INTRODUCTORY INVESTMENT MANAGEMENT BDPL4103

OUM SCHOOL OF BUSINESS

MEI 2017

BDPL4103

INTRODUCTORY INVESTMENT MANAGEMENT

MATRICULATION NO : 920526015621001

IDENTITY CARD NO. : 920526-01-5621

NAME : Muhammad Khairi Bin Nor Aziz

TELEPHONE NO. : -

E-MAIL : khairia04@gmail.com

LEARNING CENTRE : SIK

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 INTRODUCTORY INVESTMENT MANAGEMENT BDPL4103

TABLE OF CONTENT

1.0 QUESTION 1 3-6

2.0 QUESTION 2 79
3.0 QUESTION 3 10 - 14

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QUESTION 1

Calculate the annualised holding period returns for the following sets of investment.

Assets Holding period return (HPR) Holding period

(%)
Real estate 30 2.6 years
MLM share 25 1.5 years
Unit trust 3 9 months
KJB bonds 12 2 years
FBM share -3 6.2 months

1
Using this formula for Annualised HPR = (1 + HPR) - 1

Where n is the number of years in the holding period,

i. Holding period return of Real estate = 30%

30
Convert percentage into decimal =
100

= 0.3

Holding period of Real estate = 2.6years

1
Where n =
2.6

= 0.3846

Annualised HPR for Real state = (1 + 0.3)0.3846 - 1

= (1.3)0.3846 1

= 0.1062

= 0.1062

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= 10.62%

ii. Holding period return of MLM share = 25%

25
Convert percentage into decimal =
100

= 0.25

Holding period of MLM share = 1.5years

1
Where n =
1.5

= 0.6667

Annualised HPR for MLM share = (1 + 0.25 )0.6667 1

= (1.25)0.6667 1

= 0.1604

= 16.04%

iii. Holding period return of Unit trust = 3%

3
Convert percentage into decimal =
100

= 0.03

Holding period of Unit trust = 9months

1
Where n = = 0.0833 (convert the one month holding period to a yearly basis)
12

= 0.0833 x 9months

= 0.75 months

1
=
0.75

= 1.3333

Annualised HPR for Unit trust = (1 + 0.03)1.3333 1

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= (1.03)1.3333 1

= 0.0402

= 4.02%

iv. Holding period return of KJB bonds = 12%

12
Convert percentage into decimal =
100

= 0.12

Holding period of KJB bonds = 2years

1
Where n =
2

= 0.5

Annualised HPR for KJB bonds = (1 + 0.12)0.5 1

= (1.12)0.5 1

= 0.0583

= 5.83%

v. Holding period return of FBM share = -3%

3
Convert percentage into decimal = -
100

= -0.03

Holding period of FBM share = 6.2months

1
Where n = = 0.0833 (convert the one month holding period to a yearly basis)
12

= 0.0833 x 6.2months

= 0.5167 months

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1
=
0.5167

= 1.9355

1.9355
Annualised HPR for FBM share = (1 + (0.03)) 1

= (0.97)1.9355 1

= -0.0572

= -5.72%

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QUESTION 2

Differences between financial risk and business risk by giving relevant example.

Financial risk

A company's financial risk is related to the company's use of financial leverage and debt
financing, rather than the operational risk of making the company a profitable enterprise.
Financial risk is concerned with a company's ability to generate sufficient cash flow to be able
to make interest payments on financing or meet other debt-related obligations. Obviously, a
company with a relatively higher level of debt financing carries a higher level of financial risk,
since there is a greater possibility of the company not being able to meet its financial obligations
and becoming insolvent.

Some of the factors that may affect a company's financial risk are interest rate changes
and the overall percentage of its debt financing. Companies with greater amounts of equity
financing are in a better position to handle their debt burden. One of the primary financial risk
ratios that analysts and investors consider to determine a company's financial soundness is the
debt and equity ratio, which measures the relative percentage of debt and equity financing.

Foreign currency exchange rate risk is a part of the overall financial risk for companies
that do a substantial amount of business in foreign countries.

So in this way, the risk arises that the company will not be able to fulfill the financial obligations
of the shareholders due to debt financing. Moreover, financial risk does not end up here as it is
a myriad of risks which are given as under:

Market Risk: Risk arising due to the fluctuations in the financial assets.
Exchange Rate Risk: The risk arising out of the variations in the currency rates.
Credit Risk: The risk emerging because of non-payment of debt by a borrower.
Liquidity Risk: The risk originating as a result of a financial instrument is not traded
quickly in the market.

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In addition to loans, obligations your company enters into to pay suppliers and others
contribute to financial risk. For example, when your company takes delivery on inventory
resulting in an accounts payable of RM60,000 its financial risk increases. The repayment
structure, interest payment and term on your companys debt have a bigger impact than the
simple presence of debt. If you have a six percent fixed rate RM500,000 mortgage due in
quarterly installments of RM10,000 over the next ten years with a balloon payment at the end,
while another company with the same net income has a RM500,000 line of credit at an eight
percent variable interest rate, your company has less financial risk.

