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Financial Institutions and Markets

Finance
by

Amir Ghods

on 5 December 2014

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Transcript of Financial Institutions and Markets

VALUE
PRICE
PRICE
INVESTOR
BUY
SELL
VALUE
PRICE
RISK
P/E
45 = 3 * 15
FUTURE EARNING FOR NEXT YEAR
AVERAGE P/E FOR INDUSTRY
1
2
3
PREVIOUS YEAR EARNING
NEXT YEAR EARNING
NEXT YEAR EARNING
NEXT YEAR EARNING
PREDICTION
EARNING ITSELF
INDUSTRY FOR AVERAGE P/E
DIFFERENCES
WEIGHT
WEIGHT
WEIGHT
14
28
1994
1998
DDM
Dividend discount model
two-Stage Dividend Discount model
Gordon
TIME
GROWTH
GROWTH
TIME
H-MODEL
GA
GN
TIME
2H
Three- Stage Dividend Discount model
TIME
GA
GN
P/E AND DDM
RELATION
P=V=
1
P/E=
D
K-G
K-G
1
D
/
E
P/E=
K-G
B
P/E
G
K
+
_
K
CAPM
CAPITAL ASSET PRICING MODEL
RETURN
RISK
HOW TO INCORPORATE RISK INTO ERR (EXPECTED RATE OF RETURN)
Arbitrage pricing model
APM
CAPM
SYSTEMATIC RISK
RISK FREE RATE
EXPECTED RETURN
RISK PREMIUM
VALUE LINE
Regression
BETA
TIME
BETA
RETURN
Fama&French
RELATION
Chan &Lakonishok
BETA
RETURN
RELATION
~
1963 - 1993
Chan &Lakonishok
GOOD MARKET
BAD MARKET
LOW BETA
HIGH BETA
HIGH BETA
LOW BETA
10 - MONTH
APM OR APT
PRICE
ECONOMIC
MARKET
FIRM SPECIFIC
ECONOMIC
ECONOMIC GROWTH
S&P500
ECONOMIC GROWTH
DEMAND FOR PRODUCT AND SERVICE
CASH FLOW
VALUE
RISK FREE RATE (INTEREST)
RISKY ASSET
TREASURY
RISK FREE
INTEREST
DEMAND AND PRICE
DEMAND AND PRICE
DOLLAR
AMERICAN FIRM STOCK
WEAK DOLLAR
STRONG DOLLAR
BUY
FOREIGN INVESTOR
SELL
PRICE
PRICE
2
1
FOREIGN BRANCH
FIRM REVENUE
WEAK DOLLAR
STRONG DOLLAR
STOCK PRICE
STOCK PRICE
AMERICA ECONOMY
WEAK DOLLAR
STRONG DOLLAR
AMERICAN FIRM REVENUE
MARKET
Investor sentiment
+
_
FUTURE
FUTURE
1/3
FUNDAMENTAL
ECONOMIC
STOCK RETURN CHANGE
January Effect
PORTFOLIO MANAGER
January
SMALL AND RISKY STOCKS
BIG STOCKS
January
INVESTOR
DECEMBER
FIRM SPECIFIC
Change in Dividend Policy
DIVIDEND
PAY EASY
CASH FLOW
ENOUGH
unexpected earning
t
t+1
earning prediction
unexpected earning
cash flow and value
Acquisition and divestitures
divestitures
Acquisition
price
price
Synergy
expectations
prediction of new policies
time
sell higher
buy lower
policy
factors
international economy
financial policies
monetary policies
US economy
industry
firm specific
stock market
firm risk premium
risk free rate
systematic risk
(beta)
market risk premium
expected rate of return
expected cash flow
firm stock price
ANALYST
Analysts Conflicts of Interest
factors
price and value
but how
factors
investors
analysts
buy
sell
hold
ranking
investment bank
firm
analysts
investors
sell rank
revenue
manager

dismissal
stock
analysts
ownership
many stocks
_
want to buy stock
neutral
investors
analysts
employers
in favour of
in favour of
Disclosure
insiders
ceo
sooner
analyst
investors
information
estimation and adjustment
effect on buy & sell
SEC
Securities and Exchange Commission
Fair disclosure
RISK
RETURN
+
_
RETURN
CAPITAL GAIN
DIVIDEND
accumulated earnings
POTENTIAL GROWTH

