‬ ‭as‬ ‭being‬
‭for‬ ‭investors‬ ‭to‬‭buy‬‭securities‬ ‭that‬‭they‬ ‭missed‬‭out‬ ‭on‬ ‭during‬‭the‬‭initial‬‭offering.‬ ‭represented‬ ‭by‬ ‭a‬‭probability‬ ‭distribution‬ ‭of‬‭expected‬ ‭returns‬ ‭over‬‭some‬ ‭holding‬
‭Therefore, the two markets support each other‬‭.‬ ‭period.‬‭2.‬‭Investors‬ ‭maximize‬‭one-period‬ ‭expected‬ ‭utility,‬‭and‬‭their‬‭utility‬‭curves‬
‭3)‬ ‭Discuss‬‭the‬‭three‬‭components‬‭of‬‭an‬‭investor’s‬‭required‬‭rate‬‭of‬‭return‬‭on‬ ‭demonstrate‬ ‭diminishing‬‭marginal‬ ‭utility‬ ‭of‬‭wealth.‬‭3.‬‭Investors‬‭estimate‬‭the‬‭risk‬
‭investment.‬ ‭of‬ ‭the‬ ‭portfolio‬ ‭on‬ ‭the‬ ‭basis‬ ‭of‬ ‭the‬ ‭variability‬‭of‬ ‭expected‬ ‭returns.‬‭4.‬ ‭Investors‬
‭Answer:‬ ‭The‬ ‭required‬ ‭rate‬ ‭of‬ ‭return‬ ‭is‬ ‭the‬ ‭minimum‬‭rate‬ ‭of‬‭return‬ ‭an‬ ‭investor‬ ‭base‬ ‭decisions‬ ‭solely‬ ‭on‬ ‭expected‬ ‭return‬‭and‬‭risk,‬ ‭so‬ ‭their‬‭utility‬‭curves‬ ‭are‬ ‭a‬
‭should‬ ‭accept‬ ‭from‬ ‭any‬ ‭investment‬ ‭to‬ ‭compensate‬ ‭him‬ ‭for‬ ‭delaying‬ ‭function‬‭of‬‭expected‬ ‭return‬‭and‬ ‭the‬‭expected‬‭variance‬‭(or‬‭standard‬‭deviation)‬‭of‬
‭consumption.‬‭In‬ ‭other‬ ‭words,‬‭an‬‭investor‬‭invests‬‭today‬‭to‬‭enjoy‬‭the‬‭benefits‬‭at‬‭a‬ ‭returns‬ ‭only.‬ ‭5.‬ ‭For‬ ‭a‬ ‭given‬ ‭risk‬ ‭level,‬ ‭investors‬ ‭prefer‬ ‭higher‬‭returns‬ ‭to‬‭lower‬
‭later‬ ‭stage.‬ ‭The‬ ‭components‬ ‭of‬‭an‬‭investor’s‬‭required‬‭rate‬ ‭of‬‭return‬ ‭that‬ ‭could‬ ‭returns.‬‭Similarly,‬‭for‬‭a‬‭given‬‭level‬‭of‬‭expected‬‭return,‬‭investors‬‭prefer‬‭less‬‭risk‬‭to‬
‭compensate him for the risk taken are:‬ ‭more risk.‬
‭●‬ ‭The time value of money during the investment period‬ ‭2) What is variance? Discuss the variance of return for a portfolio?‬
‭●‬ ‭The expected rate of inflation during the investment period‬ ‭Variance‬‭is‬ ‭a‬ ‭statistical‬‭measure‬‭that‬‭quantifies‬‭the‬‭dispersion‬‭or‬‭spread‬‭of‬‭a‬‭set‬
‭●‬ ‭The risk involved‬ ‭of‬ ‭data‬‭points‬‭around‬‭their‬‭mean‬‭or‬‭expected‬‭value.‬‭In‬‭the‬‭context‬‭of‬‭finance‬‭and‬
‭We examine each of these components.‬ ‭investments,‬ ‭variance‬ ‭is‬ ‭commonly‬ ‭used‬ ‭to‬ ‭assess‬ ‭the‬ ‭volatility‬ ‭or‬ ‭risk‬
‭1)‬ ‭The‬ ‭time‬‭value‬ ‭of‬‭money.‬‭The‬‭idea‬‭is‬‭that‬‭money‬‭available‬‭at‬‭present‬‭is‬‭worth‬ ‭associated with the returns of an investment or a portfolio.‬
‭more‬ ‭than‬ ‭the‬ ‭same‬‭amount‬ ‭in‬‭the‬ ‭future‬‭due‬‭to‬‭its‬ ‭potential‬‭earning‬ ‭capacity.‬ ‭=>‬‭The‬‭variance‬ ‭of‬‭returns‬‭for‬‭a‬‭portfolio‬‭measures‬‭how‬‭much‬‭the‬‭actual‬‭returns‬
‭For‬‭example,‬ ‭one‬‭may‬ ‭need‬ ‭to‬‭determine‬‭the‬‭future‬‭value‬‭(FV)‬‭of‬‭an‬‭investment‬ ‭of‬ ‭the‬ ‭portfolio‬‭deviate‬ ‭from‬‭the‬‭expected‬‭returns‬‭over‬‭a‬‭certain‬‭period‬‭of‬‭time.‬‭It‬
‭of‬ ‭$100,000‬ ‭over‬‭10‬‭years‬ ‭invested‬ ‭at‬‭a‬‭specific‬‭rate.‬‭Investors‬‭generally‬‭prefer‬ ‭provides‬ ‭insights‬ ‭into‬ ‭the‬ ‭level‬ ‭of‬ ‭volatility‬ ‭or‬ ‭fluctuation‬ ‭in‬ ‭the‬ ‭portfolio's‬
‭to‬ ‭receive‬ ‭money‬‭from‬ ‭an‬‭investment‬‭sooner‬‭rather‬ ‭than‬‭later.‬ ‭Money‬ ‭received‬ ‭performance.‬ ‭A‬ ‭higher‬ ‭variance‬ ‭indicates‬ ‭greater‬ ‭dispersion‬ ‭in‬ ‭returns,‬
