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Samenvatting - Investment Analysis (3000INA_22)
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Summary of all the theory for Investment Analysis
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Tabblad 1, Chapter 1: The Investment Process
Coefficient variation is a measure to compare two investments with different rates of
expected return and different standard deviations. It offers the standardized measure for risk
per unit of return. The more risk you need to take for one unit of return, the less attractive an
investment is.
Risk of individual investment; two approaches
- Fundamental risk depends on intrinsic factors: business risk, financial risk, liquidity
risk, exchange rate risk, country risk
- Systematic risk looks at portfolio setting: movement of the individual asset in
relation to the portfolio.
Security is a financial asset that can be traded over a market.
Security Market Line (SML) reflects the risk-return combinations available for all risky
assets in the capital market at a given time.
Three cases:
1. Movement along the SML: change in risk and return.
2. Change in the slope of the SML: change in investors’ attitude towards risk. More
steep: extra return, less risk. Declines or flattens: more risk for less expected return.If
the slope increases, the attitude of the investors will change. There will be extra
return for less risk, meaning that investors will become risk-averse.
3. Shift in the SML: change in expected growth, capital market conditions, or expected
inflation.A parallel shift upwards implies that all required returns for all risky levels
increase by the same magnitude. A shift in expectations e.g. inflation, monetary
policy.
- If a security is located below the SML, it will receive lower return than the market,
meaning that it is overvalued.
- If a security is located above the SML, it will offer more return than it should, given
the risk it incorporates, meaning that it’s undervalued.
- A stock is overvalued when the estimated return is less than the required return.
- A stock is undervalued when the estimated return exceeds the required return.
Required return:
1. Risk
2. Inflation
3. Time
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