Essays on Return

Team 2

EXECUTIVE SUMMARY Our company is Prestige Worldwide Investing. Our task is to determine which property is the best investment for the three different risk investors which is the risk averse, risk neutral, and risk seeking. Richard Nixon is a risk-seeking investor. Like most VC (venture capitalist), Richard pursues the project, which is high risky and high payback. Bill Clinton is risk-neutral investor, and he is only concerned about high return regardless of the risk. Ronald Reagan is a risk-averse investor looking for safe investments. For example, risk-averse investors will prefer the one with low relative risk when faced with two ...

Capital Asset Pricing Model

The primary role of capital market is allocation of ownership of the economy’s capital stock . Capital market theory extends portfolio theory and develops a model for pricing all risky assets. Capital asset pricing model (CAPM) allows determining the required rate of return for any risky asset. CAPM offers powerful and intuitive pleasing predictions about how to measure risk and the relation between expected return and risk. It is widely used in application such as estimating the cost of capital for firms and evaluating the performance of managed portfolio . CAPM has been the basis for calculating the required rate of ...

AN EXPLORATORY ANALYSIS OF SENATE BILL 863

Requirements for the Masters in Public Policy and Administration Degree The thesis of is approved by __________________________________

Chairperson

ABSTRACT California’s (CA) legislature has passed a series of Workers Compensation (WC) reforms during the past 15 years; the most recent, Senate Bill (SB) 863 passed on August 21, 2012. SB 863 was introduced and presented to the California public as a reform bill that would ensure better coverage and easier medical access for workers injured on the job. SB 899 passed during the early 2000s was shown to be better for California’s workers, than SB863. ...

Task

Compare the corporate form of organization with the sole proprietorship and the partnership.

Describe the principles dealing with ways of creating value and economic efficiency

The major principles include comparative advantage and absolute advantage. Comparative advantage is the ability of a country to produce a particular commodity in a more efficient way than other countries. Countries that have modern machinery are likely to produce machine intensive products than other countries. Absolute advantage is the ability of a county to be able to produce a particular commodity that other countries do not produce. For instance, a country that is endowed with a unique mineral that is not produced by other countries can be said to have absolute advantage ...

QUESTION 1;

Part A: Net Present Value calculation Working capital will be regarded as the initial investment outlay which is £ 1 million. Discount rate used in calculating the net present value of the project is 7%. The internal rate of return will be hypothetically obtained with the aim of obtaining the break-even situation of the project. All costs and expenses are treated as cash outflows which will reduce the cash inflow in the project i.e. the project’s sales revenue. The cash outflows from the entire project will be deducted from the project’s inflows so as to determine ...

Capital asset pricing model serves for decision making purposes relating to a portfolio of assets. The technique factors in the expected market rate of return, the risk free rate and the beta of the related asset. The CAPM model works on a number of assumptions. Two important assumptions of the CAPM model are that investors are rational and risk adverse and that the information flows perfectly to all investors. CAPM formula is the sum of the risk free rate and the product of risk premium and the beta. Beta is found by dividing the market covariance and risk free rates of ...

Industry Report: Banking

Introduction When it comes to an industry, then there are number of things which have been taken into account for the same. The essence of effectiveness and productivity always been associated with an industry and the stance of effectiveness depends upon certain factors. There are number of industries working in the world and all of the industries have their own significance and importance lies in a broad nutshell. There are certain aspects which have to be taken into consideration by an organization or by an industry in order to become competitive and eminent in a certain industry. Financial Productivity ...

Performance measurement is the attempt in business to be able to quantify what management has been doing during a certain period. The principle behind it is that of giving management authority to make certain decisions in their areas of responsibility and later on make then making them accountable for their decisions. In the end, what a superior wants is a performance report from a manager concerning his division. The report would contain what he has been doing and whether targets set have been attained or not. There are three main financial performance measurement techniques; return on investment, residual income and economic value added.

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Portfolio Summary

Executive Summary: The portfolio which consists of twenty (20) stocks from varied industries has been benchmarked against S& P500 index on weekly basis from 8-4-2014 to 29-5-2014. During the period of our analysis, while the S&P 500 index has earned return in the range of -1.43% to 0.43%, the portfolio performance on the other hand has been bumpy. For Instance, in the beginning week of our investment, the portfolio earned a return of 12.37%, by the end of last week; the portfolio earned a return of -10.99%.