‭by‬ ‭an‬ ‭investor‬ ‭today‬ ‭can‬‭be‬‭invested‬ ‭to‬‭generate‬‭an‬‭additional‬‭return‬‭tomorrow.‬ ‭suggesting‬ ‭higher‬ ‭risk,‬ ‭while‬ ‭a‬‭lower‬ ‭variance‬‭implies‬‭more‬ ‭stability‬‭and‬‭lower‬
‭Therefore,‬ ‭the‬‭earlier‬ ‭the‬‭cash‬‭received,‬‭the‬ ‭greater‬‭the‬ ‭potential‬‭for‬‭increasing‬ ‭risk.‬
‭wealth.‬ ‭An‬ ‭individual‬ ‭may‬ ‭sacrifice‬ ‭the‬ ‭use‬‭of‬ ‭money‬ ‭for‬‭a‬‭specified‬ ‭time‬‭with‬ ‭Mathematically,‬‭the‬‭variance‬‭of‬‭returns‬‭for‬‭a‬‭portfolio‬‭can‬‭be‬‭calculated‬‭using‬‭the‬
‭some‬‭compensation‬ ‭in‬‭return.‬‭2)‬‭The‬‭expected‬‭rate‬‭of‬‭inflation‬‭.‬‭Inflation‬‭must‬‭be‬ ‭following formula:‬
‭considered‬ ‭in‬ ‭any‬ ‭calculation‬ ‭to‬ ‭reflect‬ ‭the‬ ‭value‬ ‭of‬ ‭the‬ ‭investment‬ ‭at‬‭a‬ ‭later‬ ‭Portfolio Variance=∑i=1​ ∑ j=1 wi wj ⋅Cov(Ri ,R j)‬
‭date.‬ ‭It‬ ‭suggests‬ ‭the‬ ‭spending‬ ‭power‬ ‭of‬ ‭money‬ ‭decreases‬ ‭over‬ ‭time‬ ‭due‬ ‭to‬ ‭Investors‬ ‭and‬ ‭portfolio‬‭managers‬ ‭use‬‭variance‬ ‭(and‬‭related‬ ‭measures‬‭such‬‭as‬
‭inflation.‬ ‭Any‬ ‭lender‬ ‭would‬ ‭expect‬ ‭compensation‬ ‭for‬ ‭this‬ ‭decline‬ ‭in‬ ‭spending‬ ‭standard‬ ‭deviation)‬‭to‬‭assess‬‭and‬‭manage‬‭the‬‭risk‬‭of‬‭their‬‭investment‬‭portfolios.‬
‭power.‬ ‭3)‬ ‭The‬ ‭risk.‬ ‭Compensation‬ ‭for‬ ‭the‬ ‭potential‬ ‭risk‬‭must‬ ‭be‬‭a‬ ‭subject‬‭of‬ ‭A‬ ‭well-diversified‬‭portfolio‬ ‭aims‬‭to‬ ‭minimize‬‭variance‬ ‭by‬‭spreading‬ ‭investments‬
‭consideration‬ ‭while‬‭determining‬ ‭the‬ ‭required‬ ‭rate‬‭of‬ ‭return‬‭on‬ ‭investment.‬‭Risk‬ ‭across‬ ‭different‬ ‭assets‬ ‭with‬ ‭uncorrelated‬ ‭or‬ ‭negatively‬ ‭correlated‬ ‭returns,‬
‭factors‬ ‭vary‬ ‭from‬‭one‬ ‭type‬‭of‬ ‭instrument‬‭to‬ ‭another‬‭or‬‭from‬‭one‬‭environment‬‭to‬ ‭thereby reducing overall portfolio risk.‬
‭another.‬‭When‬ ‭there‬ ‭is‬ ‭a‬‭high‬ ‭degree‬‭of‬ ‭certainty‬ ‭about‬‭an‬‭investment’s‬‭return,‬ ‭3)‬ ‭What‬ ‭are‬ ‭the‬‭similarities‬ ‭and‬‭differences‬ ‭between‬‭the‬‭CML‬ ‭and‬‭SML‬‭as‬
‭for‬ ‭example,‬ ‭in‬ ‭the‬ ‭case‬ ‭of‬ ‭treasury‬ ‭bills,‬ ‭the‬ ‭premium‬ ‭will‬ ‭be‬ ‭low.‬‭The‬ ‭most‬ ‭models of the risk return trade off?‬
‭fundamental‬ ‭principle‬ ‭of‬ ‭financial‬ ‭management‬ ‭is‬ ‭that‬ ‭the‬ ‭return‬ ‭must‬ ‭be‬ ‭Like‬ ‭the‬‭CML,‬ ‭the‬ ‭SML‬‭shows‬‭the‬‭trade-off‬‭between‬‭risk‬‭and‬‭expected‬‭return‬‭as‬
‭commensurate with the risk taken.‬ ‭a‬ ‭straight‬ ‭line‬ ‭intersecting‬ ‭the‬ ‭vertical‬ ‭axis‬‭(i.e.,‬‭zero-risk‬‭point)‬ ‭at‬ ‭the‬ ‭risk-free‬
‭2‬ ‭rate.‬ ‭However,‬ ‭there‬ ‭are‬ ‭two‬ ‭important‬ ‭differences‬ ‭between‬ ‭the‬ ‭CML‬‭and‬‭the‬
‭1) Define capital market ?‬‭Characteristics of a Good Market?‬ ‭SML.‬‭First,‬‭the‬ ‭CML‬‭measures‬ ‭risk‬‭by‬‭the‬ ‭standard‬ ‭deviation‬‭(i.e.,‬ ‭total‬‭risk)‬‭of‬
‭A‬ ‭capital‬ ‭market‬ ‭is‬ ‭a‬ ‭financial‬ ‭market‬ ‭where‬‭individuals‬‭and‬ ‭institutions‬‭trade‬ ‭the‬ ‭investment‬ ‭while‬ ‭the‬ ‭SML‬ ‭considers‬ ‭only‬ ‭the‬‭systematic‬ ‭component‬ ‭of‬‭an‬
‭financial‬ ‭securities‬ ‭such‬ ‭as‬ ‭stocks,‬ ‭bonds,‬ ‭derivatives,‬ ‭and‬ ‭other‬ ‭long-term‬ ‭investment’s‬‭volatility.‬ ‭Second,‬‭as‬ ‭a‬‭consequence‬‭of‬‭the‬‭first‬‭point,‬‭the‬‭CML‬‭can‬
