FD1

FD1
FD 1
Investment Tools
1
1-2
Copyright 2008 by Thailand Securities Institute (TSI), The Stock Exchange of Thailand. All rights reserved.
FD1
FD1
FD1
SET Market Cap

(Mil. Baht)
Daily Trading Volum e

(Mil. Baht)
6,000,000.00
100,000
90,000
5,000,000.00
80,000
70,000
4,000,000.00
60,000
Daily Trading Value

SET Market Cap
3,000,000.00
50,000
40,000
2,000,000.00
30,000
20,000
1,000,000.00
10,000
0.00
May-03
Sep-03
Jan-04
Jun-04
Oct-04
Mar-05
Jul-05
Nov-05
0
Apr-06
FD1
FD1
40
290
270
35
250
30
230
210
190
170
25
PTT
20
SCC
OISHI
150
15
FD1

ABC 10 ABC
1 1
ABC 15

5
FD1

(Realized Return)

(Average Rate of Return)
(Expected Return)
(Portfolio Expected Return)

FD1
R t 1
Pt 1 Pt d t 1
Pt
Pt

Pt+1
dt+1
Rt+1
FD1
ABC 10 /
1 ABC 9.5 /
1
(%) = [(9.5-10)+1] / 10

-
-
= 5%
= (9.5-10) / 10
= -5%
= 1/10
= 10%
= 5%
10
FD1
R 0,T
R
t0
t,t 1
R 0,t T (1 R t,t 1 ) * (1 R t 1,t 2 ) * ... * (1 R T-1,T ) 1
R0,T 0 T
11
FD1
5
30%, 12%, 25%, 20% 23%

=
(30+12+25+20+23) / 5
=
22%

=
(1.3 x 1.12 x 1.25 x 1.2 x 1.23)1/5-1
=
21.85%
12
FD1
50 100 1
100 50 2
1
=
=
=
=
=
=
=
=
(100-50)/50
100%
(50-100)/100
-50%
(100-50)/2
25%
[(1+1)*(1-0.5)]1/2-1
0%
13
FD1
E(R A ) p iR Ai
E(RA)
RAi
pi
i1
A
i
i
n
14
FD1
pi
RAi(%)
RBi(%)
0.3
0.4
0.3
16
12
20
18
11
14
E(RA)
E(RB)
=
=
=
=
0.3*16% + 0.4*12% + 0.3*20%

4.8% + 4.8% + 6.0%
0.3*18% + 0.4*11% + 0.3*14%
5.4% + 4.4% + 4.2%
= 15.6%
= 14.0%
15
FD1
E(R p ) w i E(R i )
i 1
E(Rp)
wi
E(Ri)
n

i
i

16
FD1
100,000
60,000 A 40,000 B
A 0.6
B 0.4
E(Rp)
= 0.6*15.6% + 0.4*14.0%
= 9.36% + 5.60%
= 14.96%
17
FD1

(Variance)
(Standard Deviation;
S.D. ; )
18
FD1

2
A
pi [R Ai E(R A )]
i 1
n
2
A pi RAi E (RA )
i 1
19
FD1
pi
RAi(%)
RAi-E(RA)
[RAi-E(RA)]2
pi[RAi-E(RA)]2
0.3
0.4
0.3
16
12
20
0.4
-3.6
4.4
0.16
12.96
19.36
Variance =
S.D. =
0.048
5.184
5.808
11.04
3.32265
pi
RBi(%)
RBi-E(RB)
[RBi-E(RB)]2
pi[RBi-E(RB)]2
0.3
0.4
0.3
18
11
14
4
-3
0
16
9
0
Variance =
S.D. =
4.8
3.6
0
8.4
2.89828
20
FD1
S2
S
Ri
E(R)
n
[R
i 1
E(R)] 2
n -1
n
[R
i 1
E(R)] 2
n -1

i
1 n

21
FD1
5
30%, 12%, 25%, 20% 23%
5
= (30+12+25+20+23) / 5
= 22%
S2
= [(30-22)2+(12-22)2+(25-22)2+(20-22)2+(23-22)2] / (5-1)
= 44.5
S
= (44.5)1/2
= 6.67%
22
FD1
Bond:
Expected Return
6%
Standard Deviation
8%
Time Horizon
5 Years
Stock:
Expected Return
10%
Standard Deviation
15%
Time Horizon
5 Years
23
FD1
-3
-2
-1
+1 +2 +3
68.26%
95.46%
99.74%
P(x<X)
0.01
-2.33
0.025
-1.96
0.05
-1.64
0.95
1.64
0.975
1.96
0.99
2.33
P(x<X)
-3
0.001
-2
0.023
-1
0.159
0.841
0.977
0.999
24
FD1

