Risk and Return Analysis of the Capital Market - Free Essay Example

Sample details Pages: 6 Words: 1949 Downloads: 1 Date added: 2017/06/26 Category Finance Essay Type Analytical essay Did you like this example? A financial market is a market in which the financial assets are created or transferred. A real transaction involves an exchange of money for real goods or services, whereas a financial transaction involves creation or transfer of financial asset. Financial assets or financial transactions represent the claim to a payment of a sum of money in future or periodic payment in the form of interest or dividend. Don’t waste time! Our writers will create an original "Risk and Return Analysis of the Capital Market" essay for you Create order Indian financial sector can be divided into two major segments: Organized and un-organized. Organized sector includes banks, financial institutions, insurance companies and non-banking FI such as unit trusts, mutual funds etc. Unorganized sector consists of indigenous banks, money lenders, chit funds etc. Various financial markets are as follows: Money Market wholesale debt market for low-risk investment Credit Market banks and other financial institutions giving short, medium and long term loans to corporations Forex Market deals with multi-currency requirements Capital Market long-term finance instrument to corporations and government Capital market has two broad segments: primary and secondary market. Primary market helps in raising funds by issuing securities, government and corporations can both participate. Secondary market is where the previously issued securities and financial instruments are transacted by traders. Risk Risk is defined as probability that the return from a security will not match the expectations. Every investment has inherent uncertainties. Uncertainties can be due to economic, social, political or industrial factors. These uncertainties result in making the future returns in this investment risk prone. Total Risk = Market Risk + Issuer Risk The risk in any investment will be either of the following: Systematic risk (Market Risk) Unsystematic risk (Issuer Risk) Systematic risk is a risk which is present to the whole market. It is the change in the security or its variability in terms of overall return which is directly associated with the overall movements in the market. In practical scenario all the securities will have systematic risk in it irrespective of the level of diversification of funds. In contrast, unsystematic risk is specific to an industry or a company. It is the change in the security in term of overall return which is not present on the moveme nts in the existing market. As is apparent, this risk is generally associated to a unique security or a set of similar securities. There are various types of systematic and unsystematic risks to which any security is exposed to, some of them are listed below: Market Risk Interest Rate Risk Purchasing Power Risk Regulation Risk Business Risk Re-investment Risk Bull bear market Risk Management Risk International Risk Default Risk Exchange Rate Risk Country Risk Liquidity Risk Political Risk Industry Risk Measurement of Risk Since, risk will always be present in the securities, quantifying these risks becomes an important issue. In order to quantify first some factors must be standardised on which these risks will be analyses. The most widely accepted factors are as follows: Volatility Risk basically is the deviation of a stock from its anticipated or expected value. The deviation can be in both positive as well as negative direction. Generally, it is being used to focus in the direction of the potential harm. This range of fluctuation from the expected level of return is termed as volatility. The more a security moves up and down in in price, the more volatile will be the security. As it is apparent, more the volatility higher will be the uncertainty in a stock. Hence, increased volatility leads to increased risks. Standard Deviation It is a widely used instrument to measure the risk present in a stock or portfolio. It is similar to volatility, and is used to measure the absolute variation of a stock from its expected price or value. Beta It is the systematic risk inherent in a stock which cannot be cannot be avoided by diversifying. Beta is a relative indicator of the risk of an individual security as against the market portfolio of the securities. It is important to observe that the measure of fluctuation of beta is from the set benchmarks (portfolio of stocks). Beta is a useful instrument to perform comparative analysis of risks prevalent in various set of stocks. This instrument is a direct measure of the riskiness. Most of the times the stocks are ranked in the market based on their beta values. High beta values result in high risk securities. Expected Return Any investment decision is hinged on two important criterions: risk and expected return. Another important factor is the rate of return (ROR). ROR depends upon the capital appreciation and the yield. The key determinants of ROR from the investor