Summary
Summary Net Present Value
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This summary describes in a broad context, the determination of the Net Present Value (NPV), and analyzes and criticized the Beta which is often used by investment companies.
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Net Present ValueThe Net Present Value has three key features:
The time value of money a dollar earned today is worth more than
a dollar earned tomorrow
The NPV depends on forecasted cash flows
The NPV is all measures in today’s currency, so you can add and
compare
(Future returns are unpredictable)
Risk is best judged via:
Portfolio context
Diversification
Standard deviation
Beta
Volatility volatility refers to the amount of uncertainty or risk about the
size of changes in a security's value. A higher volatility means that a
security's value can potentially be spread out over a larger range of
values. This means that the price of the security can change dramatically
over a short time period in either direction. A lower volatility means that a
security's value does not fluctuate dramatically, but changes in value at a
steady pace over a period of time.
Beta measures the amount that investors expect the security or
portfolio to change for each additional 1% change in the market. Beta is
calculated using regression analysis, and you can think of beta as the
tendency of a security's returns to respond to swings in the market. A beta
of 1 indicates that the security's price will move with the market. A beta of
less than 1 means that the security will be less volatile than the market. A
beta of greater than 1 indicates that the security's price will be more
volatile than the market. For example, if a stock's beta is 1.2, it's
theoretically 20% more volatile than the market.
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