Stock: Expected Return
5% , Standard Deviation 10%
P( R < -5%) ; Z = (-5- 5) / 10 = -1;
P( R < -5%) = 0.159
P( R > -5%) = 1 0.159
= 0.841
P( R < -15%) ; Z = (-15- 5) / 10 = -2;
P( R < 15%) = 0.023
P( R > -15%) = 1 0.023
= 0.977
P(R < X) = 0.05 ; Z = -1.64; X = -1.64 * 10% + 5% = -11.4%
P(R < X) = 0.01 ; Z = -2.33; X = -2.33 * 10% + 5% = -18.3%
25
FD1

(Covariance)
2
2
( ) ( )

AB E[R A E(R A )][ R B E(R B )]
26
FD1
A B
pi
RAi(%)
RBi(%)
RAi-E(RA)
RBi-E(RB)
[RAi-E(RA)]*
[RBi-E(RB)]
pi*[RAi-E(RA)]*
[RBi-E(RB)]
0.3
16
18
0.4
1.6
0.48
0.4
12
11
-3.6
-3
10.8
4.32
0.3
20
14
4.4
4.8
27
FD1

(Correlation Coefficient)

AB
AB
A B
AB AB A B
AB
A B
28
FD1

+1.0

1.0

0

29
FD1
2
1 .5
Rho = 0.9
1
0 .5
0
-2
- 1 .5
-1
- 0 .5
- 0 .5
0 .5
1 .5
-1
- 1 .5
-2
30
FD1
2
1 .5
1
0 .5
0
-2
- 1 .5
-1
Rho = 0
- 0 .5
- 0 .5
0 .5
1 .5
-1
- 1 .5
-2
31
FD1
4.8
A B
3.323% 2.898%
A B
= 4.8 / [(3.323%)(2.898%)]
= +0.498
32
FD1

(Risky Asset)
(Risk-free Asset)

33
FD1

(Nominal Risk Free
Rate) (Real Risk Fee
Rate) (Inflation Rate)

1+ - 1
1+
34
FD1
(Risk-free Rate)

(Inflation Premium)

35
FD1

14.00
1-4 12 2519-2544
12.00
10.00
8.00
6.00
4.00
2.00
0.00
2533
2534
2535
2536
2537
2538
2539
2540
2541
2542
2543
2544
2545
2546
2547
36
FD1
E[RP]
E[RP]
B
A
[RP]
C
D
[RP]
37
FD1
(Risk Lover)

(Risk Neutral)

(Risk Averse)

38
FD1

(Risk Premium)
p = 0.6
1)

1 - p = 0.4
100,000
2)
( )
50,000
30,000
5,000
E(R1) = 0.6*50,000 - 0.4 * 30000 = 18,000

13,000 13%
39
FD1
40
FD1
41
FD1

U = E(r) - 0.022
U

10%
20%
15%
25.495%
20%
30%
25%
33.91%

= 10-0.02x202 = 2
= 15-0.02x25.4952 = 2
= 20-0.02x302 = 2
= 25-0.02x33.912 = 2
42
FD1
C
A
43
FD1
Security Market Line : SML
C
B
A
Rf

44
FD1
Rf

SML

45
FD1
SML
SML
Rf
46
FD1
SML
Rf
SML
Rf

47
FD1
48
FD1
49
FD1

50
FD1
P = wSS
S
wF
wS
wF + wS = 1
51
FD1
1,000,000
800,000 ( S)
18%
10% 200,000 ( F)
4%
E(Rp)
=
E(RA) * wA+ E(RB) * wB
E(Rp)
=
0.8*18.0% + 0.2*4%
=
14.4% + 0.8%
=
15.2%
p
=
wSS
=
0.8*10%
=
8.0%
52
FD1

S F

S
F
Q
P
1.0
0.8
0.6
0.4
0.2
0
0
0.2
0.4
0.6
0.8
1.0
S F
(%) (%)
18.0
15.2
12.4
9.6
6.8
4.0
10
8
6
4
2
0
53
FD1

(%)