Management Discussion and Analysis:

The portfolio consists of twenty stocks and has been benchmarked against the S&P ...

<Student’s name> <University>

Abstract

An important aspect of investment management in the form of investment is to identify and improve the economic efficiency of investments. In practice, there are two approaches to the definition and evaluation of real investment - cost and income. If we start from the quantitative estimates, up to recently, the economy was dominated by the cost approach, which was reflected in the manner of determining the economic effectiveness of capital investments and the principles of effective options for selection of investment projects based on the methodology of comparative effectiveness, which was ...

Thesis Statement

In order to attain or maintain competitive advantage, retail organizations must take particular care in establishing return policies. Introduction In the United States, retail stores have to mention clearly their return policies in order to deal effectively with customers all over the world. Return policies can be defined as the conditions on which a retail store can take its product back and replace or return the product and refund the actual amount to customer. As most of the customers do not utilize the retail store return policies moderately and indulge in fraudulent activties with the company (Grannis, 2011). ...

Importance of capital budgeting process

The capital budgeting process facilitates the financial management duty of allocation of finances and decision making on investment choices. With limited amounts of capital, financial managers are required to advise on the most appropriate business investment opportunity to pursue. The capital budgeting process suffices for the identification of the best alternative for investment. Through the capital budgeting process, financial managers are able to compute the expected cash flows in various investment options. Through the discounting methods, they are able to accurately estimate the expected cash flows and settle on the most profitable in consideration of the market dynamics such ...

- Introduction Return on investments (ROI) is one of the most crucial calculations that organizations’ management need to make as a way of ensuring that their businesses have a long-term viability. Thus, it is becoming crucial for businesses not only to identify their operations profitability but also to measure the efficiency of their investments in providing a return. However, the metric’s application varies with different business types, and that forms the objective of this study in establishing the various ROI standards that are applied by companies with a focus on the service oriented businesses. (Vinci, 2010) In that respect, the analysis ...

Introduction

Investors prefer safer to riskier stocks since it provides a perceived security and there alternative to a risky investment or stock is the incentive in form of higher returns. In depth, the market prices are to be set such that investors expect riskier stocks to deliver higher returns although the higher returns are not to be viewed as dependable since if the risky stocks are to be counted on to deliver higher returns than the safer investments or stocks then they are to be considered not risky like demonstrated (LAOPODIS 2012). This expected high returns are valuated so as to attract ...

According to Fabozzi & Koln (2006), the Capital Asset Pricing Model (CAPM) is the works of Sharpe (1964) and Litner (1965) that marks the beginning of assets pricing theory. Dempsey (2013) asserts that CAPM still dominates the practical world in measuring systematic risk. CAPM offers a rate of return to compensate investors for taking risks. This model helps to calculate investment risk and the return on investment. CAPM reaches new heights as a model of measuring returns on securities. CAPM estimates the cost of capital for projects as well as evaluate the performance of portfolios in the financial market. Jagannathan & Meier, (2002) ...

Introduction

The decisions that the management makes regarding capital investment and financial management determines the success of any corporation. In essence, the management should make the investment, financing, and dividend decisions carefully to facilitate the maximization of the shareholders’ wealth. Ideally, sound investment decisions ensure that the firm utilizes the existing investment opportunities well. Additionally, sound financing decisions make sure that the firm has necessary sources of fund to use in its investments. What is more, sound dividend decisions ensure that the company retains enough earnings to distribute to the shareholders or use in future investments. The decisions about the ...

Introduction

The trade-off between risk and return is an always been a concerned for the analysts and researchers and the concepts related to the same are extremely effective and essential. Financial Management is one of the largest fields which have different dominating options embedded in it. Financial Management is a combination of two things that are managing and finance. It means that the management of the financial function is more than essential and effective for the sake of the organization (Elton, Gruber, Brown & Goetzmann, n.d.). The concept of risk and return has number of aspects as well in which different techniques ...