‭investments.‬‭The‬ ‭primary‬‭function‬‭of‬ ‭a‬ ‭capital‬‭market‬ ‭is‬‭to‬‭facilitate‬‭the‬‭raising‬ ‭be‬‭applied‬‭only‬‭to‬‭portfolio‬‭holdings‬‭that‬‭are‬‭already‬‭fully‬‭diversified,‬‭whereas‬‭the‬
‭of‬‭capital‬ ‭for‬‭businesses,‬ ‭governments,‬‭and‬‭other‬‭entities.‬‭It‬‭provides‬‭a‬‭platform‬ ‭SML can be applied to any individual asset or collection of assets.‬
‭for‬ ‭investors‬ ‭to‬‭buy‬‭and‬ ‭sell‬‭securities,‬ ‭enabling‬‭capital‬ ‭to‬‭flow‬‭from‬‭those‬‭with‬
‭surplus funds (investors) to those in need of funds (issuers).‬ ‭2‬
‭Characteristics of a Good Market‬‭.‬ ‭ ) Why do most investors hold diversified portfolios?‬
A
‭A‬‭good‬‭market‬ ‭should‬ ‭provide‬ ‭accurate‬ ‭information‬‭on‬ ‭the‬ ‭price‬‭and‬‭volume‬‭of‬ ‭Answer:-‬ ‭Investors‬ ‭hold‬ ‭diversified‬ ‭portfolios‬ ‭in‬‭order‬ ‭to‬‭reduce‬ ‭risk,‬‭that‬ ‭is,‬‭to‬
‭past‬‭transactions,‬‭and‬‭current‬‭supply‬‭and‬‭demand.‬‭Clearly,‬‭there‬‭should‬‭be‬‭rapid‬ ‭lower‬ ‭the‬‭variance‬ ‭of‬‭the‬ ‭portfolio,‬‭which‬‭is‬‭considered‬ ‭a‬ ‭measure‬‭of‬‭the‬‭risk‬‭of‬
‭dissemination‬ ‭of‬ ‭this‬ ‭information.‬ ‭Adequate‬ ‭liquidity‬ ‭is‬ ‭desirable‬ ‭so‬ ‭that‬ ‭the‬ ‭portfolio.‬ ‭A‬‭diversified‬ ‭portfolio‬ ‭should‬ ‭accomplish‬‭this‬ ‭because‬‭the‬ ‭returns‬
‭participants‬ ‭may‬ ‭buy‬ ‭and‬ ‭sell‬ ‭their‬ ‭goods‬ ‭and/or‬ ‭services‬ ‭rapidly,‬ ‭at‬ ‭a‬ ‭price‬ ‭for‬ ‭the‬ ‭alternative‬ ‭assets‬ ‭should‬ ‭not‬‭be‬ ‭correlated‬ ‭so‬‭the‬ ‭variance‬‭of‬‭the‬ ‭total‬
‭reflecting‬ ‭the‬ ‭supply‬ ‭and‬ ‭demand.‬ ‭The‬ ‭costs‬ ‭of‬ ‭transferring‬ ‭ownership‬ ‭and‬ ‭portfolio will be reduced.‬
‭middleman‬ ‭commissions‬ ‭should‬ ‭be‬ ‭low.‬ ‭Finally,‬ ‭the‬ ‭prevailing‬ ‭price‬ ‭should‬ ‭Most investors hold diversified portfolios for several compelling reasons:‬
‭reflect all available information.‬ ‭=>‬ ‭Risk‬ ‭Reduction:‬ ‭->‬ ‭Diversification‬ ‭helps‬ ‭mitigate‬ ‭risk.‬ ‭By‬ ‭spreading‬
‭A good market for goods and services has the following characteristics:‬ ‭investments‬ ‭across‬‭different‬ ‭asset‬‭classes‬‭(such‬ ‭as‬‭stocks,‬‭bonds,‬ ‭real‬‭estate,‬
‭1.‬ ‭Timely‬ ‭and‬ ‭accurate‬‭information‬‭on‬‭the‬‭price‬‭and‬‭volume‬‭of‬‭past‬‭transactions.‬ ‭and‬ ‭commodities),‬ ‭investors‬ ‭reduce‬ ‭their‬ ‭exposure‬‭to‬ ‭the‬‭poor‬ ‭performance‬ ‭of‬
‭2.‬ ‭Liquidity,‬‭meaning‬ ‭an‬‭asset‬‭can‬ ‭be‬‭bought‬ ‭or‬‭sold‬ ‭quickly‬ ‭at‬‭a‬‭price‬‭close‬‭to‬ ‭any‬ ‭single‬ ‭asset.‬ ‭>>When‬ ‭one‬ ‭investment‬ ‭underperforms,‬ ‭others‬ ‭may‬
‭the‬ ‭prices‬ ‭for‬ ‭previous‬ ‭transactions‬ ‭(has‬ ‭price‬ ‭continuity),‬ ‭assuming‬ ‭no‬ ‭new‬ ‭compensate, leading to a more stable overall portfolio.‬
‭information‬ ‭has‬ ‭been‬ ‭received.‬ ‭In‬ ‭turn,‬ ‭price‬‭continuity‬ ‭requires‬ ‭depth.‬‭3.‬ ‭Low‬ ‭=>‬‭Minimizing‬‭Volatility:‬ ‭>Diversification‬ ‭smoothes‬‭out‬ ‭portfolio‬‭volatility.‬ ‭Assets‬
‭transaction‬ ‭costs,‬‭including‬‭the‬‭cost‬‭of‬‭reaching‬‭the‬‭market,‬‭the‬‭actual‬‭brokerage‬ ‭often‬‭move‬ ‭in‬‭opposite‬ ‭directions‬‭during‬‭market‬‭fluctuations.‬‭For‬‭instance,‬‭when‬
‭costs,‬‭and‬ ‭the‬ ‭cost‬‭of‬‭transferring‬ ‭the‬‭asset.‬ ‭4.‬‭Prices‬‭that‬‭rapidly‬‭adjust‬‭to‬‭new‬ ‭stocks decline, bonds may rise, providing a buffer against losses.‬