20
Capital Allocation Line (CAL)
16
12
0
0
(%)
10
12
54
FD1
2
p2
w w
i
ij
i 1 j 1
2P

wi wj i j
ij
i
j
P
=
w2A2A + w2B2B + 2wAwBAB]1/2
AB =
AB AB
P
=
w2A2A + w2B2B + 2wAwBABAB]1/2
55
FD1
2P
E [ X E(X) ]2
E { wA RA +wB RB- [wA E(RA) +wBE( RB)] } 2
E{ wA (RA - E(RA)) +wB (RB - E( RB))} 2
E{(w2A (RA - E(RA)) 2 + w2B (RB - E(RB)2 +

+ 2wAwB (RA - E(RA)) (RB - E(RB)}
w2A2A + w2B2B + 2wAwB AB
w2A2A + w2B2B + 2wAwBABAB
56
FD1
57
FD1
100,000 60,000
A 15.6%
3.323% 40,000 B
14.4% 2.898%
A B 0.498
E(RP)
P
=
=
=
=
=
0.6*15.6% + 0.4*14.0% = 9.36% + 5.60% = 14.96%

w2A2A+w2B2B+2wAwBABAB]1/2
[0.62*11.04% + 0.42*8.4% + 2*0.6*0.4*0.498*3.323%*2.898%]1/2
[7.6224]1/2
2.76%
58
FD1

+1.0, +0.5, 0, -0.5 1.0

(%)
A B
(%)
-1.0
-0.5
0.5
1.0
1.00
0.90
0.00
0.10
15.60
15.44
3.32
2.70
3.32
2.86
3.32
3.00
3.32
3.15
3.32
3.28
0.80
0.70
0.60
0.20
0.30
0.40
15.28
15.12
14.96
2.08
1.46
0.83
2.42
2.04
1.73
2.72
2.48
2.31
2.99
2.86
2.76
3.24
3.20
3.15
0.50
0.40
0.30
0.20
0.10
0.00
0.50
0.60
0.70
0.80
0.90
1.00
14.80
14.64
14.48
14.32
14.16
14.00
0.21
0.41
1.03
1.65
2.28
2.90
1.57
1.57
1.76
2.07
2.46
2.90
2.20
2.19
2.26
2.41
2.63
2.90
2.70
2.66
2.67
2.71
2.79
2.90
3.11
3.07
3.03
2.98
2.94
2.90
59
FD1

(Rho AB) +1.0, +0.5, 0, -0.5 1.0
16.00%
15.50%
15.00%
14.50%
14.00%
13.50%
0.00%
0.50%
Rho AB = - 1.0
1.00%
Rho AB = - 0.5
1.50%
2.00%
Rho AB = 0
2.50%
Rho AB = 0.5
3.00%
3.50%
Rho AB = 1.0
60
FD1
CALY
A
Y
X
Q
F
CALX

61
FD1

A B F
3
[E(R)] () 2-7
62
FD1

A B
63
FD1
E(R)

A B
16%
14%
12%
10%
8%
6%
4%
2%
0%
0%
5%
10%
15%
20%
64
FD1
AB
(F) X
A B 0.2:0.8 F

E(Rp)
wFE(RF) + wX E(RX)
WXX
65
FD1
X F
2-9
66
FD1

A B F
E(R)
16%
14%
12%
10%
8%
6%
4%
X
P
2%
0%
0%
5%
10%
15%
20%
67
FD1

F Y
68
FD1
FD 1
Investment Tools
3-4
69
FD1
70
FD1
71
FD1
(Interest)

(Interest Rate)

:

:
72
FD1
3-1 100
10%

1
100
10
110
2
110
10
120
3
120
10
130
4
130
10
140
100
10
110
110
11
121
121
12.1
133.1
133.1
13.3
146.4
73
FD1

FV
PV(1 r)
(3.1)
PV
1
FV
n
(1 r)
(3.2)
74
FD1
3-1 1 5
7%
5
r = 7% = 0.07; PV = 5,000,000 ; n = 5
(3.1) FVIF (7%, 5 )
FV
=
PV(1+r)n
=
5,000,000 (1.07)5
=
5,000,000 (1.4026)
=
7,013,000
5
7,013,000
75
FD1
3-2
100,000 6
8% (r = 8% ; FV = 100,000 )