Introduction

Investments have two aspects; returns and risks that determine their desirability to an investor. In that respect, analyzing the two is crucial, and several models have been advanced for the purpose of identifying most suitable portfolios. In addition, investor's preferences and risk profile determine their investments choices. Thus, a portfolio construction is based on the involved assets return and risk as well as the client’s risk profile. To demonstrate the process of portfolio construction in view of the clients’ profile, this report uses a case of a client with identified investments goals. The report uses a questionnaire to evaluate the clients risk ...

Target Company

Target Corporation is a retailing corporation in America. It is based in Minneapolis, Minnesota. It was founded in 1902 and is ranked second after Wal-Mart as the biggest retailer in the United States. The company has stretched out its operations to Canada through a subsidiary, and it now operates in close to 100 locations in Canada. The corporation boasts of a large customer base of nearly over 110 million. The company operates stores in Canada, and United States that deal with general merchandise. These include pharmacy, baby care, beauty, cleaning products, personal care among others. Jewelry and clothing accessories for both sexes ...

Tools for Evaluating the Projects

Biz Systems Consultants Ltd is a firm that is set up by experienced persons. Now they are in consideration for the projects that have investment of 17, 00,000$ and three projects are mutually exclusive. In this report we will find out the ways and tools that can help the firm in accessing the feasibility of the project. There are different methods of accessing the feasibility of projects as well as many sources of finance but we will discuss here the three major sources of finance that are best suitable for the company (Bearse, 1993). For the company Biz ...

Introduction

In every investment decision, it is necessary to scrutinize the benefits and cost before venturing into it. An investor should evaluate the benefits he or she would get if they invested their capital in the project rather than depositing the cash in the bank to accumulate annual interest. A project manager is solely responsible to decide on behalf of his clients on the best project to invest from a pool of several and closely related benefits on behalf of his client. The key factors that the manager would consider are rate of return on investment, period it would take the ...

Profitability ratios

Gross profit margin =Gross profit/Net sales The formulae used in the calculations are listed in the appendix. ("Growth, Profitability, and Financial Ratios for Myer Holdings Ltd (MYR) from Morningstar.com," n.d.)

Commentary

- Profitability

Generally, profitability ratios give someone an idea on how the company is utilizing resources to make the profit.

Myer has a lower gross profit margin compared to David Jones. The gross profit, net profit margins for Myer decline over the two-year period, 2012 and 2013. During the same time, David Jones improves marginally on the margins. This is an indication of changing fortunes in the industry, where one company gains as the other declines. The two companies have a similar tax environment as tax expense ...

Introduction

Pfizer Inc. is one of the largest pharmaceutical companies in the world. It has its headquarter in New York City and its research headquarter in Connecticut. It develops and produces medicines and vaccines for a wide range of medical disciplines i.e.Immunology, oncology, cardiology, diabetology/endocrinology, and neurology. The Coca-Cola Company is the largest manufacturer, retailer and marketer of soft-drink in the world. It is an American company which produces a carbonated soft drink. It has a presence in over 200 countries around the globe and approximately 1.6 billion serving of Coke and Sprite are consumed per day. Wal-Mart Stores is an ...

Project managers have a critical task that involves guaranteeing that each project is completed in the time frame and budget given. “A manager is responsible for the application and performance of knowledge.” (BrainyQuotes, 2013) In projects, project managers are held accountable for the performance, good or bad. Performance management is a tool that is effectively used in order to maximize the success of the projects. Performance management consists of multiple mechanisms and tools that are combines to track and report the set targets in a project. Companies that are successful invest the money, time, and resources into projects making sure that they ...

Introduction

While selecting any specific portfolio it is extremely crucial that we assess the risk and return of the securities properly, to avoid facing any unfavorable scenarios in the future. For this, we need to have a thorough understanding and estimates of the risks and returns associated with a given portfolio. The expected return can be defined as the average weighted outcome of any given project and in this case, any given portfolio. In the case of a portfolio it includes all of the average weights of the expected returns associated with the individual stocks. To be more accurate, the return in this ...

- Introduction The report is the second part of the SIM and Statistical arbitrage assignment. This report describes the process which has been done in the first part. It includes the collecting of the necessary information and data, a determination of the stocks, analysis of this data and the obtained results. - Stocks Analyzed

The average return of News Corporation is higher than the average return of Commonwealth Bank of Australia. The standard deviation of the first one is lower than the standard deviation of the second company. Therefore, the stock of the News Corporation is more efficient ...

