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Fundamentals
LIQUIDITY
MAKE SHORT TERM
INVESTMENTS TO
MAINTAIN LIQUIDITY AND
EARN SOME RETURNS
AVOID UNUSUALLY HIGH
RETURN INVESTMENTS-IT
MAY BE RISKY
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Bonds
Return
Mutual Funds
Return
Real estate
Buying
Return
STCG
LTCG
CAPITAL ASSETS
STCG
LTCG
are uncertain
Future
Before
Systematic risk
Non-systematic risk
Non-systematic risk
systematic
risk
is
Measures of Risk
1. Range of returns: returns of a specific
investment over a given period
(range = highest return lowest return)
2. Standard deviation: standard deviation of stocks
monthly returns. It measures the degree of volatility
in the stocks return over time
A risky stock will normally have a relatively wide
range of returns and a high standard deviation of
returns
There are other subjective measures of risk
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3. Beta
Beta measures nondiversifiable risk i.e. Systematic risk.
Beta calculation is performed using a statistical technique called
Regression analysis.
The whole market is assigned a beta of 1.
Stocks that have a beta greater than 1 have greater price
volatility than the overall market and are considered to have
greater risk.
Stocks with a beta of 1 move up and down with the market.
Stocks with a beta less than 1 have less price volatility than the
market as a whole and are considered to have less risk.
Risk relates to return. Investors normally expect that stocks with
a higher beta should command a risk premium, that is provide a
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higher return than the market.
More risk should mean more reward!
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Where:
Rs = the required return on investment
Rf = risk-free rate of return
Rm = the average return on all stocks
Bs = the stocks beta
It is easy to see that Rs increases with
increase in its beta.
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Borrowing to invest
Taking risks to recover losses from
previous investments
Focus on Ethics: Falling prey to online
investment fraud
Avoid
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