6
(3.2) PVIF (8%, 6 )
PV = FV 1 n
= 100,000 1
(1 r)
6
(1.08)
= 100,000 (0.6302)
= 63,020
76
FD1
1,000 12%

12 1%

1
1,000(1+0.12)1 = 1,120

1
1,000(1+0.01)12 = 1,126.80

6.80
= 0.1268 12.68%
77
FD1

FV
PV
r mn
PV(1+ )
m
(3.4)
1
FV r
mn
(1+ m )
(3.5)
78
FD1
3-4 3-1 4
5
5
(r = 7% = 0.07; PV = 5,000,000 ; n = 5 ; m = 4)
4 5
FV
=
=
=
=
r mn
PV(1+ )
m
5,000,000 (1.0175)20
5,000,000 (1.414778)
7,073,890
79
FD1

r
n
PV e
FV
=
(3.7)
FV e-r n
PV
=
3-4
rn
PV
e
FV
=
=
5,000,000 (e) 0.07 * 5
=
5,000,000 (1.419068)
=
7,095,340
(3.8)
80
FD1

1

Annuity

81
FD1
FV
r
n
FV
A
(1+r) -1
A
(3.11)

(Future Value)

82
FD1
3-5
20
20,000

9% 20
(A = 20,000 ; n = 20 ; r = 9% = 0.09)
(3.11) FVIFA (9%, 20 )
FV
=
=
=
(1+r) -1
A
r
20,000 (51.160)
1,023,200
20
(1.09) -1
20,000
0.09
83
FD1
(Annuity)
PV
r
n
PV
A
1- 1
(1+r)n
A
r
(3.17)

(Present Value)

84
FD1
3-6
1,000 5
1 12%

A = 1,000 ; n = 5 ; r = 12% = 0.12
(3.17) PVIFA (12%, 5 )

PV
=
=
=
1- 1
(1+r)n
A
r
1- 1
(1.12) 5
1,000 0.12
1,000 (3.6048)
3,604.80
85
FD1

(Perpetuity)
PV =
P
r
(3.19)
r

PV
(Present Value)
P

86
FD1
CFt
(1+r) t
t=0
n
PV
FV
CF (1+r)
n-t
(3.22)
(3.23)
t=0
CFt t
87
FD1
3-2
T=1
T=2
T=3
T=4
T=5
1,000
2,000
4,000
5,000
6,000

1,000 / (1.05)1 = 952.38
2,000 / (1.05)2 = 1,814.06
4,000 / (1.05)3 = 3,455.35
5,000 / (1.05)4 = 4,113.51
6,000 / (1.05)5 = 4,701.16
= 15,036.46

5
1,000 (1.05)4 = 1,215.51
2,000 (1.05)3 = 2,315.25
4,000 (1.05)2 = 4,410.00
5,000 (1.05)1 = 5,250.00
6,000 (1.05)0 = 6,000.00
= 19,190.76
88
FD1
89
FD1

(Tangible Assets)

(Intangible Assets)

90
FD1
(Mutually exclusive project)
(Independent project)
91
FD1
2

(Screening Decisions)

(Preference Decisions)
92
FD1
(NPV)
(IRR)
(PB)
(DPB)
(PI)
(AAR)
93
FD1
(Net Present Value)
(Net Present Value NPV)

(Discounted Cash Flow)

(Cash Inflows)
(Cash Outflows)

(Benefits)
(Costs)

94
FD1
(Net Present Value)

N
NPV
CFt
t
t=0 (1+r)
CFt
r
=
=
period t
(4.1)

(NPV > 0)

(NPV < 0)
/
(NPV = 0)
95
FD1
4-1 2
A B
10%
0
1
2
3
4
5
A
( )
-1,000
500
400
200
200
100
B
( )
-1,000
100
200
200
400
700
96
4-1
A:
NPVA =
=
B:
NPVB =
FD1
500
400
200
200
100
-1,000+
+
+
+
+
1
2
3
4
(1+0.1) (1+0.1) (1+0.1) (1+0.1) (1+0.1)5
134.080
100
200
200
400
700
-1,000+
+
+
+
+
1
2
3
4
(1+0.1) (1+0.1) (1+0.1) (1+0.1) (1+0.1)5
=
114.31