Introduction

Rolls Royse is a global leader in the provision of power systems and services at sea, on land and also in the air. Over the years, the company has established a very strong position in defense aerospace, energy and nuclear production and also civil airspace. The company is headquartered at Buckingham Gate in England but has operations in the regional offices in the US, Europe, Middle east, Asia and recently, Australia. In evaluating the performance of Rolls Royse, we shall gather both qualitative and quantitative information regarding the company and carry out a number of operations to gauge the company’s performance. ...

Acknowledgement

Executive Summary The relationship between ownership structure and firm performance has gained substantial attention of in the finance literature. The present study investigates the ownership structure of firms as a corporate mechanism and its impact on firm’s performance. An empirical analysis of the firms listed on NYSE and NASDAQ belonging to different sectors has been conducted to investigate the relationship between ownership structure and firms performance. The objective of the research is to identify how the corporate governance and corporate identity influence firm’s performance on the basis of three research questions provided in the following.

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Portfolio Management

Risk of the firm Referring to the regression results, we found out that the beta of the firm is 0.70. This indicates that the return of the company’s stock are less sensitive from the market that carries a bet multiple of 1. In other words, if the market return changes by 1%, the stock return being less related to that of market return will only change by 0.70%. In addition, the regression results also provide us with R-Square multiple of 0.32. Important to note, R-Square multiple is the ratio of market risk to the total risk of ...

Introduction

Coca Cola Company Coca-Cola Company is one of the biggest manufacturing firm which produces soft drinks in the world. It has its operation in more than 200 countries, and it sells around 1.6 billion servings of Coke, Fanta and Sprite in each day. It is an American company and produces carbonated soft drinks sold almost all over the world under the trademark of Coca-Cola.

AT&T Inc.

AT&T is an American multinational company established to deliver telephone service in the United States. At present, it stands as the largest service provider of mobile as well as fixed telephone line. It is ...

Answer a)

i) Comparing the expected return and standard deviation of various assets in the portfolio, we have analyzed the following characteristics: a) Australia Shares on account of total risk of almost 22% is capable of providing return of 16% b) Australian Bonds with risk accounting to 7% provides return of 11.5% to the investor. c) Cash being the most liquid asset and least risky asset with risk factor of only 4.4%, provides return of 9.25%. d) As for international shares, despite the high risk factor of 22.62% and relatively low return of 14.88% as compared to asutralians shares, the ...

Britvic Company Financial Analysis:

Introduction: With operations in prominent countries of Europe like the Great Britain, Ireland and France, Britvic is renowned as one of the leading soft drink companies in the whole of Europe (Marketwatch.com, 2014). The Company has been able and successful in setting up a definite portfolio across the markets where it operates. The brands of the Company that have captured its own market include Robinsons, Tango, J2O, drench, MiWadi, Ballygowan, Teisseire and Fruité. The Company also produces and sells famous drinks of PepsiCo Company such as Pepsi, 7UP and Mountain Dew Energy, in Britain and Ireland, as per ...

Answer)

The Malaysian Economy which is known to be a robust economy with supportive government reforms, talented workforce and newly developed infrastructure. The country has turned out to be an attractive investment destination for the not only domestic but international investors. So the Sya Suka Berada di Sini- ‘’ I Like it Here’’ phrase is quite suited for referring to Malaysian Stock Exchange.

- Money Market Investment - Stock Market investment

Money Market Investment:

This region of investment opportunity is a risk less investment where the investors, invest their funds in highly liquid financial instruments of commercial banks primarily in Saving Bank Accounts, Fixed Deposits ...

IDENTIFICATION OF THREE ESSENTIAL ELEMENTS IN RESEARCH PROPOSAL

A research proposal basically has nine elements that make the research proposal attractive and effective. Out of the nine elements, three elements are the most essential in a research proposal. The three elements are as follows;

Statement of the Problem

The first element is providing the reader with clear and concise statement of the research or the goals of the project. In simpler words, this section includes the specific question(s) that must be answered along with the significance of the research proposal (Sekaran, 2006). In addition, it has also been indicated in several researches that this particular section provides an explanation of how ...