‭information,‬ ‭so‬ ‭the‬‭prevailing‬‭price‬‭is‬‭fair‬‭since‬‭it‬‭reflects‬‭all‬‭available‬‭information‬
‭regarding the asset.‬
 ‭b) Identify the assumptions of capital market theory.‬ ‭ tc.)‬ ‭held‬‭within‬‭the‬ ‭portfolio.‬‭>Determine‬‭the‬‭weights:‬‭Determine‬‭the‬‭proportion‬
e
‭ heory‬‭Because‬ ‭capital‬‭market‬‭theory‬‭builds‬‭on‬‭the‬‭Markowitz‬‭portfolio‬‭model,‬‭it‬
T ‭of‬ ‭each‬ ‭security's‬ ‭value‬ ‭in‬ ‭the‬ ‭total‬ ‭portfolio‬ ‭value.‬ ‭This‬‭can‬ ‭be‬ ‭calculated‬‭by‬
‭requires‬‭the‬‭same‬‭assumptions,‬‭along‬‭with‬‭some‬‭additional‬‭ones:‬‭1.‬‭All‬‭investors‬ ‭dividing‬ ‭the‬ ‭value‬‭of‬‭each‬‭security‬‭by‬‭the‬‭total‬‭value‬‭of‬‭the‬‭portfolio.‬‭>>Calculate‬
‭are‬ ‭Markowitz‬ ‭-‬ ‭efficient‬ ‭in‬ ‭that‬ ‭they‬ ‭seek‬ ‭to‬ ‭invest‬ ‭in‬ ‭tangent‬ ‭points‬ ‭on‬ ‭the‬ ‭the‬ ‭beta‬‭for‬‭each‬‭security:‬‭Obtain‬‭the‬‭beta‬‭coefficient‬‭for‬‭each‬‭individual‬‭security.‬
‭efficient‬ ‭frontier.‬ ‭The‬ ‭exact‬ ‭location‬ ‭of‬ ‭this‬ ‭tangent‬ ‭point‬ ‭and,‬ ‭therefore,‬ ‭the‬ ‭Beta‬‭values‬‭are‬‭often‬‭available‬‭from‬‭financial‬‭websites,‬‭databases,‬‭or‬‭investment‬
‭specific‬ ‭portfolio‬ ‭selected‬ ‭will‬ ‭depend‬ ‭on‬ ‭the‬ ‭individual‬ ‭investor’s‬ ‭risk-return‬ ‭research‬ ‭platforms.‬ ‭Alternatively,‬ ‭you‬ ‭can‬ ‭calculate‬ ‭beta‬ ‭using‬ ‭statistical‬
‭utility‬ ‭function.‬ ‭2.‬ ‭Investors‬ ‭can‬ ‭borrow‬ ‭or‬ ‭lend‬ ‭any‬ ‭amount‬ ‭of‬ ‭money‬ ‭at‬ ‭the‬ ‭methods‬ ‭such‬‭as‬‭regression‬‭analysis,‬‭where‬‭historical‬‭returns‬‭of‬‭the‬‭security‬‭are‬
‭risk-free‬ ‭rate‬‭of‬ ‭return‬ ‭(RFR).‬ ‭(Clearly,‬‭it‬‭is‬‭always‬‭possible‬‭to‬‭lend‬‭money‬‭at‬‭the‬ ‭regressed against the returns of a market index (e.g., S&P 500).‬
‭nominal‬ ‭risk-free‬‭rate‬‭by‬‭buying‬‭risk‬‭free‬‭securities‬‭such‬‭as‬‭government‬‭T-bills.‬‭It‬ ‭>>Calculate‬ ‭the‬‭weighted‬ ‭average‬‭beta:‬‭Multiply‬ ‭the‬‭beta‬‭of‬‭each‬‭security‬‭by‬‭its‬
‭is‬ ‭not‬ ‭always‬ ‭possible‬ ‭to‬ ‭borrow‬ ‭at‬ ‭this‬ ‭level.)‬ ‭3.‬ ‭All‬ ‭investors‬ ‭have‬ ‭respective‬ ‭weight‬ ‭in‬ ‭the‬ ‭portfolio,‬ ‭and‬ ‭then‬ ‭sum‬ ‭these‬ ‭products‬ ‭to‬ ‭find‬ ‭the‬
‭homogeneous‬ ‭expectations;‬ ‭that‬ ‭is,‬ ‭they‬ ‭estimate‬ ‭identical‬ ‭probability‬ ‭weighted‬ ‭average‬ ‭beta‬ ‭of‬‭the‬‭portfolio.‬ ‭The‬‭formula‬‭for‬‭calculating‬‭the‬‭weighted‬
‭distributions‬‭for‬ ‭future‬‭rates‬ ‭of‬‭return.‬‭4.‬ ‭All‬‭investors‬‭have‬‭the‬‭same‬‭one-period‬ ‭average beta of a portfolio is:‬
‭time‬ ‭horizon,‬ ‭such‬‭as‬ ‭one‬ ‭month‬‭or‬‭one‬‭year.‬‭The‬‭model‬‭will‬‭be‬‭developed‬‭for‬‭a‬ ‭Portfolio Beta=∑(Weight of Securityi ×Beta of Security i)‬
‭single‬ ‭hypothetical‬ ‭period,‬ ‭and‬ ‭its‬ ‭results‬ ‭could‬ ‭be‬ ‭affected‬ ‭by‬ ‭a‬ ‭different‬ ‭3)‬‭What‬‭is‬‭an‬‭efficient‬‭portfolio?‬‭How‬‭can‬‭the‬‭return‬‭and‬‭standard‬‭deviation‬
‭assumption‬ ‭since‬ ‭it‬ ‭requires‬ ‭investors‬ ‭to‬ ‭derive‬ ‭risk‬ ‭measures‬ ‭and‬ ‭risk-free‬ ‭of a portfolio be determined?‬
‭assets‬ ‭that‬‭are‬ ‭consistent‬‭with‬‭their‬ ‭investment‬ ‭horizons.‬‭6)‬‭There‬‭are‬‭no‬‭taxes‬ ‭>>An‬ ‭efficient‬ ‭portfolio‬ ‭is‬ ‭a‬ ‭portfolio‬ ‭of‬‭assets‬ ‭that‬ ‭offers‬‭the‬ ‭highest‬‭expected‬
