Corporate Finance

Corporate Finance

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  “Investment Analysis &Portfolio Management” Presenter Name: Sami Ullah 17131554-002 M Abdul-Hanan 17821554-008 Muhammad Umar 18221554-007
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  Risk 2 • Risk isdefined in financial terms as the chance that an outcome or investment's actual gains will differ from an expected outcome or return. • Risk includes the possibility of losing some or all of an original investment. • Risk takes on many forms but is broadly categorized as the chance an outcome or investment's actual gain will differ from the expected outcome or return. • Risk includes the possibility of losing some or all of an investment. • There are several types of risk and several ways to quantify risk for analytical assessments. • Risk can be reduced using diversification and hedging strategies.
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  Sources Of Risk 3 1.Interest Rate Risk 2. Market Risk 3. Inflation Risk 4. Business Risk 5. Financial Risk 6. Liquidity Risk 7. Currency Risk (Exchange Rate Risk) 8. Country Risk
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  Measuring Risk 4 • Thelevel of volatility, or the variation between actual and expected returns, is used to calculate risk. The standard deviation is the measurement of this difference. Variance A statistical term measuring dispersion—the standard deviation squared. Standard Deviation measure of the dispersion in outcomes around the expected value
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  Return Return: “Return is themotivating force in the investment process. It is the reward for undertaking the investment”. Two Components Of Asset Return: • Yield The income component of a security’s return • Capital Gain (Loss) The change in price on security over some period
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  Return 6 TOTAL RETURN • Percentagemeasure relating all cash flows on a security for a given time period to its purchase price RETURN RELATIVE • The total return for an investment for a given period stated on the basis of 1.0
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  R E TU R N Cumulative Wealth Index  Cumulative wealth over time, given an initial wealth and a series of returns on some asset Currency Risk  The risk of an adverse impact on the return from a foreign investment as a result of movements in currencies.
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  A Framework forEvaluating and Assessing Portfolio Performance  We will consider four broad issues in evaluating portfolio performance: 1. Performance Measurement Issues—The critical concern for most investors is to correctly determine how a portfolio performed over some period of time. Thus, the portfolio’s results have to be correctly measured and analyzed. 2. Well Known Measures of Performance—Several risk-adjusted measures of portfolio performance have been available for many years. One or more of these are often referred to in discussions of portfolio performance, and therefore investors need to be aware of them. 3. Performance Attribution and Style Analysis—Going beyond measuring a portfolio’s performance, the concept of performance attribution seeks to determine why a portfolio had the rate of return it did over some specified period of time. This relates to style analysis, which describes a portfolio manager’s investing style. 4. Portfolio Presentation Standards—How should the actual results of a portfolio be presented to those directly affected by that portfolio—in other words, from investment manager to client? Fifteen years ago there were few standards or guidelines. Now there are a clearly stated set of standards to be followed when presenting portfolio results.
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  • A mutualfund is a company that pools money from many investors and invests the money in securities such as stocks, bonds, and short-term debt. The combined holdings of the mutual fund are known as its portfolio. Investors buy shares in mutual funds. • The performance of Mutual funds can be measured/ evaluated through the following ways. I. Alpha II. Beta III. R-Squared IV. Standard Deviation V. Sharp Ratio VI. Trynor Ratio 9 Mutual Fund & Ways To Measure Performance
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  Alpha α • Alpharefers to excess returns earned on an investment above the benchmark return. • Active portfolio managers seek to generate alpha in diversified portfolios, with diversification intended to eliminate unsystematic risk. • Because alpha represents the performance of a portfolio relative to a benchmark, it is often considered to represent the value that a portfolio manager adds to or subtracts from a fund's return. • An alpha of 1.0 means the fund has outperformed its benchmark index by 1%. Correspondingly, an alpha of -1.0 would indicate an underperformance of 1%. For investors, the higher the alpha the better. • Calculation of Alfa. Alfa = Rp – [ Rf + (Rm –Rf) B* ] Portfolio Return 16 Market Return 14 Risk Free Return 6.25 Beta 0.8 1 1.3 Alfa 3.55 2 -0.325
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  Beta β 1 1 • Beta,primarily used in the capital asset pricing model (CAPM), is a measure of the volatility–or systematic risk–of a security or portfolio compared to the market as a whole. • Beta data about an individual stock can only provide an investor with an approximation of how much risk the stock will add to a (presumably) diversified portfolio. • A beta of 1.0 indicates that the investment's price will move in lock-step with the market. A beta of less than 1.0 indicates that the investment will be less volatile than the market. Correspondingly, a beta of more than 1.0 indicates that the investment's price will be more volatile than the market. For example, if a fund portfolio's beta is 1.2, it is theoretically 20% more volatile than the market.
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  Standard Deviation σ 1 2 •Standard deviation measures the dispersion of data from its mean. In finance, standard deviation is applied to the annual rate of return of an investment to measure its volatility (risk). A volatile stock would have a high standard deviation. With mutual funds, the standard deviation tells us how much the return on a fund is deviating from the expected returns based on its historical performance. • It is used to check the deviation of all returns from expected returns based on historical data, therefore standard deviation is a popular way to measure the volatility of a fund. • The higher the deviation is the higher is the funds volatility and risk and vice versa.