perspective are as follows: Expected Rate of Inflation Risk associated with investment unique to the investment Time preference risk free real estate Therefore, ROR = Risk free real estate + Inflation Premium + Risk Premium The rate of return can be calculated as: EQUATION Risk and Return Relationship The fundamental principle of this seminar paper is that there is trade-off between risk and return. The connection between the risk and return demands that as the returns increase there is an increase in risk. Low levels of risk are associated with low potential returns and vice-versa. The risk and return relationship is the desire to be exposed to minimum possible risk and highest possible returns. The following figure represents the risk-return relationship: DIAGRAM The slope in the above figure is the measure of return per unit of risk. High risk prone investments will have steeper line. Generally, higher yield compared to the rest of the market indicates an above average risk. The following figure illustrates that: DIAGRAM Risk-Return Relationship of Different Stocks In most of the practical scenarios, various lines of securities in the market exist. An investor would like to choose options which are consistent with his/her risk preferences. It might be a low risk or a high risk option. There is an important myth that higher risk leads to better returns. The trade- off tells us that higher risk leads to possibility of better returns. Thus, it can also result in potential losses. The risk tolerance differs from person to person. It depends on the income, goals, standard of living, and variety of other issues. On the lower scale of risk-free ROR is treasury bills provided by the government. These bills are virtually risk free as they are backed up by the Indian government. Portfolio Security Returns A portfolio is a collection of securities. Investors rarely put their entire funds of an individual or an institution in a single stock. Thus, It becomes essential to view a security in portfolio context. Expected return from a portfolio will depend on the expected return of each security in the portfolio. Return of portfolio (Two assets) The expected return from a portfolio of two securities is equivalent to the weighted average of the expected returns from them. DIAGRAM Risk of Portfolio (Two assets) The risk will be measured in terms of the various measurement parameters as discussed in the previously in the paper. The risk will not simply be the weighted average risk of the variance of the returns of securities from expected value. These securities will be inter-linked as they belong to the same portfolio. In this case, the portfolio risk also needs to be taken into account. It will consider the co-variance (it is a measure of co-movement) of the two securities and will provide the degree to which these securities vary together. The standard deviation in such a scenario will be calculated by: EQUATION The co-variance of security A and security B can be expressed as: EQUATION The unsystematic risk diversification of the two securities portfolio will depend on the degree of co-relation which exists between the return of these securities. Co-relation varies from -1 to +1. The different values will imply following: Co-relation co-efficient (r) = -+1; No unsys tematic risk can be diversified Co-relation co-efficient (r) = -1; All unsystematic risk can be diversified Co-relation co-efficient (r) = 0; No co-relation It is important to note that ideally, as an investor, assets with low or negative correlations should exist in the portfolio. When one or more of the holdings depreciate in value, the other holdings should pick up the slack. Risk and Return of Portfolio (Three assets) The risk of the portfolio consisting of three securities can be calculated as follows: EQUATION Optimal Portfolio (Two assets) The objective of an investor is minimizing the risk of the portfolio. The tools which are used to achieve this are: risk avoidance and risk minimisation. These tools are integral part part of portfolio management. A portfolio will contain various securities; by combining the weights of these securities expected return can be calculated. An optimal portfolio will minimize the risk to the greatest extend. The minimum risk portfolio of two assets is calculated as follows: EQUATION Portfolio diversification and Risk The fundamental principle of portfolio diversification is not-to hold-all-eggs-in-one-basket. Co-relation is the underlying principle of any diversified portfolio. Ideally in order to diversify project risk and thereby reducing the firms overall risk; the projects which should be added in the portfolio are those which are negatively co-related with the existing projects. By adding such stocks the overall variability of the returns/risks can be reduced to an extent. The following figure shows reducing risks through diversification: DIAGRAM As is clearly visible from the above diagram that project A and B are negatively co-related. The securities have same expected return E under similar market situation. The combination