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Assignment:
Mr. A has following options for investment. Identify the major risks associated with following investment alternatives and give reason why a particular investment is more suitable for Mr. A. (All cases are independent of each other). Answer should be to the point. Avoid irrelevant details.
A. Mr. A has planned to hold a security for one year. He has the option to buy Treasury security that matures in one year as compare to another Treasury security that matures in 30 years.
B. Mr. A has planned to hold a security for ten years. He has the option to buy Treasury security that matures in ten years versus purchasing an AAA corporate security that matures in two years.
C. Mr. A has planned to hold a security for two years. He has the option to buy a zerocoupon bond that matures in one year as compare to another zero- coupon bond that matures in two years.
D. Mr. A has decided to hold the security for five years. He can opt to buy an AA sovereign bond (with dollar denominated cash flow payments) versus purchasing a US corporate bond with a B rating.
E. Mr. A has planned to hold a security for four years. He has the option to buy a less actively traded 10-year AA rated bond versus purchasing a 10-year AA rated bond that is actively traded.
GGG Company yesterday paid latest annual dividend of Rs. 1.25 a share and maintained its historic 7 percent annual rate of growth. You have planned to purchase the stock today because you believe that the dividend growth rate will increase to 8% for the next three years and the selling price of the stock will be Rs. 40 per share at the end of three years. How much should you be willing to pay for the GGG stock if you require a 12% return?

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INVESTMENT ANALYSIS & PORTFOLIO MANAGEMENT

 

ASSIGNMENT # 1

FIN 630

 

 

Assignment:

 

Mr. A has following options for investment. Identify the major risks associated with following investment alternatives and give reason why a particular investment is more suitable for Mr. A. (All cases are independent of each other). Answer should be to the point. Avoid irrelevant details.

 

  1. A.   Mr. A has planned to hold a security for one year. He has the option to buy Treasury security that matures in one year as compare to another Treasury security that matures in 30 years.
  2. B.    Mr. A has planned to hold a security for ten years. He has the option to buy Treasury security that matures in ten years versus purchasing an AAA corporate security that matures in two years.
  3. C.   Mr. A has planned to hold a security for two years. He has the option to buy a zero coupon bond that matures in one year as compare to another zero- coupon bond that matures in two years.
  4. D.   Mr. A has decided to hold the security for five years. He can opt to buy an AA sovereign bond (with dollar denominated cash flow payments) versus purchasing a US corporate bond with a B rating.
  5. E.    Mr. A has planned to hold a security for four years. He has the option to buy a less actively traded 10-year AA rated bond versus purchasing a 10-year AA rated bond that is actively traded.

 

GGG Company yesterday paid latest annual dividend of Rs. 1.25 a share and maintained its historic 7 percent annual rate of growth. You have planned to purchase the stock today because you believe that the dividend growth rate will increase to 8% for the next three years and the selling price of the stock will be Rs. 40 per share at the end of three years. How much should you be willing to pay for the GGG stock if you require a 12% return?

plz share solution

if any one have idea plz share agr kisi ny solve kar li ha to plz help karo baki b solve kar sakyn. discussion plz

plz share solution discuss plz

Please share your ideas

9 types of investment risk

1. Market risk

The risk of investments declining in value because of economic developments or other events that affect the entire market. The main types of market risk are equity risk, interest rate risk and currency risk.

  • Equity risk – applies to an investment in shares. The market price of shares varies all the time depending on demand and supply. Equity risk is the risk of loss because of a drop in the market price of shares.
  • Interest rate risk – applies to debt investments such as bonds. It is the risk of losing money because of a change in the interest rate. For example, if the interest rate goes up, the market value of bonds will drop.
  • Currency risk – applies when you own foreign investments. It is the risk of losing money because of a movement in the exchange rate. For example, if the U.S. dollar becomes less valuable relative to the Canadian dollar, your U.S. stocks will be worth less in Canadian dollars.

2. Liquidity risk

The risk of being unable to sell your investment at a fair price and get your money out when you want to. To sell the investment, you may need to accept a lower price. In some cases, such as exempt market investments, it may not be possible to sell the investment at all.

3. Concentration risk

The risk of loss because your money is concentrated in 1 investment or type of investment. When youdiversify your investments, you spread the risk over different types of investments, industries and geographic locations.

4. Credit risk

The risk that the government entity or company that issued the bond will run into financial difficulties and won’t be able to pay the interest or repay the principal at maturity. Credit risk applies to debt investments such as bonds. You can evaluate credit risk by looking at the credit rating of the bond. For example, long-term Canadian government bonds have a credit rating of AAA, which indicates the lowest possible credit risk.

5. Reinvestment risk

The risk of loss from reinvesting principal or income at a lower interest rate. Suppose you buy a bond paying 5%. Reinvestment risk will affect you if interest rates drop and you have to reinvest the regular interest payments at 4%. Reinvestment risk will also apply if the bond matures and you have to reinvest the principal at less than 5%. Reinvestment risk will not apply if you intend to spend the regular interest payments or the principal at maturity.