Business risk

Business risk refers to the basic viability of a business, the question of whether a
company will be able to make sufficient sales and generate sufficient revenues to cover its
operational expenses and turn a profit. While financial risk is concerned with the costs of
financing, business risk is concerned with all the other expenses a business must cover to remain
operational and functioning. These expenses include salaries, production costs, facility rent,
and office and administrative expenses.

The level of a company's business risk is influenced by factors such as its cost of goods,
profit margins, competition, and the overall level of demand for the products or services that it
sells. The economic environment includes both micro and macro environment. The changes in
the factors of the two environments directly influence the business, and the risk arises. Some of
those factors changes in customer tastes and preferences, inflation, change in the policies of the
government, natural calamities, strikes, etc. The business risk is divided into various categories:

Compliance Risk: The risk arising due to the change in government laws.
Operational Risk: The risk originating due to the machinery break down, process failure,
lockouts by workers, etc.
Reputation Risk: The risk emerging as a result of any misleading advertisement, lawsuit,
criticism of bad products or services, etc.
Financial Risk: The risk arising due to the use of debt capital.

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Strategic Risk: Every business organization works on a strategy, but due to the failure
of strategy the risk arises.

For example, an owner of a business may face different risks like in production,risks due to
irregular supply of raw materials, machinery breakdown, labor unrest. In marketing, risks may
arise due to different market price fluctuations, changing trends and fashions, error in sales
forecasting. In addition, there may be loss of assets of the firm due to fire, flood, earthquakes,
riots or war and political unrest which may cause unwanted interruptions in the business
operations. Thus business risks may take place in different forms depending upon the nature
and size of the business.

Accounting policies like the decision to extend terms to customers impact your company's
business risk. A high level of delinquent accounts receivable that you need to write off will
decrease operating income. Your sales and marketing strategy also affects business risk. For
example, you spend large sums on marketing but few sales result. You can only do this a limited
number of times before losses result. Having high overhead also impacts business risk. If you
pay RM10,000 in rent and utilities per month but your monthly sales infrequently surpass
RM20,000, you have high business risk. If you could reduce your overhead to RM5,000, you
would drastically reduce this risk.

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QUESTION 3

Describe the differences among investment, savings, speculations and gambling and indentify
the categories of the following cases.

Investment

Investment refers to the acquisition of the asset, in the expectation of generating income.
In a wider sense, it refers to the sacrifice of present money or other resources for the benefits
that will arise in future.

Investing is a long term process. It often involves committing a portion of your money
to owning a share of a business, with the expectation that you will receive a higher return than
inflation. The most important factor in investing is the growth of your money. And there are
many ways to invest, with stocks, bonds, and real estate being the most popular.

However, once again there is a trade-off. While investing typically offers better returns
than saving, it also carries more risk, as the value of your investment bounces up and down. At
least, when looked at in the short term. To be a successful investor, you must invest your money
for at least 3 years. That is because over longer periods, the value of your money will appreciate
enough so that even if the value of your investment falls over a short period of time, it will still
be higher at the end of the period than it would have been if your money had been sitting in a
savings account.

Case 1 : Malik bought 2,000 units of CB Bank shares at RM4.15 per share and plan to hold
them for long term because he thinks that CB Bank would be able to pay good dividends and
the price of the shares would increase in the future.

For category case 1, we can say that this is an investment. This is because an investor
like Malik will be concerned with two things: return of capital and dividends. He is committing
his funds for long term with the expectation of deriving income from dividends which would

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be paid by CB Bank as well as the expectation of capital gain derived from price increase in the
share.

Speculations

Speculation is a trading activity that involves engaging in a risky financial transaction,

in expectation of making enormous profits, from fluctuations in the market value of financial
assets. In speculation, there is a high risk of losing maximum or all initial outlay, but it is offset
by the probability of significant profit. Although, the risk is taken by speculators is properly
analysed and calculated.

Sometimes, speculators can be referred to as "glorified gamblers," because their

investment decisions are based more on hunches and feelings. They often look at market trends
and try to buy stocks as they move up. Speculators can win big, but they can also lose
everything.

Speculation can be defined as a matter of buying and selling something in the hope of
making a quick profit as a result of price changes (Friedman 1987). This includes selling and
buying shares, land, property assets, commodities, match results or anything else that can
generate exceptional profits based on risk (Spencer 1974). Speculators are called speculators
usually buy securities instead of earning dividends but to capital gains (Dewan Bahasa dan
Pustaka 1993). For example speculators buy shares during low prices and sell them when prices
are high. This explains that speculation is closely related to business and investment activities
involving risks (Clark 2001).