of the two projects also has return E but with less risk and variability. Such, a risk is known as the alpha or diversifiable risk. The combination of two perfectly positively correlated stocks does not reduce the risk of the overall project below the lea st risk level. In contrast, two stocks with perfectly negative co-relation will reduce the risk component of the overall project below the risk of either stocks or in certain situation in can touch 0 also. Modern Portfolio Theory Modern portfolio theory (MPT) is an investment theory which attempts to maximize the portfolios expected return for a given amount of portfolio risk, or to minimize the risk for a level of expected return, by selecting the amounts of various assets. One of the most important models of modern portfolio theory is listed below. Markowitz Model of Risk-Return Optimization Harry Markowitz proposed the portfolio theory. The model proposed in 1952, tries to optimize the trade-off between the risk and expected return of a portfolio. The underlying assumption of the theory is that individual assets do not matter to the investor but its the contribution in the total risk of the portfolio is critical. Utility function and Risk Taking Common investors will have three possible attitudes to undertake risky course of action: An Aversion to risk A Desire to take risk An Indifference to Risk This behaviour can best be understood with the help of an example. There are two stock options A and B with expected return of 100 each in normal economy. In a booming economy the return will be 110 and 200 units for stocks A and B respectively. The risk seeker or the person, who desires to take risk, will in such a scenario prefer the riskier stock option B. A risk indifferent (risk neutral) will be unresponsive to both the options A and B as they have same expected returns. Utility in economic terms is defined as the indicator of relative satisfaction. Generally, money is considered as a desirable commodity and large sum of money has a greater utility than smaller sum. The utility function is expressed in the following figure: DIAGRAM The figure clearly implies that the risk preferring decision maker maximi ses the expected utility by increasing the expected monetary value to maximum.

Essay about Persuasive Speech We Must Fight Homelessness

Specific Purpose: To persuade my audience to help fight homelessness Central Idea: With more help for the homeless we can make America better for everyone Attention I. Imagine for a moment that youre not in this classroom. A. Instead your outside, but you not walking to class or your dorm, your living there. B. Imagine for a moment that you yourself are homeless. 1. You have no shelter 2. When it rains your wet 3. When its cold your freezing 4. You have no money C. This is what life is like for many Americans each day D. Today I would like to encourage you to donate your time or money to†¦show more content†¦C. Declining wages have put housing out of reach for many workers. 1. In every state, more than minimum wage is needed to afford a one or two bedroom apartment. 2. According to a study by the U.S. Conference of Mayors in 1998, a minimum wage worker would have to work 87 hours a week to afford a two bedroom apartment. 3. This insufficient income leaves many people homeless. D. Another contribution to homelessness is serious health problems. 1. Over 41 million Americans have no health care insurance according to the U.S. Bureau of Census. 2. Homelessness severely impacts health and well being a. With the exception of obesity, strokes, and cancer, homeless people are far more likely to suffer from every category of severe health problem. b. Conditions which require regular, uninterrupted treatment, such as HIV/AIDS, addictive disorders, and mental disorders are extremely difficult to treat or control among those without adequate housing. c. Housing is the first from of treatment for homeless people with medical problems. (Transition: It should be clear by now that the homeless epidemic in the U.S. is a problem, so let’s look at some ways we can help.) Satisfaction I. Homelessness is not a problem that will just go away, but we can help fight the problem A. One way to help is to volunteer your time. 1. Working at soup kitchens not only benefit the homeless, but alsoShow MoreRelated Animal Farm and A Modest Proposal Essay2687 Words   |  11 Pagessituation of homelessness in Ireland. Also, both of the pieces are satirical. Animal Farm ridicules the ordinary Russian people for being gullible, and A Modest Proposal mocks politicians who ignore sensible suggestions and come up with extreme ones. In the build up to his speech, Old Major first clears his throat, to gain all of the animals attention. The fact that all he has to do is clear his throat to do this, gives the impression that he is authoritative, and in control. We are given theRead More Criminalization of Poverty in Capitalist America Essay3029 Words   |  13 Pagesbelieve we all will agree that the United States is a nation of criminals. From its inception as a settler nation, exiled