‭or‬ ‭transaction‬ ‭costs‬ ‭involved‬ ‭in‬ ‭buying‬ ‭or‬ ‭selling‬ ‭assets.‬ ‭This‬‭is‬‭a‬ ‭reasonable‬ ‭return‬ ‭for‬ ‭a‬ ‭given‬ ‭level‬ ‭of‬ ‭risk‬ ‭or‬ ‭the‬‭lowest‬ ‭level‬ ‭of‬‭risk‬ ‭for‬‭a‬‭given‬‭expected‬
‭assumption in many instances.‬ ‭return.‬ ‭In‬ ‭other‬ ‭words,‬ ‭it‬ ‭represents‬ ‭the‬ ‭optimal‬ ‭combination‬ ‭of‬ ‭assets‬ ‭that‬
‭c)‬ ‭What‬ ‭is‬ ‭the‬ ‭theory‬ ‭of‬ ‭valuation?‬ ‭Discuss‬ ‭the‬ ‭process‬‭of‬ ‭valuation‬‭requires‬ ‭maximizes‬ ‭return‬ ‭for‬ ‭a‬ ‭given‬‭level‬ ‭of‬ ‭risk‬ ‭or‬‭minimizes‬‭risk‬ ‭for‬‭a‬‭given‬‭level‬ ‭of‬
‭estimates.‬ ‭return.‬ ‭Efficient‬ ‭portfolios‬ ‭lie‬ ‭on‬ ‭the‬ ‭efficient‬ ‭frontier,‬ ‭which‬ ‭is‬ ‭the‬ ‭set‬ ‭of‬ ‭all‬
‭>>‬‭The‬‭theory‬ ‭of‬ ‭valuation,‬‭also‬ ‭known‬‭as‬ ‭asset‬‭valuation‬‭or‬‭security‬‭valuation,‬ ‭possible‬‭portfolios‬ ‭that‬‭offer‬ ‭the‬ ‭highest‬ ‭expected‬‭return‬‭for‬‭a‬‭given‬‭level‬‭of‬‭risk,‬
‭is‬ ‭a‬ ‭framework‬ ‭used‬ ‭to‬ ‭determine‬ ‭the‬‭intrinsic‬ ‭value‬‭of‬‭an‬ ‭asset‬ ‭or‬‭security.‬ ‭It‬ ‭or the lowest level of risk for a given expected return.‬
‭involves‬ ‭assessing‬ ‭the‬ ‭worth‬ ‭of‬ ‭an‬‭asset‬ ‭based‬‭on‬ ‭various‬ ‭factors‬‭such‬ ‭as‬‭its‬ ‭=>‬‭Determining‬ ‭the‬‭return‬ ‭and‬‭standard‬‭deviation‬ ‭(which‬‭is‬‭a‬‭measure‬‭of‬‭risk‬‭or‬
‭cash‬ ‭flows,‬ ‭earnings,‬ ‭dividends,‬ ‭growth‬ ‭prospects,‬ ‭risk‬ ‭characteristics,‬ ‭and‬ ‭volatility) of a portfolio involves a few steps:‬
‭prevailing‬ ‭market‬ ‭conditions.‬ ‭Valuation‬ ‭is‬ ‭fundamental‬ ‭to‬ ‭investment‬ ‭>Identify‬ ‭the‬ ‭assets‬‭in‬‭the‬ ‭portfolio:‬‭List‬ ‭all‬‭the‬ ‭assets‬ ‭(stocks,‬‭bonds,‬‭etc.)‬‭that‬
‭decision-making,‬ ‭as‬‭it‬‭helps‬‭investors‬‭determine‬‭whether‬‭an‬‭asset‬‭is‬‭overvalued,‬ ‭make‬ ‭up‬ ‭the‬ ‭portfolio.‬ ‭>>Determine‬ ‭the‬ ‭weights‬‭of‬‭each‬‭asset:‬ ‭Decide‬ ‭on‬ ‭the‬
‭undervalued, or fairly valued relative to its current market price.‬ ‭allocation‬ ‭of‬ ‭funds‬ ‭to‬ ‭each‬ ‭asset‬ ‭in‬ ‭the‬ ‭portfolio.‬ ‭The‬ ‭weights‬ ‭represent‬ ‭the‬
‭>>This‬ ‭process‬ ‭of‬ ‭valuation‬ ‭requires‬ ‭estimates‬ ‭of:‬ ‭(1)‬ ‭the‬ ‭stream‬ ‭of‬ ‭proportion of the total portfolio value invested in each asset.‬
‭expected‬ ‭returns‬ ‭and‬ ‭(2)‬ ‭the‬ ‭required‬ ‭rate‬ ‭of‬ ‭return‬ ‭on‬ ‭the‬ ‭investment‬ ‭(its‬ ‭>>Estimate‬ ‭the‬ ‭expected‬‭return‬ ‭of‬ ‭the‬ ‭portfolio:‬‭Multiply‬ ‭the‬‭expected‬ ‭return‬ ‭of‬
‭discount rate).‬ ‭each‬ ‭asset‬‭by‬ ‭its‬‭weight‬ ‭in‬‭the‬‭portfolio,‬‭and‬‭then‬‭sum‬‭these‬‭products‬‭to‬‭find‬‭the‬
‭1.‬ ‭Stream‬ ‭of‬ ‭Expected‬ ‭Returns‬ ‭(Cash‬ ‭Flows)‬ ‭An‬ ‭estimate‬ ‭of‬ ‭the‬ ‭expected‬ ‭expected‬ ‭return‬‭of‬‭the‬ ‭portfolio.‬‭The‬ ‭formula‬‭for‬‭calculating‬ ‭the‬ ‭expected‬‭return‬
‭returns‬ ‭from‬ ‭an‬ ‭investment‬ ‭encompasses‬ ‭not‬ ‭only‬ ‭the‬ ‭size‬‭but‬ ‭also‬ ‭the‬‭form,‬ ‭of a portfolio is:‬
‭time‬ ‭pattern,‬ ‭and‬ ‭uncertainty‬ ‭of‬ ‭returns,‬‭which‬ ‭affect‬‭the‬ ‭required‬‭rate‬‭of‬‭return.‬ ‭Expected‬ ‭Return‬‭of‬‭Portfolio=∑(Weight‬‭of‬‭Asset‬‭i‬‭×‬‭Expected‬‭Return‬‭of‬‭Asset‬
‭-‭> ‬ >Form‬ ‭of‬ ‭Returns:‬ ‭The‬ ‭returns‬ ‭from‬ ‭an‬ ‭investment‬ ‭can‬ ‭take‬ ‭many‬ ‭forms,‬ ‭i)‬
