Professional Documents
Culture Documents
Finance Rev
Finance Rev
Finance Rev
WEEK 1
INTRODUCTION TO INVESTMENT
TYPE OF INVESTMENTS
WEEK 3
DIFFERENT TYPES OF INVESTMENT RISK AND WAYS
TO MINIMIZE AND REDUCE THEM
2. Conducting due diligence.
▪ RISK ▪ Research about the investment instruments,
- It refers to the degree of uncertainty and/or checking out the investment’s history,
potential financial loss inherent in an earnings’ growth, management team and debt
investment load.
▪ Compare with other similar investment
FUNDAMENTAL TYPES OF RISKS: products and other asset in investment
1. Systematic Risk portfolio.
- has effects that are wider in scope, that it is 3. Asset Allocation.
almost impossible for an investor to avoid ▪ It is necessary to evaluate holdings at least
this type of risk. once a year to assess whether there is a need
- also known as market risk, undiversifiable to buy or sell assets to bring back the portfolio
risk to proper asset allocation.
- measurement Beta (β) 4. Diversification of investment portfolio.
2. Unsystematic Risk ▪ A risk management strategy of combining a
- also referred to as specific risk, which affects variety of assets to reduce overall risk in an
only a small number of assets. investment portfolio. One of its purpose is
- also known as specific risk, diversifiable risk, portfolio risk management.
residual risk ▪ This lowers investments’ volatility as changes
- measurement Standard deviation (σ) in market prices of different investment can
happen at different time intervals.
OTHER TYPES OF RISKS: ▪ This result in a more balance risk and return or
1. Business risk risk is spread over a variety of products.
- When a company makes inadequate profits 5. Monitoring of Investment.
or goes bankrupt. ▪ Regular reallocation of resources is necessary for
2. Volatility risk control purposes.
- Even when companies aren’t in danger of ▪ Proper allocation of investment depends on such
failing, their stock price may fluctuate up or factors as age, investment period and
down. investment temperament.
3. Inflation risk ▪ It is necessary to evaluate holdings at least once
- Is a general upward movement of prices. a year to assess whether there is a need to buy
- It reduces the purchasing power, which is a or sell to bring back the portfolio to proper asset
risk for investors receiving a fixed rate of allocation.
interest.
4. Interest rate risk
- Interest rate changes can affect an
investment’s value (example bond).
5. Liquidity risk
- This refers to the risk that investors won’t
find a market for their securities, potentially
preventing them from buying or selling when
they want.
WEEK 4
RISK MEASURE AND RISK REDUCTION
Where:
Rt = Return for a Particular Period
Rmean = Average return 2. Risk-Return Measure
N = Number of Periods - Assets should be compared based on both risk and
return. The coefficient of variation is a simple risk-
COMPUTING THE VARIANCE INVOLVES THE return measure to compare various assets.
FOLLOWING STEPS:
Coefficient of variation = σ/Rmean
1. Get the mean. Using our Stock, A example, the coefficient of variation is
2. Get the difference of each return and the mean. equal to:
3. Get the squared difference. Coefficient of variation = 0.0326/0.1504 = 0.21676
4. Add the squared difference.
5. Divide by the number of periods. RISK-RETURN MEASURE
▪ Based on this simple measure, investors should
prefer assets with a low coefficient of variation.
▪ Investment risk is the idea that an investment will
not perform as expected, that its actual return will
deviate from the expected return. Risk is measured
by the amount of volatility, that is, the difference
between actual returns and average (expected)
returns. This difference is referred to as the standard
deviation. Returns with a large standard deviation
1. Get the mean – average return for the years (showing the greatest variance from the average)
period. have higher volatility and are the riskier investments.
Rmean = 75.20% / 5 years
= 15.04% RISK REDUCTION
▪ From a portfolio perspective, risk, as measured by
2. Get the difference of each return and the mean. the portfolio variance or standard deviation, can be
Stock A In Percentage In Decimal reduced by combining assets whose returns do not
2016 13.25% - 15.04% -1.79% -0.0179 move in the same direction or at least do not move
2017 16.25% - 15.04% 1.21% 0.0121 perfectly together.
2018 13.80% - 15.04% -1.24% -0.0124
2019 20.70% - 15.04% 5.66% 0.0566
2020 11.20% - 15.04% -3.84% -0.0384
WEEK 5
MONEY MANAGEMENT PHILOSOPHIES
2. Adequate Protection
- Analysis of protection needed for unforeseen
risks.