A
97
FD1
4-2
5,000,000
2,000,000
7,000,000
6,000,000
25%
10%
35%
30%
6%
12%
18%
18%
20,000,000
100%

1.5%
1.2%
6.3%
5.4%
14.4%
98
FD1
(Internal Rate of Return)
NPV
N
CFt
NPV
=
0
=
(4.2)
t
t=0 (1+IRR)
CFt
t
N

r IRR
99
FD1
4-4
D
0
-400,000
1
200,000
2
400,000
(4.2)
NPV =
0
=
=
CF1
CF2
CF0 +
+
1
(1+IRR) (1+IRR) 2
200,000 400,000
-400,000+
+
1
(1+IRR) (1+IRR) 2
28%
100
FD1
NPV IRR
D
300,000
NPV
200,000
100,000
Discount Rate (%)
0
-100,000
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
-200,000
101
FD1
(Payback Period)
(Payback Period)

102
FD1
(Payback Period)
PB

(PB < cutoff period)

(PB > cutoff period)
103
FD1
4-5 E
E 4-3
0
1
2
3
4
5
E
()
-1,500
700
600
300
200
100
104
FD1
4-4 E
E
0
1
2
3
4
5
PB
( )
-1,500
700

( )
-1,500
-800
600
300
200
100
-200
100
300
400
2 + 200
300
2.667
105
FD1
(Discounted Payback Period)

PB

106
FD1
4-6 4-5 E
4-3 10%
E
( )
-1,500
( )
-1,500/ (1.10)0 = -1,500

( )
-1,500
700
700/(1.10)1 = 636.363
-863.636
600
600/(1.10)2 = 495.868
-367.769
300
300/(1.10)3 = 225.394
-142.374
200
200/(1.10)4 = 136.603
-5.771
100
100/(1.10)5 = 62.0921
56.321
DPB
4 + 5.771 =
62.0921
4.093
107
FD1
(Profitability Index)
(Benefit / cost ratio)

> 1

< 1

/
=1
108
FD1
4-7
4-6
E
PI = PV (Futures Cash flows)
Initial Investment
= (636.36 + 495.87 + 225.39 + 136.60 + 62.09)
1,500
= 1556.32 / 1500
= 1.0375
109
FD1
(Average Accounting Return)

(Average Net Income)

(Average Book Value)
=
1 X ( + )
2
110
FD1
4-8
F 4 50
10
10
0%
1
2
3
4
100
120
160
60
90
100
110
40
111
FD1
4-8
1
2
3
4
(100-90-10) =
(120-100-10) =
(160-110-10) =
(60-40-10) =
0
10
40
10
= (0 + 10 + 40 + 10) / 4 = 15
= (50 + 10) / 2 = 30
= 15 / 30 = 50%
112
FD1

(Cost) (Revenue) (Profit)
(Volume)
113
FD1
114
FD1

(Sensitivity
Analysis)

115
FD1
116
FD1

117
FD1
UESTIONS &
NSWERS
(TSI)
S-E-T Call Center 0-2229-2222
www.tsi-thailand.org
118

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SET Market Cap

Daily Trading Volum e

Daily Trading Value

(Portfolio Expected Return)

R 0,t T (1 R t,t 1 ) * (1 R t 1,t 2 ) * ... * (1 R T-1,T ) 1

0.3*16% + 0.4*12% + 0.3*20%

E(R1) = 0.6*50,000 - 0.4 * 30000 = 18,000

Security Market Line : SML

Capital Allocation Line (CAL)

E { wA RA +wB RB- [wA E(RA) +wBE( RB)] } 2

E{ wA (RA - E(RA)) +wB (RB - E( RB))} 2

E{(w2A (RA - E(RA)) 2 + w2B (RB - E(RB)2 +

w2A2A + w2B2B + 2wAwB AB

w2A2A + w2B2B + 2wAwBABAB

0.6*15.6% + 0.4*14.0% = 9.36% + 5.60% = 14.96%

(3.17) PVIFA (12%, 5 )

(Mutually exclusive project)

(Net Present Value)

(Net Present Value NPV)

(Net Present Value)

(Internal Rate of Return)

Discount Rate (%)

(Discounted Payback Period)

(Average Accounting Return)

S-E-T Call Center 0-2229-2222

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0.316% + 0.412% + 0.3*20%

E(R1) = 0.650,000 - 0.4 30000 = 18,000

0.615.6% + 0.414.0% = 9.36% + 5.60% = 14.96%