The Australian consumer Act of 2010 provides for the protection of consumers in the entire of Australia. Parts of its provision are policies to govern the return of purchased goods to their sellers. Under Australian return policies, sellers have three options in case of a genuine and warranted return of goods. They can replace the returned product, refund for the product or provide repair to the returned product (Australian Competition & Consumer Commission, 2012). The Australian return policy provides the conditions to govern the returning of goods on both the seller and the buyer. Sellers are required under Australian law ...

- Introduction The report describes the process of the analysis of two stocks which has been done using the Single Index Model. It includes collecting and sorting the data, analysis this data using the SIM and regression analysis and the explanation and the evaluation of the results. The findings are useful for decision making in the financial planning. - Stocks Analyzed The table above contains the information about two analyzed stocks: the company name, stock code, relevant sector, the average return and the standard deviation of the return. Last two points have been computed using the ...

The “Equity premium,” written by Eugene F. Fama and R. French (2002) describes how to estimate equality premium using both dividend and the growth rate of earning to predict the rates of expected capital gain. The equality premium is important in making decisions on portfolio allocation and in estimation of capital gain. The expected market return is estimated using the returns on portfolio of stocks. To estimate the stock return, the dividend and earnings are used along with other evidence to determine if the expected return is higher than the realized average. In this case, the average stock return ...

Introduction

Investment and return are the two flip sides of the same coin. There are certain pre-requisites that are essential for the investment purpose, and it would be used on the basis of analysis. There is tradeoff finds among the risk and return approach of an investment, and the most effective investor is the one who has the ability to manage the investment in a well organized and perfect manner (Davies and Servigny, p.34). Making of portfolio and diversification is one of the most important aspects from the viewpoint of investment purpose, and investors are delivering their best to maintain their ...

Introducing the Scenario

Investment analysis is always been a challenge for the analysts, as it has a large trade-off related to return and risk. The management of investment is a topic which is high in demand from number of years, as it has the most important significance associated with it, which is yield. In the field of financial management, a yield is referred as an output or return which ultimately emerged as one of the essentials for the analyst or a researcher (Chandra, Comora & Cole, 2003). There are two different kinds of investors are there, Active Investor and passive investor. An Active Investor is an investor ...

a) Company name: _____ Motors, in the car and motor industry

Advantages of going public:

i. Good method to further the growth of the company ii. Generate capital needed for expansion iii. This capital can be used to further Research & Development, fund capital expenditure or pay off existing debt iv. Increase public awareness of the company and generate publicity v. Increase market share of company

b) Necessary managerial roles in firm:Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, Chief Marketing Officer, Head of Sales and the Chief Procurement Officer and Chief Risk Officer.

c) Shadow firm: BMW i. Downloaded ...

Building a balanced securities portfolio is a difficult task taking into account tendencies of contemporary stock exchange. This paper is devoted to this issue and represents two strategies of building stocks and bonds portfolios implementing fundamental and technical analyses. Also, main concepts of allocation of securities were described and analysis of created portfolios with the help of appropriate benchmarks was represented.

Investment Analysis and Strategy

Part 1. Fundamental and Technical Analyses of Securities

A) Fundamental Analysis of Stocks

Fundamental analysis aimed at buying stocks which prices are below the potential value. There are several methods used by analysts that help determine the right stocks to ...

Rolls Royce is a multinational corporation that operates in four main global markets which include; defense aerospace, energy, civil aerospace and marine. The company values it’s and brand more than anything else. Strategic innovation has been essential to the organization’s corporate objectives for over ten years and currently the company is delivering outstanding performance across the globe. This paper endeavors to conduct a financial analysis on Rolls Royce by evaluating the information provided in the annual report.

Discuss the importance of comparing income from operations to cash flow from operations

One significant effect of comparing the income from operations to cash flow operations is due to the fact that both give different ...

Introduction

The performance of a company is gauged by the evaluation of both qualitative and quantitative information regarding the company. Some of the qualitative information that is used in this evaluation of the company could be the experience of the management, macro and micro environment in which the company operates among other metrics. In making a decision as to whether a company is doing well, an in-depth analysis of the company’s financial information is particularly important. The comparison of the company’s financial data with its previous year’s performance and also with its peers and industry at large would shade ...

