Investment

In ordinary sense, Investment is a current outlay

of fund for a period of time to derive future
payment.
In Economics
An investment is the purchase of goods (also
called capital goods) that are not consumed
today but are used in the future to create wealth.
For example: A farmer ploughs his field on a
daily basis under the expectation that he may
reap some returns in the form of grains after a
specified period of time. This means that he
gives his time, Energy & energy anticipating
future benefits within a certain time frame.
In finance, the meaning of investment is
purchasing or creating an asset anticipating
an interest income, rental income, dividend,
profits or any combination of the mentioned
returns.
For example: I purchased 100 shares of a
company anticipating dividend from these
shares. In this case, shares are my investment
and I am anticipating dividend income from
the investment made.
Investment in business
Investment refers to the act of buying an asset
to make a profit from its use.
Simply put, it is when a business spends
money on something that will help it make
financial returns.
Example:
Consider a Restaurant, It buys various type of
assets, like Furniture, different Appliances and
others in order to offer it’s services to the
customers. Therefore, with the help of those
spending, it will generate money and
eventually earns profit.
 Why do businesses invest?

Investment is a crucial element for every

business. Without making an completed
investment, it would be impossible to
establish a business and keep it running.
Almost in every business it’s a regular
phenomenon to keep investing money in
order for the firm to keep them running as
well as to keep pace with the changing
conditions.
Why do Investors Need to be Compensated
It’s because;
i. The time the funds are committed-
Opportunity Costs
ii. The expected rate of inflation and
iii. The uncertainty of the future payments-
Risk
Investment is made in anticipation of future
benefits which may not be guaranteed. The
reason for this instability is the element of
risk associated with the investment made.
Whether the investment is made in real
estate, capital market or any other kind of
securities, the risk involved is indispensable.
Before making any investment commitment, it
is wise enough to consult an expert or do a
dedicated research to assure ourselves of
taking the best possible investment decision.
 What is Portfolio
A collection of investments owned by the
individuals or organization. These investments
often include stocks, which are investments in
individual businesses; bonds, which are
investments in debt securities that are
designed to earn interest; and mutual funds,
which are essentially pools of money from
many investors that are reinvested by
professionals.
 Business Portfolio
A Business Portfolio is a combination of various products,
services and business units that make up a business. By
observing this portfolio and each business unit individually,
managers can take strategic business level decisions for the
whole portfolio.
The goal of a company’s portfolio are:
 To create a presence of the business on the market,
 To attract more customers and
 To show how the business differs from its direct competitors on
the market.
 The company portfolio is also used as a business strategy to
show the growth
 'Portfolio Management'
Portfolio management is the art and science of
selecting and overseeing a group of investments
that meet the long-term financial objectives and risk
tolerance of a client, a company, or an institution.
Portfolio management requires the ability to weigh
strengths and weaknesses, opportunities and
threats (SWOT) across the full spectrum of
investments. The choices involve trade-offs, from
debt versus equity to domestic versus international
and growth versus safety.
 Portfolio Manager
Professional licensed Portfolio Managers work
on behalf of clients, while individuals may
choose to build and manage their own
portfolios. In either case, the portfolio
manager's ultimate goal is to maximize the
investments' expected return within an
appropriate level of risk exposure.
Two basic forms of Portfolio Management:
Active management
Active management is the use of human
capital to manage a portfolio of funds. Active
managers rely on analytical research,
personal judgment, and forecasts to make
decisions on what securities to buy, hold, or
sell.
For example, one may sell stock A in order to
buy stock B. Then, a few days or weeks later,
one may sell stock B to buy bond C.
 Theory of Active Management