6. Inflation risk

The risk of a loss in your purchasing power because the value of your investments does not keep up with inflation. Inflation erodes the purchasing power of money over time – the same amount of money will buy fewer goods and services. Inflation risk is particularly relevant if you own cash or debt investments like bonds. Shares offer some protection against inflation because most companies can increase the prices they charge to their customers. Share prices should therefore rise in line with inflation. Real estate also offers some protection because landlords can increase rents over time.

7. Horizon risk

The risk that your investment horizon may be shortened because of an unforeseen event, for example, the loss of your job. This may force you to sell investments that you were expecting to hold for the long term. If you must sell at a time when the markets are down, you may lose money.

8. Longevity risk

The risk of outliving your savings. This risk is particularly relevant for people who are retired, or are nearing retirement.

9. Foreign investment risk

The risk of loss when investing in foreign countries. When you buy foreign investments, for example, the shares of companies in emerging markets, you face risks that do not exist in Canada, for example, the risk of nationalization.

Various types of risk need to be considered at various investing stages and for different goals. See how JohnGiovanni and Julia, and Juan manage these risks.

Benefits and Risks Associated with Bonds

While bonds traditionally earn lower returns than stocks, that does not mean there isn't a place in your portfolio for bonds. The most common reason for investors to purchase bonds are below:

  • Diversification - Bonds tend to be less volatile than stocks and can therefore stabilize the value of your portfolio during times when the stock market struggles. Having a combination of both types of investments over the long term can often provide comparable returns with less risk than a portfolio devoted to only one type of investment.
  • Stability - If investors know they will need access to large sums of money in the near future-for example, to pay for college, a home, etc.-then it does not make sense to place that money in a highly volatile investment like stocks.
    Because the majority of the return on bonds comes from the interest payments (the coupon payments), fluctuations in the price of a bond will have little impact on the value of the investment.
  • Consistent Income - Unlike stock dividends, coupon payments are consistently distributed at regular intervals. Individuals seeking this consistent income might find bonds a better alternative than the dividend payments some stocks offer.
  • Taxes - Payments from some bonds are exempt from federal taxes . For individuals in high tax brackets, these investments are often an excellent vehicle for their portfolio.

Bonds are often called "fixed income" investments, but don't let that term fool you. Bonds are not riskless investments. While they are usually considered much safer than stocks, bonds can still lose value while you hold them. Here is a brief look at some of the risks associated with bonds:

  • Interest rate risk - Bond prices are inversely related to interest rates, so if interest rates increase, the price of the bond will decrease. The interest rate on a bond is set at the time it is issued. Generally, the coupon will reflect interest rates at the time of issuance. However, if interest rates increase, people will be unwilling to purchase the bonds in the secondary market at the earlier rate. For example, if the coupon is set at 6% and interest rates in the market are at 7%, the interest rate on the bond is well below what you could get from a different investment. Therefore, the price of the bond will decrease so that the capital appreciation will make up for the difference in interest rates. (For this reason, it can be risky to buy long-term bonds during periods of low interest rates.)
  • Credit Risk - Just as individuals occasionally default on their loans or mortgages, some organizations that issue bonds occasionally default on their obligations. If this is the case, the remaining value of your investment can be lost. Bonds issued by the federal government , for the most part, are immune from default (if the government needed money it could just print more). Bonds issued by corporations are more likely to be defaulted on - companies often go bankrupt. Municipalities occasionally default as well, although it is much less common. The good news is that you are compensated for taking on the higher risks associated with corporate bonds and municipal bonds. The yield on corporate bonds is higher than that of municipal bonds, which is higher than that of treasury bonds. Moreover, there is a rating system that enables you to know the amount of risk each class of bond entails.
  • Call Risk - Some bonds can be called by the company that issued them. That means the bonds have to be  redeemed by the bond holder, usually so that the issuer can issue new bonds at a lower interest rate. This forces you to reinvest the principal sooner than expected, usually at a lower interest rate. This subject will be further discussed in later sections.
  • Inflation Risk - With few exceptions, the interest rate on your bond is set when it is issued, as is the principal that will be returned at maturity. If there is significant inflation over the time you held the bond, the real value (what you can purchase with the income) of your investment will suffer.

Please tell me the PART B formula how to calculate it. is this formula is right for use. k=D(I+g)/P+g. please help to solve it.

can anyone share the idea how to solve this assignment just for reference to see how to solve it. 

Aster if you find solution plz share here

we need to identify the risk taken by investor and then explain how that investment is suitable for investor

qusetion 1 part a

ek to interest rate risk h

part b me 

interest rate and inflation risk h

kuch samj ni aa rahi

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