Financial ratios are used to evaluate the company's financial performance in the market. This helps in identifying the key financial areas in the organization. The ratios are also used to compare the company performance with that of its competitors. This helps management in developing strategies for improving the organization financial position over that of their competitors. The intent of this paper is to analyze the financial ratios of Google and Yahoo companies, and a comparison is made with the whole industry. The analysis of the ratio between the two companies is done for a period of five years starting from the ...

Discount Rate in Project Appraisal

Discount rate is a measure of risk and the cost of capital used to finance a project. There are various models, which have been designed, to determine the discount rate to use in appraising projects of multi-activity companies. The models include capital asset pricing model, arbitrage pricing theory, weighted average cost of capital and marginal cost of capital. These alternative ways of deciding on discount rates are discussed in this paper.

One of the approaches is the interaction between equity; asset and debt through information available can be utilized. In this case, a sector that has identical characteristics as the new project ...

Weighted average cost of capital (WACC) is the minimum return expected from the securities of a company. It is the sum of the weighted costs of the individual components in the capital structure. The product of the cost of capital of a component and the proportion of the component in the capital structure yields the weighted cost of that particular component in the capital structure. The cost of capital for equity is the ratio of the dividend per share and the market price for each share. This is computed as 1.50/15*100=10%. The weighted cost of equity capital is the product ...

There are different methods used in capital budgeting. They include the net present value, profitability index, internal rate of return and payback period. This research paper will evaluate the differences that exist between these methods basing the argument on the strengths and weaknesses of these methods. The net present value method is used to determine whether a certain project should be invested or not. It is obtained by summing the present value of the future cashflows of a project. On the other hand, profitability compares the present value of the future cashflows to the initial capital outlay of a project in ...

The paper is devoted to the analysis of financial ratios of Continental Tire AG and its two competitors in the world market – Michelin and Goodyear. Full ratio analyses include Liquidity, Leverage, Profitability, and Management Ratios analyses which will be represented in this research proposal. Companies’ balance sheets and income statements as of 2011 will be analyzed for the purposes of this paper. Input data for analyses of the three companies is included in Appendix 1, full ratio analyses is in Appendix 2. The first group of the ratios belongs to the liquidity financial analysis. There were three ratios ( ...

Introduction

The entire concept of both of these things is vital for an organization and the importance of the same thing cannot be derailed from any standpoint. In finance, the name of Financial Modeling is one of them, which has its own significance and importance. Theoretically, financial modeling is basically a task of building an abstract of representation of a real world and financial institution. Financial Model is usually known as a mathematical model represents the asset class of a financial based asset or a portfolio of a business or an individual . The essence of financial modeling is increasing day by day in number of countries ...

Analysis: Next Plc

Assignment 1: Executive Summary: The report makes a recommendation about the balanced scorecard of Next Plc. It makes this recommendation on the basis of mission, vision and strategic objectives of the company. The strategy map links the perspectives of the balanced scorecard with the strategic objectives of the company. It is by adopting the perspectives mentioned in the balanced scorecard, the company can achieve its strategic objectives. The limitations of the balanced scorecard as a strategic management tool have also been identified and are largely dependent on an effective accounting system. Balance scorecard tends to put the interest ...

Introduction

This report contains the results of regression analysis for four variables captured in the Springdale community shopping survey. The analysis established that there was significant linear relationship between attitude towards Springdale and ease of return/exchange of goods. However, there was no significant linear relationship between the attitude towards Springdale and a lot of bargain price. On the other hand, it was found that there was significant linear relationship between attitude towards West Mall and a lot of bargain sales. On the contrary, there was no significant linear relationship between attitude towards West Mall and ease of return/exchange of goods. - ...

Facilitator:

Fundamentals of investing Investments involve making a choice among the available alternatives to adopt the best option that would yield ultimate returns for the capital invested. Capital budgeting involves different methods that investors use in evaluating opportunities available in the market and choosing the best place to invest. The most essential stage in the investment process encompasses determining the risk and return of different ventures and investing in the most promising venture (Hartwig, 2012). Different methods apply in the determination of the risk and return in standalone investment assets. This includes measuring of historical rates of return, expected rates ...