‭including‬ ‭earnings,‬ ‭cash‬ ‭flows,‬ ‭dividends,‬ ‭interest‬ ‭payments,‬ ‭or‬ ‭capital‬ ‭gains‬ ‭=>>‬ ‭Calculate‬‭the‬ ‭portfolio's‬‭standard‬ ‭deviation‬ ‭(risk):‬‭The‬‭standard‬‭deviation‬‭of‬
‭(increases‬ ‭in‬ ‭value)‬ ‭during‬ ‭a‬ ‭period.‬ ‭We‬ ‭will‬ ‭consider‬ ‭several‬ ‭alternative‬ ‭a‬ ‭portfolio‬ ‭measures‬‭the‬ ‭volatility‬‭or‬‭risk‬‭of‬‭the‬‭portfolio.‬‭It‬‭takes‬‭into‬‭account‬‭the‬
‭valuation techniques that use different forms of returns.‬ ‭covariance‬ ‭between‬ ‭the‬‭returns‬ ‭of‬ ‭different‬‭assets‬ ‭in‬‭the‬ ‭portfolio.‬‭The‬ ‭formula‬
‭->Time‬‭Pattern‬ ‭and‬‭Growth:‬ ‭Rate‬‭of‬ ‭Returns‬ ‭You‬‭cannot‬‭calculate‬ ‭an‬‭accurate‬ ‭for‬ ‭calculating‬ ‭the‬ ‭standard‬ ‭deviation‬ ‭of‬ ‭a‬ ‭portfolio‬ ‭depends‬ ‭on‬ ‭whether‬ ‭the‬
‭value‬‭for‬ ‭a‬‭security‬ ‭unless‬‭you‬‭can‬‭estimate‬‭when‬‭you‬‭will‬‭receive‬‭the‬‭returns‬‭or‬ ‭assets‬ ‭are‬ ‭perfectly‬ ‭correlated,‬ ‭positively‬ ‭correlated,‬ ‭negatively‬ ‭correlated,‬ ‭or‬
‭cash flows.‬ ‭uncorrelated.‬ ‭In‬‭the‬ ‭general‬‭case‬‭where‬‭assets‬ ‭are‬ ‭correlated‬‭to‬‭some‬‭degree,‬
‭2)‬ ‭Required‬ ‭Rate‬ ‭of‬ ‭Return:‬ ‭>>Uncertainty‬ ‭of‬‭Returns‬ ‭(Cash‬‭Flows)‬ ‭You‬‭will‬ ‭the‬ ‭formula‬ ‭involves‬ ‭the‬ ‭weighted‬ ‭sum‬‭of‬ ‭variances‬‭and‬‭covariances‬‭between‬
‭recall‬ ‭from‬ ‭Chapter‬ ‭1‬ ‭that‬ ‭the‬ ‭required‬ ‭rate‬ ‭of‬ ‭return‬ ‭on‬ ‭an‬ ‭investment‬ ‭is‬ ‭assets.‬
‭determined‬ ‭by:‬ ‭(1)‬ ‭the‬ ‭economy’s‬ ‭real‬ ‭risk-free‬ ‭rate‬ ‭of‬ ‭return,‬ ‭plus‬ ‭(2)‬ ‭the‬ ‭4) What are mutual funds? Why do people buy mutual funds?‬
‭expected‬ ‭rate‬‭of‬ ‭inflation‬‭during‬ ‭the‬ ‭holding‬ ‭period,‬‭plus‬ ‭(3)‬‭a‬‭risk‬‭premium‬‭that‬ ‭>>‬‭Mutual‬ ‭funds‬‭are‬‭investment‬‭vehicles‬‭that‬‭pool‬‭money‬‭from‬‭multiple‬‭investors‬
‭is‬ ‭determined‬ ‭by‬ ‭the‬‭uncertainty‬ ‭of‬‭returns.‬ ‭All‬‭investments‬‭are‬ ‭affected‬‭by‬‭the‬ ‭to‬ ‭invest‬‭in‬ ‭a‬‭diversified‬ ‭portfolio‬ ‭of‬ ‭stocks,‬‭bonds,‬ ‭or‬‭other‬ ‭securities‬‭managed‬
‭risk-free‬ ‭rate‬ ‭and‬ ‭the‬ ‭expected‬ ‭rate‬ ‭of‬ ‭inflation‬ ‭because‬ ‭these‬ ‭two‬ ‭variables‬ ‭by‬ ‭professional‬ ‭fund‬‭managers.‬‭When‬‭an‬‭investor‬‭buys‬‭shares‬‭of‬‭a‬‭mutual‬‭fund,‬
‭determine the nominal risk-free rate.‬ ‭they‬ ‭are‬ ‭effectively‬ ‭buying‬ ‭a‬ ‭portion‬ ‭of‬ ‭the‬ ‭fund's‬ ‭portfolio.‬‭The‬ ‭value‬‭of‬‭their‬
‭#)‬ ‭Investment‬ ‭Decision‬ ‭Process:‬ ‭A‬ ‭Comparison‬ ‭of‬ ‭Estimated‬ ‭Values‬ ‭and‬ ‭investment‬ ‭is‬‭determined‬‭by‬‭the‬‭performance‬‭of‬‭the‬‭underlying‬‭securities‬‭held‬‭by‬
‭Market‬ ‭Prices‬‭To‬ ‭ensure‬‭that‬‭you‬‭receive‬‭your‬‭required‬‭return‬‭on‬‭an‬‭investment,‬ ‭the fund.‬
‭you‬‭must‬‭estimate‬ ‭the‬ ‭intrinsic‬ ‭value‬‭of‬ ‭the‬‭investment‬ ‭at‬‭your‬‭required‬ ‭rate‬‭of‬ ‭=>People buy mutual funds for several reasons, including:‬
‭return‬ ‭and‬ ‭then‬ ‭compare‬‭this‬ ‭estimated‬ ‭intrinsic‬‭value‬‭to‬‭the‬ ‭prevailing‬ ‭market‬ ‭>‬‭Diversification:‬ ‭Mutual‬‭funds‬ ‭offer‬ ‭investors‬ ‭access‬‭to‬ ‭a‬‭diversified‬‭portfolio‬‭of‬
‭price.‬ ‭You‬ ‭should‬ ‭not‬ ‭buy‬ ‭an‬ ‭investment‬ ‭if‬ ‭its‬ ‭market‬ ‭price‬ ‭exceeds‬ ‭your‬ ‭securities,‬ ‭which‬ ‭helps‬ ‭spread‬ ‭risk‬ ‭across‬ ‭different‬ ‭assets‬ ‭and‬ ‭reduces‬ ‭the‬