British criminals stole the land and lives from Native Americans and Africans. They justified their actions with making and defining the law of the land, for example defining Africans as 3/5 of a man during slavery. Hence the power to define is an awesome power. It is the power of propaganda. It is the ability to manipulate our ideas, to limit our agenda, to mold how we see, andRead MoreWe Need Talk About Kevin8189 Words   |  33 PagesText Title – We Need Talk About Kevin Text Type - Visual Author – Lynne Ramsay The movie is shoot in the past and present going back and forth, where Tilda is experiencing the aftermath of her family’s death, and the past, delving deeper into the way her son treated her. We need to talk about Kevin tells us the story about a fractious relationship between a mother and her son. Tilda goes through intense grief and violence after a homicidal massacre where Kevin had killed 15 people with this bowRead MoreDeveloping Management Skills404131 Words   |  1617 PagesWorksheet 661 APPENDIX I GLOSSARY 673 683 APPENDIX II REFERENCES NAME INDEX 705 709 713 SUBJECT INDEX COMBINED INDEX xvi CONTENTS P R E FA C E What’s New in This Edition? Based on suggestions from reviewers, instructors, and students we have made a number of changes in the eighth edition of Developing Management Skills. †¢ Added new skill assessments in Chapter 1 and a new case in Chapter 3. †¢ Revised parts of the book to reflect suggestions and feedback from instructors and students

Great Gatsby Chapter Journals Free Essays

Daisy says these words as she describes to Nick and Jordan her hopes for her young daughter. Daisy is not a fool herself but because of her surroundings intelligent women are not viewed as valuable. Opposite of the older generation, the younger generation enjoys the thoughtless minds of the young and vulnerable women only seeking pleasure and not those that cater to their needs. We will write a custom essay sample on Great Gatsby Chapter Journals or any similar topic only for you Order Now Daisy’s remark is somewhat cynical: while she addresses the social values of her era, she does not seem to mind them. Rather, she describes that she is bored with life and it seems like she implies that a girl can have more fun if she is beautiful and simplistic. Daisy often conforms to the social expectation of the American woman in order to avoid issues. â€Å"He had one of those rare smiles with a quality of eternal reassurance in it, that you may come across four or five times in life. It faced, or seemed to face, the whole external world for an instant and then concentrated on you with an irresistible prejudice in your favor. It understood you just as far as you wanted to be understood, believed in you as you would like to believe in yourself. As a part of Nick’s first close examination of Gatsby’s character and appearance he describes that Gatsby’s smile captures both the theatrical quality of Gatsby’s character and his personality. Additionally, it captures the manner in which Gatsby appears to everyone in the outside world. His smile seems to be both an important part of the role in the character. Here, Nick describes Gatsby’s rare focus—he has the ability to make anyone he smiles at feel as though he has chosen that person out of â€Å"the whole external world. † â€Å"With an effort I managed to restrain my incredulous laughter. This is when Gatsby is telling Nick about his life. Nick is trying to restrain himself from laughter because he knows that there is something wrong with what Gatsby is saying. As he continues, Jordan looks like she knows he is lying so when Nick looks at her he feels that it’s all bogus. From what Nick believes, what Gatsby is saying is so in the moment because there isn’t a lot of detail in his story to go on and see if it’s true or not. Gatsby is saying that he lived so well after his family had all died and that he travelled a lot and tha t he had his life pretty much made for him. If that was all true why would he be living in a place like west egg? â€Å"The truth was that Jay Gatsby, of West Egg, Long Island, sprang from his Platonic conception of himself. He was a son of God—a phrase which, if it means anything, means just that—and he must be about His Father’s business, the service of a vast, vulgar, and meretricious beauty. So he invented just the sort of Jay Gatsby that a seventeen year old boy would be likely to invent, and to this conception he was faithful to the end. † When Nick is describing Gatsby he uses this bold comparison between Gatsby and Jesus Christ to illuminate what Gatsby has created himself to be. Jesus is described to be â€Å"faithful to his self-created dream but scornful of the factual truth that finally crushes him and his dream†Ã¢â‚¬â€an appropriate description of Gatsby. Though the comparison between Gatsby and Jesus is not an important event in The Great Gatsby, it is nonetheless a suggestive comparison, as Gatsby transforms himself into the image that he envisioned for himself as a youngster and remains committed to that idea, despite the obstacles that society