However speculation is different from those of which investment is more long-term and
less risky (Kunhibava 2011). Traders usually buy shares and hold such shares for a certain
period of time to earn dividends. There is also a case where investors sell their shares when
necessary to capital gains. According to the American Bankers Association (1999) capital gain
is the gain derived from the sale of assets. The profit is the result of the difference in the
purchase price and the selling price of an asset for the asset owner. This is different from

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speculators who buy stocks to sell them in the near future when prices rise. They take a high
risk to get maximum profit in a very short period of time.

Case 4 : Hisyam bought 300 units of JKN shares at RM0.35 per share and he intends to sell it
as soon as the price rises to RM0.55 per share.

For category case 4, we can say that is a speculation. This is because Hisyam is committing his
funds for the short term with the hope of getting capital gain when the price rises from RM0.35
to RM0.55 a share. Besides this, he is buying penny stock, that is, a low priced counter with
the hope of reaping a high return from it. The risk involved is also higher.

Savings

Saving can be defined as the process of setting money aside in order to make a purchase
a short time in the future. The most important element when it comes to saving is the safety of
your money. You do not want the value of your savings to fluctuate, because you will need all
of it to make your purchase. There are several options available to help you save money which
is savings accounts, money market accounts, and certificates of deposit, for example.

Unfortunately, as a trade-off for protecting your money, saving typically pays interest at a rate
that is just a bit higher than inflation. If you want to earn more than that, you should not do
saving as alternative ways but investing is a good ways.

Case 2 : Angelina deposits RM300 every month in her savings account so that she can use the
money as a deposit to book her winter vacation with her friends.

For category case 2, we can say that is a savings. This is because Angelina just put aside the
money so that she can use it as deposit to book her winter vacation. Besides this, if Angelina
needs the money in case of an emergency, she can also withdraw the amount from the bank.
Thus the time preference of money is short and the risk involved is very low.

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Gambling

Gambling includes two basic components: win or lose determination methods and
payment from losers to winners. In order to be categorized gambling then there must be 3
elements to be met:

1)The existence of bets of property / material that comes from both parties who gamble

2)There is a game used to determine the winner and the loser

3)The winner takes the (partial / total) stake at stake, while the losing party loses his fortune

The main components of gambling are so-called "zero sum game" transactions. In such
transactions the winner receives payment from the losing party without any fee for the payment.
So the winner increases his wealth and in the meantime the loser loses his wealth in equal
amounts. The additions and subtractions will add up to zero. That is the essence of "zero sum
game".

In gambling does not involve only two parties, but can be many parties. Even between
parties who bet and the dealer (committee executor) not necessarily meet. An example of online
gambling is still rife at this time, by logging into the provider's site the gambler was able to
gamble anytime of the morning. Gambling is also various kinds:

1) Gambling dexterity and and proficiency. Who is the most agile and the most adept he
who wins and is entitled to the treasures of other players at stake. Examples of gambling cards,
gambling billiards, horse racing gambling and the like.

2) Sports gambling and the like. The game here is who can guess right. Here the perpetrator
tries to guess who or which team will come out to win in a sporting event or other event. Who
managed to guess will get a prize bet from other players. In addition gamblers can come from
the athlete itself where he also bet on it. For example which team won the World Cup, how
many match scores (and sort of)
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3) Gambling numbers and the like. In a more sophisticated system gambling these numbers
are many of which are wrapped with frill investments. The most recognizable feature is to buy
/ sell something that does not exist, then expect the price to go up / down to gain (gain).

For example two players in a throwing game will have to pay RM10 each. Each part of
the coin represents the part of the participants. This means the winning party and benefiting the
other party's losses or in other terms this activity is known as zero sum game. In this case there
is no activity that can add economic value. In view of the macroeconomic angle, the wealth of
the community will not increase because the winner's advantage is to match the loss of the loser.

If examined in a gambling activity there is a zero-sum game element where the defeat
of a party is compatible with the other party's victories (al-suwaylem 2000). For example two
parties A and B each bet RM1000 against two badminton players. If the selected badminton
player A wins then A will get a sum of RM2000 and that's the opposite. This means the losers
will lose their betting money. This situation shows that it is unlikely that both parties can win.
The fact is that the winner's gain is equal to the loss of the loser. This causes the acquisition of
property through the wrong way. Besides the term "zero-sum" illustrates the intention of the
players to be in conflict with each other which may lead to hostility and hatred among the
players.

Case 3 : Daniel bought 1000 lottery tickets at RM3.50 a ticket with the hope of winning the
first prize plus bonus of RM1 million.

For category case 3, we can say that is a gambling. This is because Daniel is taking a very high
risk whereby he may lose his RM3,500 or he may be able to stike it very rich if he wins the first
prize or he may be able to win a small prize of RM100. The commitment of funds is very short
term and the risk is very high.

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