‭estimated‬ ‭value‬ ‭because‬ ‭the‬ ‭difference‬ ‭will‬ ‭prevent‬ ‭you‬ ‭from‬ ‭receiving‬ ‭your‬ ‭impact‬ ‭of‬ ‭adverse‬ ‭events‬ ‭on‬ ‭the‬ ‭overall‬ ‭portfolio.‬‭This‬‭diversification‬‭can‬ ‭help‬
‭required‬ ‭rate‬ ‭of‬ ‭return‬ ‭on‬ ‭the‬‭investment.‬ ‭In‬‭contrast,‬ ‭if‬‭the‬ ‭estimated‬‭intrinsic‬ ‭mitigate‬ ‭the‬ ‭risk‬ ‭associated‬ ‭with‬ ‭investing‬ ‭in‬ ‭individual‬ ‭stocks‬ ‭or‬ ‭bonds.‬
‭value‬ ‭of‬ ‭the‬ ‭investment‬ ‭exceeds‬ ‭the‬ ‭market‬ ‭price,‬ ‭you‬ ‭should‬ ‭buy‬ ‭the‬ ‭>>Professional‬ ‭Management:‬ ‭Mutual‬ ‭funds‬ ‭are‬ ‭managed‬ ‭by‬‭professional‬ ‭fund‬
‭investment.‬ ‭managers‬ ‭who‬ ‭make‬ ‭investment‬ ‭decisions‬ ‭on‬ ‭behalf‬ ‭of‬ ‭investors.‬ ‭These‬
‭Previous-2021‬ ‭managers‬ ‭conduct‬ ‭research,‬ ‭analyze‬ ‭market‬ ‭trends,‬ ‭and‬ ‭actively‬‭manage‬ ‭the‬
‭fund's‬ ‭portfolio‬‭to‬‭achieve‬ ‭the‬‭fund's‬‭investment‬‭objectives.‬‭>>Convenience‬‭and‬
‭ )‬ ‭What‬ ‭are‬ ‭the‬ ‭popular‬ ‭sources‬ ‭of‬ ‭risk‬ ‭affecting‬ ‭firms‬ ‭and‬ ‭shareholders?‬
1 ‭Accessibility:‬‭Mutual‬‭funds‬‭provide‬‭investors‬‭with‬‭easy‬‭access‬‭to‬‭a‬‭wide‬‭range‬‭of‬
‭Explain.‬ ‭investment‬ ‭opportunities‬ ‭without‬ ‭the‬‭need‬ ‭for‬‭substantial‬ ‭capital‬‭or‬‭specialized‬
‭Let’s‬ ‭delve‬ ‭into‬ ‭the‬ ‭various‬ ‭sources‬ ‭of‬ ‭risk‬ ‭that‬ ‭can‬ ‭impact‬ ‭firms‬ ‭and‬ ‭their‬ ‭knowledge.‬ ‭>>Liquidity:‬‭Mutual‬ ‭funds‬‭offer‬‭liquidity,‬‭allowing‬‭investors‬‭to‬‭buy‬‭or‬
‭shareholders:‬ ‭sell shares on any business day at the fund's current net asset value (NAV).‬
‭=>‬‭Marketplace-Related‬ ‭Risks:‬ ‭>The‬‭marketplace‬ ‭in‬‭which‬‭a‬‭company‬‭operates‬ ‭5)‬ ‭Distinguish‬ ‭between‬ ‭hedge‬ ‭fund‬ ‭and‬ ‭mutual‬ ‭fund.‬ ‭What‬ ‭to‬ ‭consider‬
‭is‬‭a‬ ‭primary‬‭source‬ ‭of‬‭risk.‬‭These‬ ‭risks‬‭cannot‬ ‭always‬‭be‬‭directly‬‭controlled‬‭but‬ ‭before investing a hedge fund?‬
‭must‬ ‭be‬ ‭managed‬ ‭effectively.‬ ‭Examples‬ ‭include:‬ ‭–Demand‬ ‭Fluctuations:‬ ‭Hedge‬ ‭funds‬ ‭and‬ ‭mutual‬ ‭funds‬ ‭are‬ ‭both‬ ‭investment‬‭vehicles‬ ‭that‬ ‭pool‬‭money‬
‭Changes‬‭in‬ ‭consumer‬‭demands‬ ‭or‬‭desires‬ ‭may‬‭lead‬‭to‬‭reduced‬‭demand‬‭for‬‭the‬ ‭from‬‭multiple‬ ‭investors‬ ‭to‬‭invest‬‭in‬ ‭a‬ ‭diversified‬‭portfolio‬‭of‬‭securities.‬‭However,‬
‭company’s‬ ‭products.‬ ‭–Competition:‬ ‭Competitors‬ ‭introducing‬ ‭similar‬ ‭or‬ ‭better‬ ‭there are several key differences between the two:‬
‭products at lower prices can threaten sales or profit margins.‬ ‭=> Investor Eligibility:‬
‭=>‬ ‭Financing‬ ‭and‬ ‭Cash‬ ‭Flow‬‭Risks:‬‭These‬ ‭risks‬ ‭are‬‭associated‬ ‭with‬ ‭obtaining‬ ‭>Mutual‬ ‭Funds:‬ ‭Mutual‬ ‭funds‬ ‭are‬ ‭typically‬ ‭open‬ ‭to‬ ‭retail‬ ‭investors‬ ‭and‬ ‭have‬
‭necessary financing and managing cash flow. Examples include:‬ ‭fewer restrictions on who can invest.‬
‭>Difficulty‬ ‭Obtaining‬ ‭Financing:‬ ‭Sometimes‬ ‭a‬ ‭company‬ ‭faces‬ ‭challenges‬ ‭in‬ ‭>>Hedge‬‭Funds:‬ ‭Hedge‬‭funds‬ ‭are‬ ‭generally‬‭open‬‭to‬‭accredited‬‭or‬‭sophisticated‬
‭securing‬ ‭financing‬ ‭for‬ ‭expansion‬ ‭projects.‬‭>Cash‬‭Flow‬‭Constraints:‬ ‭Insufficient‬ ‭investors, such as high-net-worth individuals, institutions, and pension funds.‬