Investors who do not follow the Efficient

Markets Hypothesis believe in active
management. They hold the belief that there
are some inefficiencies in the market that
allow for market prices to be incorrect.
Therefore, it is possible to earn profit in the
stock market by identifying mispriced
securities and employing a strategy to take
advantage of the price correction.
Such an investment strategy can involve
purchasing securities that are undervalued or
short-selling securities that are overvalued. In
addition, active management is used to
modify risk and create less volatility than the
benchmark.
Active management aims to generate better
returns than a benchmark, usually some sort
of a market index.
Unfortunately, a majority of active managers
are unable to consistently outperform
effectively than that of the passively managed
funds. In addition, actively managed funds
charge higher fees than passively managed
funds.
Fundamental Information
The facts that affect a company's underlying
value. Examples of fundamental information
include , Net asset Value, debt, cash flow,
supply of and demand for the company's
products, and so forth. For instance, if a
company does not have a sufficient supply of
products to it’s customers demand, it will fail.
For example, money managers may only buy
blue-chip stocks for a certain fund and growth
stocks for another. The basic thought of active
management is how the manager can
maximize the return for investors by buying or
selling securities on a fairly regular basis.
Blue Chip Stocks
A very high quality investment involving a
lower-than-average risk of loss of principal or
reduction in income. The term is generally
used to refer to securities of companies having
a long history of sustained earnings and
dividend payments.
 Stocks in a well-known and highly respected
publicly-traded company. Blue chip companies
are usually financially sound and are thought
to be relatively low-risk investments. They
tend to be less volatile than other companies
and to provide solid growth to portfolios.
Growth stock
The stock of a firm that is expected to have above-
average increases in revenues and earnings. These
firms usually retain most earnings for reinvestment
and therefore, pay small dividends. The stock, often
selling at relatively high price-earnings(P/E) ratios,
is subject to wide swings in price.
Share in a company performing better, or expected
to perform better, than its industry or the market as
a whole.
 Passive Management
Passive management, on the other hand, involves
buying an index, an exchange-traded fund, or
some other investment vehicles with securities the
investor does not directly choose. For example, one
may buy an exchange-traded fund that holds all the
stocks on the S&P 500 or DSE-30
An exchange traded fund (ETF) is a basket of
securities that trade on an exchange, just like a
stock. ETF share prices fluctuate all day as the ETF is
bought and sold
 Key Takeaways of Passive Management

• Passive management is a reference to index

funds and exchange-traded funds, that mirror
an established index, such as the S&P 500.
• Passive management is the opposite of active
management, in which a manager selects
stocks and other securities to include in a
portfolio.
• Passively-managed funds tend to charge lower
fees to investors than funds that are actively
managed.
• The Efficient Market Hypothesis (EMH)
demonstrates that no active manager can beat
the market for long, as their success is only a
matter of chance; longer-term, passive
management delivers better returns.
 Index
An index is used to track the performance of
equity or other assets. A basket of securities
makes up the index used to track the
performance. Indices can be broad-based or
track the performance of specific
sectors/stocks etc.
Broad Based Index
DSE-30 is a broad-based index which tracks the
performance of the top 30 stocks listed on the
DSE known as DSE-30 Index.
Specific Index
The indices can also be of specific sectors, like
the Pharmaceutical index, which tracks the
performance of the top Pharmaceutical’s
stocks listed on the DSE.
DSE 30 Index, this index is constructed
with 30 leading companies which can be said
as investable index of the exchange. It reflects
around 51% of the total market capitalization.
 Criteria for inclusion in DSE-30 Index
The Dhaka Stock Exchange (DSE) rebalances its DS30 index
as per criteria set by S&P Dow Jones Indices.
• According to DS30 criteria, eligible stocks must have a
float-adjusted market capitalization worth above Tk 500
million as of the rebalancing reference date.
• And the eligible stocks also must have a minimum three-
month average daily traded value worth 5.0 million as of
rebalancing reference date.
• Stocks must be profitable as measured by positive net
income over the last 12-month period, as of the
rebalancing reference date.
Standard & Poor’s 500 Index Definition

The S&P 500, short for Standard and Poor’s

500, is a stock market index that tracks
performance of 500 U.S.-based large-cap
companies from various sectors.
The S&P 500 is a market cap-weighted index,
meaning companies with the
highest valuations have the most impact on
the index’s value.
The S&P 500 index was launched in 1957 and
had 425 companies from the industrial sector,
25 companies from the railroads sector, and
50 utility firms. Over the years, the index’s
composition has changed to reflect the
current American economy. Technology is
currently the dominant sector, accounted for
more than 1/4 of the overall index.
Exchange-Traded Fund
A security that represents all the stocks on a
given exchange. For example, an exchange-
traded fund may track the Standard and Poor's
500. Investors use exchange-traded funds as a
way to easily diversify their portfolios at
relatively low cost.
 Dow Jones Industrial Average (DJIA)