RISK MEASURE
BETA
VALUE AT RISK
VARIANCE
&
STANDARD DEVIATION
VARIANCE
&
STANDARD DEVIATION
TABLE OF STANDARD NORMAL PROBABILITIES
MEAN
STANDARD DEVIATION OF PORTFOLIO
COV
VAR
COV
COV
COV
COV
COV
COV
COV
COV
COV
COV
COV
VAR
VAR
VAR
TYPE
1
2
3
4
1
2
3
4
BETA FOR STOCK
SENSITIVITY
MARKET
REGRESSION
P
R
BETA
BETA
>
BETA FOR PORTFOLIO
HIGH BETA
LOW BETA
RETURN
MARKET
RETURN
RETURN
RETURN
TIME
PREDICTION
BETA
PREDICTION
PERIOD
WEIGHT
0.5
0.2
0.3
0.1
PREDICTION
(PORTFOLIO)
1
2
3
4
VALUE AT RISK
Sharp index
Treynor index
BETA
STANDARD DEVIATION
AVERAGE RETURN FOR STOCK
AVERAGE RISK FREE RATE RETURN
AVERAGE RETURN FOR STOCK
AVERAGE RISK FREE RATE RETURN
A
B
BETA
STANDARD DEVIATION
1.2
1
0.15
0.08
TREYNOR
SHARP
0.4
0.5
0.5
0.4
RF = 0.1
R = 0.16
MARKET EFFICIENCY
Weak-form efficiency
Semi-strong-form efficiency
Strong-form efficiency
Weak-form efficiency
SECURITY PRICE
VOLUME
TREND
ABNORMAL RETURN
PRICE CHANGE
Semi-strong-form efficiency
SECURITY PRICE
FIRM NEWS
PUBLIC INFORMATION
ECONOMIC NEWS
VOLUME
TREND
political news
MRKET INFORMATION
PUBLIC INFORMATION
SUB SET
SEMI STRONG
WEAK
SURE
ABNORMAL RETERN
MARKET INFORMATION
MARKET INFORMATION
Strong-form efficiency
SECURITY PRICE
ALL INFORMATION
INSIDER
ALL INFORMATION
PUBLIC INFORMATION
SUB SET
STRONG
SEMI-STRONG
ABNORMAL RETURN
SURE
EFFICIENCY TEST
PAST PRICE CHANGE
ABNORMAL RETURN
FUTURE PRICE CHANGE
PUBLIC INFORMATION
MARKET
ABNORMAL RETURN
RANDOM
ABNORMAL RETURN
WEAK FORM
SEMI-STRONG
PRICE
IMMEDIATELY
STRONG FORM
PRIVATE INFORMATION
MARKET
PRICE
IMMEDIATELY
ABNORMAL RETURN
FOREIGN STOCK
AMERICAN INVESTOR
P/E
TAX AND ACCOUNTING
LOW PRICE STOCK
STRONG DOLLAR
BUT
AMERICAN INVESTOR
DDM
DIVIDEND * DOLLAR EXCHANGE RATE
STRONG DOLLAR
WEAK DOLLAR
PORTFOLIO MANAGER IN FOREIGN MARKET
MANAGER
STRONG DOLLAR
WEAK DOLLAR
1
2
EXCHANGE RATE
GOOD MARKET
BAD MARKET
PUNISHMENT
REWARD
INTERNATIONAL DIVERSIFICATION
INVESTOR
GLOBALIZATION
FUNDAMENTAL FACTORS
EURO
INDEX
Bloody thursday
1987
1998
EMERGING MARKETS
HIGH GROWTH RATE
GOVERNMENT
INSIDERS
PRICE REACTION
INEFFICIENCY
ANALYSTS AND INVESTORS
LOCAL MONEY
The Idea behind VAR
What is my worst-case scenario
What is the most I can - with a 95% or 99% level of confidence - expect to lose in dollars over the next month?
What is the maximum percentage I can - with 95% or 99% confidence - expect to lose over the next year?

level of confidence
Historical Method
With 95% confidence, we expect that our worst daily loss will not exceed 4%.

If we invest $100, we are 95% confident that our worst daily loss will not exceed $4 ($100 x -4%).

NEAR 1500 DAYS
5% OF ALL DAILY RETURNS
95%
The Variance-Covariance Method
Z (P=95%) = -1.65
Z (P=99%) = -2.58
10000000
$
level of confidence
BETA METHOD
BETA * WORST RETURN * SUM
-1.65*SD*
POINT ON X AXIS
FOR EXAMPLE 100 DAYS PERIOD
FOR A LEVEL OF CONFIDENCE
FAMA & FRENCH
SMALL MINUS BIG
HIGH MINUS LOW
BOOK TO MARKET RATIO
CAPITALISATION
SIZE
VALUE
MARKET RISK
Thanks
FOREIGN BRANCH
CARHART
average return to a set of stocks with the best performance over the prior year
minus
the average return to stocks with the worst returns.
A
B
R = 0.14
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