‭cash flow can hinder operations and growth.‬ ‭=>Investment‬ ‭Strategies:‬‭>Mutual‬‭Funds:‬‭Mutual‬‭funds‬‭typically‬‭follow‬‭traditional‬
‭=>‬ ‭Employee-Related‬ ‭Issues:‬ ‭>Labor‬ ‭disputes,‬ ‭employee‬ ‭turnover,‬ ‭and‬ ‭other‬ ‭investment‬ ‭strategies‬‭such‬‭as‬‭long-only‬‭equity‬‭investing,‬‭fixed-income‬‭investing,‬
‭workforce-related‬ ‭problems‬ ‭can‬‭create‬‭risks‬‭for‬‭a‬‭business.‬‭>Ensuring‬‭a‬‭positive‬ ‭or‬ ‭index‬ ‭tracking.‬ ‭>>Hedge‬ ‭Funds:‬ ‭Hedge‬ ‭funds‬ ‭employ‬ ‭a‬ ‭wider‬ ‭range‬ ‭of‬
‭work‬ ‭environment‬ ‭and‬ ‭effective‬ ‭human‬ ‭resource‬‭management‬‭is‬‭essential.‬‭=>‬ ‭investment‬ ‭strategies,‬ ‭including‬ ‭long‬ ‭and‬ ‭short‬ ‭positions,‬ ‭derivatives‬ ‭trading,‬
‭International‬ ‭Risks:>Operating‬ ‭in‬ ‭global‬ ‭markets‬ ‭introduces‬ ‭risks‬ ‭related‬ ‭to‬ ‭leverage,‬ ‭arbitrage,‬ ‭and‬‭alternative‬ ‭investments‬ ‭such‬ ‭as‬‭private‬ ‭equity‬‭and‬‭real‬
‭currency‬ ‭fluctuations,‬ ‭geopolitical‬ ‭instability,‬ ‭and‬ ‭regulatory‬ ‭differences.‬ ‭estate.‬
‭Companies must navigate these complexities to mitigate international risks.‬ ‭=>‬‭Liquidity:‬ ‭>‭M ‬ utual‬ ‭Funds:‬‭Mutual‬ ‭funds‬‭offer‬‭daily‬‭liquidity,‬‭allowing‬‭investors‬
‭2) What risk does beta measure? How can you find the beta of a portfolio?‬ ‭to‬ ‭buy‬ ‭or‬ ‭sell‬ ‭shares‬ ‭at‬ ‭the‬ ‭fund's‬ ‭net‬ ‭asset‬ ‭value‬ ‭(NAV)‬ ‭at‬ ‭the‬ ‭end‬‭of‬‭each‬
‭Beta‬ ‭measures‬ ‭the‬ ‭systematic‬ ‭risk‬ ‭or‬ ‭market‬ ‭risk‬ ‭of‬ ‭an‬ ‭individual‬ ‭stock‬ ‭or‬ ‭trading‬‭day.‬ ‭>>Hedge‬‭Funds:‬ ‭Hedge‬ ‭funds‬‭typically‬‭have‬‭less‬ ‭frequent‬‭liquidity‬
‭portfolio‬ ‭in‬ ‭relation‬ ‭to‬ ‭the‬ ‭overall‬ ‭market.‬‭It‬‭indicates‬ ‭how‬‭much‬ ‭the‬ ‭price‬‭of‬‭a‬ ‭options, such as quarterly or annual redemption periods.‬
‭security‬‭tends‬‭to‬‭move‬‭in‬‭response‬‭to‬‭changes‬‭in‬‭the‬‭broader‬‭market.‬‭A‬‭beta‬‭of‬‭1‬ ‭Before investing in a hedge fund, investors should consider several factors:‬
‭implies‬‭that‬‭the‬‭security's‬‭price‬‭movement‬‭is‬‭perfectly‬‭correlated‬‭with‬‭the‬‭market,‬ ‭>>Investment‬ ‭Objectives‬ ‭and‬ ‭Risk‬ ‭Tolerance:‬ ‭Investors‬ ‭should‬‭understand‬‭the‬
‭while‬‭a‬ ‭beta‬ ‭greater‬‭than‬‭1‬‭indicates‬‭higher‬‭volatility‬‭than‬‭the‬‭market,‬‭and‬‭a‬‭beta‬ ‭hedge‬ ‭fund's‬‭investment‬ ‭strategy,‬‭risk‬‭profile,‬ ‭and‬‭potential‬‭return‬‭expectations.‬
‭less than 1 indicates lower volatility than the market.‬ ‭They‬ ‭should‬ ‭assess‬ ‭whether‬ ‭the‬‭hedge‬‭fund's‬‭investment‬ ‭objectives‬‭align‬ ‭with‬
‭To‬ ‭find‬ ‭the‬‭beta‬ ‭of‬ ‭a‬‭portfolio,‬‭you‬‭need‬‭to‬‭calculate‬‭the‬‭weighted‬‭average‬‭of‬‭the‬ ‭their own investment goals and risk tolerance.‬
‭betas of the individual securities held in the portfolio.‬ ‭>>Track‬ ‭Record‬ ‭and‬ ‭Performance:‬ ‭Investors‬ ‭should‬ ‭review‬ ‭the‬ ‭hedge‬ ‭fund's‬
‭Here's a step-by-step process:‬ ‭historical‬ ‭performance,‬ ‭including‬‭both‬‭absolute‬‭returns‬‭and‬‭risk-adjusted‬‭returns.‬
‭>Identify the individual securities: List all the individual securities (stocks, bonds,‬ ‭They‬ ‭should‬‭evaluate‬‭the‬‭consistency‬‭of‬‭returns‬‭over‬‭different‬‭market‬‭cycles‬‭and‬
‭compare the fund's performance to relevant benchmarks.‬