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Financial Investments Guide: Maximizing Income and Minimizing Risk

Learn about investments, income volatility, inflation, financial assets, historical rates of return, expected returns, and risk management in financial markets.

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Financial Investments Guide: Maximizing Income and Minimizing Risk

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  1. CHAPTER 1 Investments

  2. Whatarewegoingtolearn in thischapter?

  3. Youhave 1 yeartoliveandhave 10 million TL. What do you do?

  4. Youhave 50 yearstoliveandhave 5 million TL. What do you do?

  5. A soccerplayer, who is not veryskilled, at Adanademirsporearning 300,000 TL a year.

  6. A studentwholovestravelling but does not havetoomuchmoney, stillwantstotravelwhileyoung.

  7. Investment • Incomevolatility • Ifmoreincomethanconsumption, what do you do? • Presentconsumption vs. futureconsumption

  8. Investment • Investment=> • Those who defer consumption expect toreceive……..? • Those whoborrowarewillingto………?

  9. Investment • Delayconsumption: 100-110 TL • Whatstheprice of delayingconsumption? • How is thispricedetermined? • Stablepricelevels vs. inflation • What do youwant in returnfor risk?

  10. Investment • Investment: is the current commitment of dollars for a period of time in order to derive future payments thatwill compensate the investor for (1) the time the funds are committed, (2) the expected rate ofinflation, and (3) the uncertainty of the future payments. • Whocould be considered as an investor? • What can youinvest in?

  11. Real Assets vs. FinancialAssets • Whatarerealassets/financialassets? • Financial assets are claims to the income generated by real asset. • Ifyoubelieve in thefutureprospect of autoindustry, whatwouldyouneedto start yourowncompanyandtoopenyourownfacilities? • How do theseassetseachaffecttheeconomy?

  12. FinancialAssetTypes • Muhittin’sretirement • Tip from Berna aboutTemsa • FortunetellerpredictionaboutArçelik

  13. Why do weneedfinancialmarkets?

  14. Howdoestheinvestmentprocesswork? (simplifiedversion)

  15. Whoaretheactors in financialmarkets?

  16. Whoaretheintermediaries in financialmarkets? Why do weneedtheintermediaries?

  17. HistoricalRates of Return • 10 TL stock=> no dividends – 15 TL nextyear 15 TL stock=> 2 TL dividend – 19 TL nextyear 20 TL stock=> 12 TL dividend – 17 TL nextyear Whichonetochoose? • Change in wealth: components? • Holding period & holding periodreturn (HPR) • Example of an investmentwithnegative HPR?

  18. HistoricalRates of Return • Holding period yield (HPY) • Multipleyearinvestments & Annual HPR • 250 TL today=> 350 TL in twoyears: Annual HPR & HPY? • 500 TL today=> 340 TL in twoyears: Annual HPR & HPY? • 100 TL today=> 112 TL in sixmonths: Annual HPR & HPY?

  19. MeanHistoricalReturns • High rates of return & low rates of returnovertheyears? • SingleInvestment: Arithmetic mean Geometric mean A.M.=? G.M.=?

  20. MeanHistoricalReturns • Long-term performance vs. short-termperformance? • A.M. vs. G.M.? • Compound annual rate of return • Volatilesecurities A.M.=? G.M.=?

  21. MeanHistoricalReturns • Portfolio of Investments=> HPY=?

  22. Expected Rate of Return • What’s risk? • Future expectations vs. historicalreturns • Pointestimation • Whydoes risk matter in terms of investments? • Probabilityassignments

  23. Expected Rate of Return • Expected Return • Perfect certainty • An investment with 10 possible outcomes ranging from –40 percent to50 percent with the same probability for each rate of return. E(R)=? • What is risk aversion?

  24. Risk of theExpected Rate of Return • Howtocomparethereturns of twoalternative investments directly? • Variance • Do youpreferhigherorlowervariance? • The variance for theperfectcertainty? Forthe 2nd examplewithinflation?

  25. Risk of theExpected Rate of Return • Standard Deviation • For the second example, standarddeviation? • Inv I=> standard dev.=0.12 Inv II=> standard dev.= 0.15 Whichonetochoose? • Coefficient of variation (CV)

  26. END OF CHAPTER

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