Investment Analysis and Portfolio
Management: notities lessen
TOPIC 1: INTRODUCTION: GENERAL CONCEPTS AND INVESTMENT
PROCESS
Slide 10
Invest indirectly: bv. Pension fund → buy shares from a portfolio
High return → higher risk (trade-off)
bv. Saving account: low risk but also low return (0,11%)
What models can we use to determine the value of an asset?
Go to the market (P)
Correct value (V) can differ from the market price!
Expected return of investing in a certain asset (E)
How do we construct portfolio’s (stock market/savings account/real estate/…)
→ you don’t put all your money in one asset: diversify
You want to evaluate the performance of your investment
Slide 11
Compounding: it’s important to start investing as soon as possible!
vb. Today, you invest 100, return of 10% → after 1 year: 110 € (10)
In the second year, return of 10% → after 2 years 121 € (11)
11: 10eu return on investment; 1eu return on return (=compounding effect)
vb. Slides: compounding effect becomes stronger, the longer you invest (*3.65)
compounding effect becomes stronger, the more return you have
Stockbroker: trade assets for investor
Chartered Financial Analyst: certification of being a good analyst after doing some exams
Slide 15
Real estate can give some return without taking a lot of risk
Slide 16
Blue line: value of the stock market (global market)
→ went up, but you take some risk (bv. Mar ’20), if you wait long enough the stock market
recovers
Green line: performance governmental bonds
→ less risk, but doesn’t increase that much
Grey line: corporate bonds
→ bit more risk, but more or less the same as government bonds
Slide 17
Higher return in the US
Markets are doing week (vaccination, economy is starting up again)
Some countries’ performance is close to zero, are not doing well
→ reason: bv. Much lower vaccination grade in undeveloped countries
,Slide 18
Financial sector performs the best
Energy too, because the economy is growing
Slide 19
Gold fluctuates a lot: don’t put all your money in it!
In times of crisis, the value of gold seems to increase → safe haven → good diversifier: if stock
market goes down (crisis), gold price goes up
Gold has a negative return this year
Slide 21
Bond yield: return you get when you hold a government bond and hold until maturity
Yields in the US are a bit higher, EU close to 0, Germany negative (you lose money as you put your
money in it)
Why are the yields negative in Germany? (1) Investors consider German bonds as risk-free, when
there is a lot of uncertainty → buy German bonds → when everyone buys them, prices go up and
yields go down. (2) Central banks buy government bonds to stimulate the economy, then interest go
down, costs less money to borrow money, positive effect on the economy. → quantitative easing
(3) if the yield goes down a lot (goes down if people buy bonds), then prices go up, you can sell the
bond before the end of maturity and still make a gain!
Why would an investor invest in bonds with a negative yield? (1) other investments are even worse,
bv. Stock market goes down a lot. (2) why don’t you prefer to keep it in cash? Risk that someone
takes your money. (3) suppose we have deflation (prices of products go down), in real terms, you still
have a positive return bv. You lose 0.5% on your investment, but deflation is 1%. (4) if you combine it
with investments in the stock market → diversification! they compensate each other. (5) Some large
investors have the obligation to invest in government bonds bv. Pension funds.
Slide 22
Most bonds don’t perform well over the last years → if there are negative yields, yields can only go
up, then the prices will go down, this leads to a negative return
Inflation bonds perform well when there is inflation
Slide 23
Real estate performed better than the stock market (S&P500) over the last 20 years
Crash in the real estate market during the financial crisis, so be careful!
Slide 24
Invest in bitcoin: you can make a lot of money!!
But there can be a substantial crash, so there is a lot of risk.
Slide 25
All numbers: historical data. You have to base your decision on more fundamental information (not
only look back).
,Slide 27
Historical perspective: long-term evolution
Blue line: value of Apple share
Red line: Agias (Fortis)
→ price including dividends
→ investing in individual stocks has the potential to create a lot of money (bv. Apple),
but It’s difficult to decide at what time you need to invest.
→ Fortis crashed during the financial crisis, you didn’t make a lot of money, risk
Slide 28
Also looks at the s&p500 (blue line)
Bank of America: crash at the financial crisis
→ diversify!! Some stocks will go up during the financial crisis, invest in stock market index,
not in individual stocks
Slide 29
Upward potential in investing in the stock market is a lot higher, but higher risk
But bond market: less risk! Also less upward potential
Slide 33
Opportunity cost of holding cast: you will not have a return, and because of inflation the value of
your money goes down.
Expected return: expectation at time t of what the return will be at time t+1
Realized return: after the facts
→ those 2 will not be the same! =risk, uncertainty
Risk= uncertainty about the actual return
If there is no risk, you know what the return will be bv. Savings account
Slide 34
Answer: higher
Slide 35
(1) there Is no free lunch
Financial markets are competitive: everyone looks for the single asset that gives you a high return,
without taking too much risk
If there is a good investment opportunity: all investors will buys this asset → price will go up → the
yield will go down up to the moment until the yield is in line with the risk.
(2) most people are risk-averse. Only take risk if you get a high return (compensation).
If you are a risk-lover, you only focus on the return, not on the risk.
How much risk do you want to take?
This depends on your investment horizon
bv. Investment horizon is 5 years: you invest now and you want your money back in 5 years
Investment horizon is 40 years
→ difference in what kind of risk you want to take: short investment horizon leads to
a lower risk, because you have less time to recover from a crash.
in the long run, your risk will pay off (stock market performs better)
, Slide 36
Risk and expected return: positive trade-off
Ex-ante point of view: before you invest, you expect that higher risk offers a higher return, otherwise
you would not invest in stock market!
What happens ex-post? Higher risk offers higher return?
Slide 37
US stock market: a lot of fluctuation. In the long run, you will make a lot of money: it pays off to
make a lot of money?
German bonds: they both increased but not a lot (less risky, less return).
→ positive relation risk and return! (ex-post)
Slide 38
Shorter time period: totally different picture!! Risky stock market underperforms less risky bond
market. Contradiction to the positive risk-return trade-off.
Slide 39
How much return on an annual basis bv. 10% return each year.
Positive trade-off
Slide 40
Shorter time period: negative relation, no positive trade-off
Slide 41
Conclusion: Trade-off risk-return is always positive from an ex-ante point of view. You also have this
trade-off if we look at the long term period. If you have long term, invest in the stock market to
become a higher return. This positive trade-off is not necessarily the case on the short term; if
something is more risky, it is possible you lose money!
Slide 43
Efficient markets: if all the investors behave rational, you would expect the market to be efficient
(this is not always the case).
E(r) = required r in efficient markets → price (p) that you have to pay for the share should be the
same as the fair price (v).
If markets are not efficient vb. E(r) 6% > required r 4% → interesting investment opportunity!!! You
get more than you want → everyone buys this asset → p increases → return will decrease until it is
the same as the required return!
If p < v: investment opportunity.
Market price should be equal to the fair price! If this is not the case → markets are not efficient.
Implications:
(1) the return you get is just a compensation for the risk, you will not be able to have a higher
return
(2) don’t look for individual stocks, they will not perform better because all relevant
information is immediately reflected in the price
(3) passive management: you buy the index and keep it until the end of investment horizon
