Investment Analysis Notes
1. Introduction to Investment Analysis
• Investment: Allocation of money into assets expecting future financial returns.
• Types of Investments:
o Equities (Stocks): Ownership in a company.
o Bonds: Fixed-income securities offering periodic interest.
o Mutual Funds: Pooled investments in diversified assets.
o Real Estate: Investment in property for rental income or appreciation.
o Derivatives: Financial contracts based on underlying assets.
• Objective: Wealth creation, capital appreciation, and income generation.
• Key Principles: Risk-return tradeoff, diversification, and market efficiency.
2. Risk & Return Relationship
• Risk: Probability of losing investment value.
o Systematic Risk: Affects entire markets (e.g., inflation, interest rates).
o Unsystematic Risk: Specific to a company or industry (e.g., poor management).
• Return: Earnings generated from investment.
o Expected Return Formula: E(R)=∑(pi×ri)E(R) = \sum (p_i \times r_i) Where pip_i =
probability of return rir_i.
o Risk Measures:
▪ Beta (β): Measures stock volatility vs. market.
▪ Standard Deviation (σ): Measures total return variability.
▪ Sharpe Ratio: (Rp−Rf)/σp(R_p - R_f) / \sigma_p, evaluates risk-adjusted
return.
3. Portfolio Management & Diversification
• Portfolio: Combination of various asset classes.
• Diversification: Spreading investments to minimize unsystematic risk.
• Modern Portfolio Theory (MPT): Maximizing returns for a given risk level.
• Efficient Frontier: Set of optimal portfolios offering highest return per risk level.
• Asset Allocation: Balancing assets based on risk tolerance.