• The Dow Jones Industrial Average (DJIA), also

commonly referred to as “the Dow Jones” or
simply “the Dow,” is one of the most popular and
widely-recognized stock market indices. It
measures the daily stock market movements of
30 U.S. publicly-traded companies listed on the
NASDAQ or the New York Stock Exchange (NYSE).
The 30 publicly-owned companies are considered
leaders in the United States economy.
The DJIA is one of the stock indices created by
Dow & Jones Company founder and Wall
Street Journal editor Charles Dow.
When the DJIA launched in 1896, it was
comprised of only 12 US companies that were
mainly engaged in industrial activities.
What is an 'Investment Vehicle'
An investment vehicle is simply an investment
product that is offered to investors that
provide the chance for investors to earn a
return, or profit, on the product purchased.
An investment vehicle may involve the
purchase of a debt obligation, which entitles
one to repayment with interest (Bond), or
it may involve buying an ownership stake in a
business(Stock), with the hope that the
business will become profitable or any
product that could be tangible as well as
intangible.
 Some Terminologies
Interest
Pure rate of interest; The rate of exchange
between the future consumption and current
consumption
Example; Deposit $100 today and receive $110,
then pure rate of return would be 10%
(110/100 – 1)
This concept assumes there is no inflation and
risk.
Some Terminologies continued…
Nominal Rate of return; The minimum rate of
return that an investor must receive from it’s
risk free investment.
Example; Pure rate 10% and if inflation rate is
5%, then nominal rate of return would be 15%.
So, Nominal rate of return = PRR + Inflation
Risk premium
As an investor you must be compensated
addtionally due to the uncertainty you are
bearing.
The additional return added to the nominal,
risk-free interest rate is called Risk Premium.
Risk Premium = Required rate of return –
Nominal rate
Required Rate of Return
It is the minimum rate of return that a Company
must offer the investors in order to fully
compensate for putting money into a particular
security or project due to;
i. The time the funds are committed,
ii. The expected rate of inflation and
iii. The uncertainty of the future payments
RRR = NRR(PRR+Inflation) + Risk premium
 General Types of Risk
1. Business Risk
2. Financial Risk
3. Liquidity Risk-
i. Time to convert
ii. Certainty of investment recovery
 Business Risk & Financial Risk
Income Statement
Sale 100000
Business
-COGS/Purchase price 60000 Risk Area
GP 40000
-OE ( S & Adm Ex) 30000
EBIT )Earning Before IT) 10000 Financial
Risk Area
-Interest 5000
EBT 5000
4. Exchange rate Risk-The risk that changes in currency exchange rates cause
the value of an investment to decline
Example
Investment in NYSE-1000 shares @ $10,000 when exchange rate of Taka & dollar
was BDT95.00
One year later 1000 shares can be sold for $12,000.
But exchange rate of Taka & dollar becomes BDT-100.50
Now, Investor in USA will receive Lower HPR than the investor in Bangladesh.
Or if reverse happened.
Suppose, exchange rate decreases to Tk.96/dollar.
Then situation would be different for BD investor.

5. Country/Political Risk: The risk that is related with country specific risk or due
to domestic events – such as political uncertainty, financial troubles, or
natural disasters like Covid-19 – will weaken a country’s financial markets.
 Math
Holding Period Return (HPR)
Holding Period Yield (HPY)
Annual Holding Period Return (AHPR)
Annual Holding Period Yield (AHPY)
 Holding Period Return (HPR)

For investments, the Holding Period Return

(HPR) refers to the total return earned from an
investment or an investment portfolio over
the holding period, that is, the period for
which the asset or portfolio was held by the
investor. The holding period can be anything
such as 1 day, 1 month, 6 months, 1 year, 5
years and so on.
Example;
If you buy an asset now at $100 and sell it at
$120 after 2 years, the holding period return
will be (120/100) = 1.20.
HPR = (Ending value of investment ÷
Beginning value of Investment)
Holding Period Yield = (HPR – 1)X100
Example;
HPY = (1.20-1.0)x100 = 20%
AHPR = (HPR)1/n
= (1.2)1/2 [n=2 years)
=1.0954
AHPY = (HPR)1/n -1 = 1.0954-1 =0.0954 =9.54%
 Formulae Summary
HPR = (Ending value of investment ÷
Beginning value of Investment)
HPY = (HPR – 1)X100
AHPR = = (HPR)1/n
AHPY = = (HPR)1/n - 1
 Some problems for solutions
1.Mr. X purchased 2000 shares of Bata Shoe
Company at Tk. 60 each one year back. The
share can be sold now for @Tk. 70. And the
company also will pay 20% cash dividend on
face value which is Tk. 10 each.
Calculate ;
i. HPR, HPY, AHPR, AHPY
2. Mr. Y purchased 5000 shares of AB Bank Ltd.
at Tk. 40 each two year from now. During this
time the bank has paid 10% cash dividend and
20% stock dividend. The market price of the
share is Tk. 30 each. Consider that, the face
value of the share is Tk. 10.
Calculate ;
i. HPR, HPY, AHPR, AHPY
3. Mr. Z purchased 15000 shares of Prime
Finance Ltd. at Tk. 25 each 6 month from now.
During this time the company has paid 20%
cash dividend and 30% stock dividend. The
market price of the share is Tk. 16 each.
Consider that, the face value of the share is
Tk. 10.
Calculate ;
i. HPR, HPY, AHPR, AHPY
 Expected rate of return
The return that is expected to be earned
on a given investment each period over a
time horizon.