Conventional versus Islamic

Y M

Fin399-P

Dr. N E Abstract: The current paper relates financial analysis of commercial and Islamic banks in UAE. The aim of this paper is to evaluate financial performance of commercial and Islamic banks in UAE and make appropriate conclusions regarding comparative advantages and disadvantages of the two groups of the banks. The evaluation between commercial and Islamic banks was carried out with the help of financial analysis. Analysis of financial ratios was used as the main technique of financial analysis in this paper. There were four groups of financial ratios analyzed, namely: liquidity ratios, solvency ratios, ...

Summary of Chapters

Chapter 7: Mathematics of Investing

One of the return measures used includes compounding. Compounding can be done arithmetically or geometrically. In order for one to determine whether to use arithmetic compounding or geometric compounding one has to take into account the future value of what is to be estimated (Evensky, Horan, and Robinson 122). Arithmetic compounding is best used when determining the estimate of the anticipated future return for the following year when there is no other information. The geometric compounding is best applied when determining the anticipated return over many periods.

Covariance

This is applied when investments in a combined ...

There are various techniques used to evaluate viability of investments and in comparing different investments. These techniques include net present value, payback period, accounting rate of return and internal rate of return . Net present value is preferred when evaluating projects because in takes into consideration time value of money unlike Payback period and accounting rate of return. Although internal rate of return considers time value of money it is confusing to compute and conceptualize . Net Present value is computed by discounting annual cash flows at a given discounting rate. Annual cash flows are determined by subtracting annual cash outflows ...

Check Your Understanding:

Feasible set are all possible portfolios that could be constructed from a certain group of securities available to an investor whereas an efficient set is that portfolio in the feasible set that offers the investor maximum returns at a given level of risk .

The rate of return on publicly traded bonds can be used to assess and compare default risk. The higher the default risk the higher the rate of return to compensate investors for taking extra risk. Therefore publicly traded bonds with a higher rate of return have a higher default risk.

Real rate of return is the rate of return realized ...

I. CAPM Model

Capital asset pricing model (CAPM) is a model in finance that aims to explain the relationship between expected return and risk and formally represents the tradeoff between risk and return. It stipulates that a return of any portfolio or a security is a sum of the risk free security and a risk premium. This relationship can be expressed through an equation Rm = Rf + β ( Rm – Rf), where

Rf = risk free rate β = contribution coefficient of the stock to a diversified portfolio Rm = expected market return.

Here the risk-free rate is a theoretical return that is generated by an investment with ...

Interest rates are the monetary compensation or the cost of borrowing given to the lender(s) or supplier(s) of funds by the borrower(s) or demander(s) of funds or loans (CMU, 2010). The terms required returns and interest rates are similar in that the lender gets compensated for the funds they provide to the borrower. However, required returns are used when referring to equity instruments (investments) like common stock, and the interest rate is used when referring to debt instruments like bonds or bank loans. There are several factors that influence interest rates. They include inflation, risk ...

Criticisms of Payback and Simple Rate of Return Methods

Payback Period and Simple Rate of Return Methods are among the tools used in capital budget budgeting. Payback period measures the length of time to recoup an investment, while the simple rate of return method, also known as Accounting Rate of Return (ARR) provides the expected income for the entire life of a capital investment (Investopedia, 2014).

The formulas to calculate for these two methods are:

- Payback Period = Cost of Project / Annual Cash Inflows

Criterion: The project that has shorter payback period is deemed better.

- Simple Rate of Return= Average profit /Initial investment

Criterion: Choose the project with higher returns or exceeds the hurdle rate.

Although considered as the simplest method in appraising capital investments, one of the criticisms with the payback period method is it ignores benefits from ...

Ratio refers to a comparison between two variables, ratios is an important component in day to day business as it enables the shareholders and other stakeholders to check the performance of business in comparison to the previous year’s which refers to trend analysis it can also be used for cross sectional analysis which involves comparing the performance of business with other business within the same industry. Other financial ratios such as liquidity ratio plays a very important part in managing working capital in that a business will be able to predict the cash required to manage day to day transactions, in ...