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• Most individuals make investment decisions sometime
‣ Need sound framework for managing and increasing wealth
‣ Retirement decisions: importance of making good decisions
Source: Jones, 2010, Investments: Principles and Concepts, p.6
x 14.73
• Essential part of a career in the field
‣ Security analyst and portfolio manager
‣ Stockbrokers and financial advisors/planners
‣ Chartered Financial Analyst
10
Compounding effect when generating profits in year 1. Return in year 2 will be calculated on
starting capital + profit year 1 → return on return.
Effect will increase over time, exponential curve.
Table: from 20Y to 40Y: doubling in years (so doubling sum invested), but return is x3.65
because of the compounding effect.
Effect will be stronger. The bigger the return, the bigger the effect.
Efficient Markets
• Two types of expected returns:
‣ E(r): Return you expect based on fundamental information (i.e. forecasted
return)
‣ Required r: Return you expect or require as compensation for risk (i.e. real
rate + inflation + risk premium)
• If markets are efficient
‣ E(r) = required r => no bargains (no-free-lunch)
‣ Market price = fair price
‣ What happens when E(r) > required r?
• Efficient market hypothesis (EMH): Asset prices reflect all relevant
information
• Implications of EMH:
‣ Return you get/expect is compensation for risk
‣ Not possible to do better than the market
‣ Passive management is preferred over active management
28
Efficient markets: P = V (price of the stock = value of the stock)
, Multiple Choice Question
Government bond yields:
Question: What explains that 10-year government bond yields differ from
country to country?
A. (Expected) inflation
B. Credit risk
C. Both (expected) inflation and credit risk
D. They only differ due to inefficiencies in the market
URL: http://vote.ugent.be/client.php
14
Answer C.
You want at least a compensation for inflation, otherwise you lose purchasing power. So
expected inflation has an effect.
Higher expected inflation in US than in Europe, explains a bit of the higher bond yield.
But also credit risk. = risk that government will not be able to pay back it’s debt.
Credit risk in US is higher than Germany, because USA has more debt than Germany. Might
also explain the higher yield.
Bond Ratings
• Rate relative probability of default
• Rating organizations
‣ Standard and Poors Corporation (S&P)
‣ Moody’s Investors Service Inc
‣ Fitch
• Investment grade securities
‣ Rated AAA, AA, A, BBB
‣ Typically, institutional investors are confined to bonds in these four
categories
• Speculative securities
‣ Rated BB, B, CCC, C
‣ Significant uncertainties
‣ C rated bonds are not paying interest
15
AAA: doesn’t have any credit risk → Germany
Above BBB: not much risk
BB and less: they have higher risk that you will lose some investments.
, START LECTURES
Investment Analysis and
Portfolio Management
Introduction: Some General Concepts
and the Investment Process
1
Some Practical Information
• Lecturer: Koen Inghelbrecht
‣ Questions right before, during or after the lectures
• Exercises: Open exercises + Multiple choice (Connect)
• Video material: Available through Connect
• Assignment in groups
• Exam: Open questions and Multiple choice questions
3
Multiple Choice Questions
• Connect-platform (practice yourself)
‣ URL: https://connect.mheducation.com/class/k-inghelbrecht-lectures-2019-2020
‣ How to register? https://www.youtube.com/watch?v=tY61B0GP-jA&feature=youtu.be
• Vote-platform (during lectures)
‣ Using smartphone, tablet or PC
‣ It is anonymous!
‣ How?
- Go to: http://vote.ugent.be/client.php
- Login with UGent account and password
- Enter ‘group number’ that I will provide
4
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