Where,
Pi = Probability of return of individual security
Ri = Possible return of individual security
Examples;
Situation -1;
Under perfect certainty; When investor is
absolutely certain about return on investment.
If the investor expects 10% certain return on
its investment
Solution 1;
P1 = 1.0, under certain possibility
Ri = 10% = 0.10
E(Ri) = (P1)(R1) = 1.0 X 0.10 = 0.10 = 10%
Situation -2;
Under uncertainty; When investor is not
absolutely certain about return on investment.
Suppose the investor expects 10% return on
its investment, but possibility is 50%.
Solution 2;
P1 = 0.50, since probability is 50%
Ri = 10% = 0.10
E(Ri) = (P1)(R1) = 0.50 X 0.10 = 0.05 = 5%
 Economic Condition Probabi Rate of
Situation-3 lity return
Strong Economy, No 15% 20%
inflation
Weak Economy 15% -20%
Normal Economy 70% 10%

Solution; Economic Condition Pi Ri PiXRi

E(Ri) = Strong Economy, No
inflation
0.15 0.20 0.03

Weak Economy 0.15 -0.20 -0.03

Normal Economy 0.70 0.10 0.07
E(Ri) =0.07=7
%
 Risk of expected rate of return
Variance
This is the difference between the actual
result and the expected one.
It measures how far a set of numbers are
spread out from their average value
Greater the dispersion of expected return,
greater the uncertainty or risk of the
investment.
 Standard Deviation;

Standard deviation is a basic mathematical

concept that measures volatility in the market
or the average amount by which individual
data points differ from the mean. Simply put,
standard deviation helps determine
the spread of asset prices from their average
price.
It is the square root of the Variance.
 KEY TAKEAWAYS

• One of the most common methods of determining

the risk an investment poses is standard deviation.
• Standard deviation helps determine market
volatility or the spread of asset prices from their
average price.
• When prices move wildly, standard deviation is
high, meaning an investment will be risky.
• Low standard deviation means prices are calm, so
investments come with low risk.
Co-efficient of Variation;
If the conditions for two investment
alternatives are not similar-that is, if there are
major differences in expected rates of return-
then only variance & standard deviation could
be misleading to measure the degree of risk of
investment.
Under this circumstances, it is necessary to
use a measure of relative variability to indicate
per unit of expected return. Co-efficient of
Variation is a widely used relative measure.
Formulae;
CV = Standard deviation/Expected return
What does the co-efficient of variation tell
us?
The co-efficient of variation (CV) indicates the
size of a standard deviation in relation to its
mean. The higher the co-efficient of variation,
the greater the dispersion level around the
mean.
Applications of the Coefficient of Variation

COV is used to analyze the risk of per unit of

return of an investment
When used to evaluate investment risk, COV
can be interpreted similarly to the standard
deviation in Modern Portfolio Theory (MPT).
But the COV is arguably a better overall
indicator of relative risk when it's used to
compare different securities.
The COV's main advantage is its applicability
to any given quantifiable data, thus paving the
way for a comparative analysis between two
unrelated entities. This quality separates COV
from a standard deviation analysis, which
cannot facilitate a meaningful comparison
between two independent variables.
For example, suppose two different stocks offer
different returns, with each exhibiting a different
standard deviation.
Specifically, let's assume Stock A has an expected
return of 15% with a standard deviation of 10%, while
Stock B has an expected return of 10% coupled with a
5% standard deviation. In this scenario, the COV for
Stock A is 0.67 (10%/15%), while the COV for Stock B is
0.5 (5%/10%). Simply put, the data suggests that Stock
B is a superior investment from a risk-based
perspective.
 The Bottom Line

• The co-efficient of variation is a simple way to

compare the degree of variation from one
data series to another. It can be applied to
pretty much anything, including the process of
picking suitable investments.
• Generally speaking, a high CV indicates that
the group is more variable, whereas a low
value would suggest the opposite.
 Exercise-01

Year Annual rate of

return
2006 7%
20007 11
2008 -4
2009 12
20010 -6
Exercise-02

Possible Probabil
return ity
10% 25%
0 15
10 35
25 25
 Exercise-03
Possible Probability
return
60% 15
-30 10
-10 5
20 40
40 20
80 10
 Exercise for practice
Chapter-1
Reference Book-
“Investment Analysis and Portfolio
Management”
By,
Frank K. Reilly
Keith C. Brown
12th Edition or Latest