presents to the fulfillment of his dream. â€Å"’God sees everything,’ repeated Wilson. These were the last words that George Wilson had said before he murdered Gatsby in the end of the chapter. It is showing the madness that came from his realization of the affair and the death of his wife, but maybe this could be indicating that he was the only sane one of all the characters in the end. With the rough life that George had, he did not experience the immorality of society in the 1920s. Th e abuse of money, the new crimes developed, and the other aspects of life were not able to corrupt his lifetyle in the Valley of Ashes. Being a poor man, it was his dream to be rich and make a life for himself and his wife in New York City, but living, isolated, in the Valley of Ashes kept his morals. All of the characters seemed to be blinded by the lifestyle that surrounded them. They were rich, or wanted to be in George’s case, and were blinded by the corruption of society. They could not see what harm they were doing to each other and themselves and started keeping secrets, having affairs and causing unneeded destruction. God was the only one that could see their flaws and lies; he could look past their secrets and see the real people on the inside – the bad people they had become. â€Å"Tom and Gatsby, Daisy and Jordan, and I, were all Westeners, and perhaps we possessed some deficiency in common which made us subtly inadaptable to Eastern life. † Gatsby had the dream of coming back with Daisy. He got money just to achieve his dream, and try to make it work, but it did not work. Gatsby tried to put the values into the wrong place. Gatsby also cared too much about people’s feelings and he made friends to easily. How to cite Great Gatsby Chapter Journals, Papers

Capital Punishment Essay Introduction Example For Students

Capital Punishment Essay Introduction Good Afternoon, I am honored to be here, and I thank you for having me. Today I would like to speak to you about a very controversial issue-capital punishment. What do those two words mean to you? To mostpeople they mean a murder victims family receiving justice for theirdeceased. Let me see a show of hands. How many people in the audiencebelieve in the death penalty? I conducted a weeklong survey of twohundred people of all ages. The purpose was to see how many peoplebelieved in the death penalty and how many opposed it. My results areshown on this overhead. As you can clearly see, 98% believe in the death penalty. 57% believethat the death penalty is a deterrent for murder. A high of 97% of thepeople favor capital punishment, where 1% think that our justice systemshould not be more lenient on death row inmates. Only 89% think thatonce convicted of murder, an inmate should be sentenced to deathimmediately. I would like to take this time to tell you a story. On August 15,1997, the Reverend John Miller preached a sermon at the Martha VineyardsTabernacle in New Hampshire. He told his congregation, which includedthe vacationing President Clinton and his wife, that capital punishmentis wrong. I invite you to look at a picture of Timothy McVeigh and toforgive him, said Miller. If we profess to be Christians, then we arecalled to love and forgive. Once the sermon ended, Rev. Miller,Clinton, and their wives got together for brunch at the Sweet Life Cafi. What the Rev. did not know was that 24-year-old Jeremy T Charron; anEpsom New Hampshire police officer was gunned down in cold blood justhours before Millers sermon on forgiving murderers. That Sunday markedCharrons 44th day as a full time police officer, the job he dreamed ofsince he was 6 years old. Jeremy Charron leaves behind his parents, two sets of grandparents, twosisters, two brothers, a wide circle of friends, and a girlfriend whoseengagement ring he had begun to shop for. Maybe the Reverend Millerwould advise those grieving for Charron to look at pictures of GordonPerry, the robber accused of pumping the bullets into Charrons heart,and 18 year old Kevin Paul, the accomplice, and forgive. The state of New Hampshire has opted not to forgive, but to prosecute. Perry has been charged with capital murder. If he is convicted, thestate will seek the death penalty for the first time since 1939. Jeanne Shepard, the democratic governor, says a capital murderprosecution will put criminals On notice that if they kill a policeofficer in New Hampshire, they will face the death penalty. What ifthey kill someone other than a cop? Should criminals not be put onnotice that they will face the death penalty if they kill a cashier incold blood? A farmer, or a schoolteacher? They should- but the lawsays otherwise. In New Hampshire as in all states with the deathpenalty, murder can be punished with execution only in specificcircumstances. The murder of an officer in the line of duty is one ofthem. Among others are murder combined with rape, murder for higher,and murder in the course of kidnapping. First degree murder is notpunishable by death. One who willfully murders a cashier is no lessevil then the murderer of a police officer. Both have committed