1. Objective Setting - Includes risks of liability, property, death,
▪ Quantify monetary objectives with definite disability, health, and long-term care
time frames. - Some insurance plan enjoy some tax benefits.
▪ Prioritize objectives. May need to answer the following questions:
▪ Examine these objectives with an ▪ What things can they not afford to lose?
individual’s resources and limitations. ▪ How will they take care of their dependents?
2. Data Gathering ▪ How have they planned for financial risks such as
▪ Use survey, questionnaires, and Monitoring disability, illness, long-term care, and death?
interview to gather quantitative and
qualitative information from the individual. 3. Tax Planning
▪ Quantitative – for assessing financial status - Management of when and how much taxes will
(investment, cash flow, liabilities etc.) be paid.
▪ Qualitative – to identify individual’s goals - Understanding possible tax incentives,
and objective, lifestyle, risk- tolerance etc. deductions, rebates, etc. can have a significant
3. Data Analysis impact on managing personal finances given the
▪ Analyze the individual’s financial position magnitude of taxes paid by an individual.
and cash flow. May need to answer the following questions:
▪ Review legal papers ( insurance policies, ▪ How do they manage their taxes?
trust agreement etc.). ▪ How do they plan the timing of income and
▪ Evaluate objectives vis-vis the individual’s deductions for tax purposes?
resources and economic conditions. ▪ Are they comfortable with the tax environment
4. Financial Plan Recommendation applicable to them?
▪ Propose financial products.
▪ At this point, the individual can comment on 4. Investment and Accumulation Goal
the proposed solutions. - Planning on wealth accumulation for large
5. Plan Implementation purchases such as house, educational expenses,
▪ Assist the individual in the execution of the investments.
recommended financial plan. May need to answer the following questions:
▪ Implementation may involve other entities ▪ What are their goals for wealth accumulation? (i.e.
so assist the individual in dealing with the education, home, business, retirement comfort,
parties involved in the execution of the etc.)
financial plan. ▪ How are their current investments performing to
6. Plan Monitoring meet their goals?
▪ Review the financial plan periodically to ▪ How much will they need? When will they need it?
evaluate changing market conditions
(economic conditions, taxes, interest rates, 5. Retirement Planning
etc.) - Understanding the cost of retirement.
▪ Evaluate the financial plan regularly to see if - Analysis of cash flows to come up with
it effectively meets the individual’s goal and investment plans that will meet the costs of
objectives. retirement in the future.
FINANCE
6. Estate Planning
- Planning for disposition of one’s assets after
death.
- Estate taxes paid to the government are huge, so
avoiding these taxes can significantly impact
one’s personal finances.
May need to answer the following questions:
▪ How should their assets be distributed upon death?
▪ How will their intentions be carried out? (i.e. will,
trust, power of attorney, etc.)
BEHAVIOURS
▪ Trouble sticking to a budget, overspends
and is a compulsive buyer. Avoids looking
at bank statements.
EX. A lot of people believe they’re quoting the
Bible when they say, “Money is the root of all evil,”
but the actual Bible verse (1 Timothy 6:10) says,
“The love of money is the root of all evil.”
2. Money Worship
MENTAL INDICATORS
▪ Thinks money equals happiness, but
doesn’t believe he’ll have enough money
to be truly happy.
BEHAVIOURS
▪ Compulsive spender and revolves credit
card debt. Workaholism at the expense of
family relationships.
EX. If I could just buy [thing], I would be happy.
With enough money, I can handle anything.
Wealth is freedom.
3. Money Status
MENTAL INDICATORS
▪ Thinks self-worth is tied to net-worth.
Believed living the right way will result in
having their financial needs met.
BEHAVIOURS
▪ Pretends to be richer than in reality. Lies
about money to spouse or loved ones and
prone to gambling addiction.
EX. I don’t want people to think I’m poor.
I feel better about myself when I’m wearing
new clothes.
My money says something about me.
4. Money Vigilance
MENTAL INDICATORS
▪ Believes in saving money, and disagrees
with financial handouts. Anxious and
secretive about financial status.
BEHAVIOURS
▪ Alert and watchful over finances and
avoids buying on credit. Excessive
wariness or anxiety over money.
EX. People who are money vigilant frequently
evaluate their financial habits to make sure
they’re hitting their goals and making wise
decisions. Sounds perfect, right?