theworst crime. Both should be subjected to the worst possiblepunishment. That is justice. Standing in the way of that justice, however, are the likes of Rev. Miller, who brim with such pity for criminals that they have none leftover for the victims. Forgive Timothy McVeigh, he says, as if we havethat right. Absolve the man who slaughtered 168 innocent men, women,and children in Oklahoma City. Pardon the killer of Officer Charron. Nothing could be more sinful and indecent. How sad that Miller,enjoying his brunch with the president at the Sweet Life Cafi, shouldlack compassion for the sweet life of others. Executions at U.S. prisons reached a 40- year high last year. There aregoing to be more executions in the future as these cases are speeded up,as a result of federal and state laws shortening the appeal process. Iwould now like to direct your attention to the overhead. Examination of the slave experience EssayA heinous crime occurs and most people ask the inevitable question: Whoare these people capable of such inhuman acts? According to Gilligan,they generally are ordinary people who often describe themselves asrobots, zombies, nonentities, and even vampires. In a 1977 courtroom,convicted serial killer Ted Bundy said many things about himself. Amongthose descriptions were; Sometimes I feel like a vampire, and Im themost cold blooded son of a bitch youll ever meet. Murderersfrequently mutilate themselves in prison, cutting their arms, swallowingrazor blades, blinding or castrating themselves- because feelingsomething, even pain, is better than feeling nothing. People who windup committing murder are often the survivors of attempted murderthemselves, or of a child abuse that is so severe, that if they were notstrong, they would not have survived. David Berkowitz was the Son ofSam serial killer. The press at one time asked him why he killed somany people. He replied, I always had a certain fetish for murder anddeath. Berkowitz was jolted to kill when he found out a familysecret. He was an accident, a mistake, never meant to be born. He hadalways been told that his birth mother had been killed during labor. What he found out was it was just a lie to cover up the fact that hisreal mother did not even care about him. Once he discovered the truth,he vowed to find the woman that cast him aside. When asked by a friendwhat he would do when he found her, he said, Im not going to rob her. Im not going to touch her or rape her. All I want to do is kill her. Gilligans hypothesis is that the common underlying cause of violenceis shame. Violent behavior only results when three other conditionsoccur: 1) The individual does not see himself as having any nonviolentmeans to gain respect or find justice. 2) The shame and humiliation areso overwhelming they threaten to destroy the persons sense of self. 3)The violent impulses stimulated in all of us by feelings of humiliationare not inhibited by guilt, remorse, empathy, or love. The characterHannible Lechter, as shown in this clip from the movie Silence of theLambs explains it best. Rather than punishment, Gilligan said, one proven approach to reducingviolence is education, especially a college degree. Several years ago,Gilligan conducted a study in the Massachusetts Prison system in whichmore than two hundred inmates, including those that were convictedmurderers, earned degrees and were released from prison. So far, notone repeat offender has been found. Gilligan said We know that the single most effective factor whichreduces the rate of recidivism in the prison population is education,and yet education in the prisons is the first item to be cut when anadministration gets tough on crime. If our goal is to reduce crimeand violence, we would benefit all law abiding members of society if wemade college education available in the prisons. Gilligan said he isamazed by how inarticulate and incoherent many violent prisoners are. They have never learned to express themselves. They have never hadanyone to listen to them and take their thoughts seriously. If we canget them to talk about their life experiences, we immediately give theman alternative. If we can provide these men with an alternative toviolent behavior, they will use it. The best way to get people to actlike human beings is to treat them like human beings. Gilligan acknowledges that some violent criminals are so severelydamaged and dangerous they simply can never live out in society again. But the emphasis, he said, must be on restraining and quarantining,rather than punishment. Over time, even the most deeply damaged peoplecan recover a great deal of the humanity that they have lost; even thedeadest could be restored to some semblance of humanity if given ahumane enough environment, said Gilligan. I now leave the decision up to you. I have given you both the pros andcons on the issue of capital punishment. If you choose to remember onlyone point of my speech tonight let it be this quote of human beings byHenry Ford. None are good but all are scared. Even the mosthorrendous criminal is a human being with a soul, and that soul isscared.