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  Sharp Ratio 1 3 • Developedby Nobel laureate economist William Sharpe. • The Sharpe ratio measures risk-adjusted performance. • It shows us how much performance additional return we are earning for every unit of risk we undertake by buying a unit of the mutual fund. • Its is the ratio of the risk –adjusted return to the volatility of the fund which is shown by Standard deviation • It is calculated by subtracting the risk-free rate of return from the rate of return for an investment and dividing the result by the investment's standard deviation of its return. • Formula for Calculating Sharp Ratio  S.R = Excess Return / S.D  Excess Return = Rp - Rf • Sharp ratio greater than >1.0 is Considered acceptable “Good” by investors. • Sharp ratio greater than >2.0 is rated as “Very Good” • Sharp ratio is 3.0 = or Higher is Considered as “ Excellent” • Ration under < 1.0 is “Sub optimal” • The higher  the Sharp Ratio, the better performing an investment is, and Vice Versa
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  R-Squared R2 1 4 • R-Squaredis a measure to find a fund’s Correlation to its benchmark performance. • This is done on the scale of 100 which means if the R2 = 100 then it shows that the performance the mutual fund is perfectly correlated with the performance of benchmark. • According to Morningstar, a mutual fund with an R-squared value between 85 and 100 has a performance record that is closely correlated to the index. • A fund rated 70 or less typically does not perform like the index. R2 = 100 Benchmark Fund
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  Sortino Ratio  TheSortino ratio is a variation of the Sharpe ratio that differentiates harmful volatility from total overall volatility by using the asset's standard deviation of negative portfolio returns—downside deviation—instead of the total standard deviation of portfolio returns.  The Sortino ratio takes an asset or portfolio's return and subtracts the risk-free rate, and then divides that amount by the asset's downside deviation.  The ratio was named after Frank A. Sortino. 1 5 Formula and Calculation of Sortino Ratio Sortino Ratio = Rp - Rf r where: Rp​=Actual or expected portfolio return Rf=Risk-free rate σd​=Standard deviation of the downside​
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  Table 1. PerformanceMeasure of Mutual Funds in Pakistan for the period 2018 to 2021 1 6 Name of the fund Annual Return Ri Rf Ri- Rf 2018 2019 2020 2021 Abbott Lab (Pakistan) Ltd. -0.287 -0.019 -0.049 -0.051 -0.102 0.118 -0.220 Alfalah Consumer Index ETF -0.263 -0.133 -0.103 -0.162 -0.165 0.118 -0.283 Al-Ghazi Tractors Ltd 0.026 -0.021 0.109 -0.083 0.008 0.118 -0.110 Air Link Communication. -0.158 0.002 -0.202 -0.131 -0.122 0.118 -0.240 Atlas Battery Ltd. -0.217 -0.056 -0.085 -0.179 -0.134 0.118 -0.252 Altern Energy Ltd. -0.06 -0.078 -0.212 -0.021 -0.093 0.118 -0.211 Aisha Steel Ltd. 0.017 -0.041 0.254 -0.434 -0.051 0.118 -0.169 Aisha Steel Ltd. Balance 0.102 -0.004 -0.101 -0.022 -0.006 0.118 -0.124 Atlas Honda Ltd. 0.174 -0.018 -0.234 0.050 -0.007 0.118 -0.125
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  Performance Measure ofMutual Funds in Serbia for the period 2018 to 2021 1 7 Calculate the performance of Funds in Pakistan • Formula for Calculating Sharp Ratio  S.R = Excess Return / S.D  Excess Return = Ri - Rf 1. S.R = -0.220/ 0.125 = -1.763 2. S.R = -0.283/ 0.069 = -4.077* 3. S.R = -0.110/ 0.081 = -1.362 4. S.R = -0.240/ 0.088 = -2.735 5. S.R = -0.252/ 0.076 = -3.312 6. S.R = -0.211/ 0.083 = -2.540 7. S.R = -0.169/ 0.285 = -0.592* 8. S.R = -0.124/ 0.084 = -1.487 9. S.R = -0.125/ 0.171 = -0.730 Name of the fund Annual Return Ri Ri-Rf St Dev Sharpe ratio 2018 2019 2020 2021 Abbott Lab (Pakistan) Ltd. -0.287 -0.019 -0.049 -0.051 -0.102 -0.220 0.125 -1.763 Alfalah Consumer Index ETF -0.263 -0.133 -0.103 -0.162 -0.165 -0.283 0.069 -4.077 Al-Ghazi Tractors Ltd 0.026 -0.021 0.109 -0.083 0.008 -0.110 0.081 -1.362 Air Link Communicat ion. -0.158 0.002 -0.202 -0.131 -0.122 -0.240 0.088 -2.735 Atlas Battery Ltd. -0.217 -0.056 -0.085 -0.179 -0.134 -0.252 0.076 -3.312 Altern Energy Ltd. -0.06 -0.078 -0.212 -0.021 -0.093 -0.211 0.083 -2.540 Aisha Steel Ltd. 0.017 -0.041 0.254 -0.434 -0.051 -0.169 0.285 -0.592 Aisha Steel Ltd. Balance 0.102 -0.004 -0.101 -0.022 -0.006 -0.124 0.084 -1.487 Atlas Honda Ltd. 0.174 -0.018 -0.234 0.050 -0.007 -0.125 0.171 -0.730 Note: The average annual rate of return on treasury bills of the NBS for the period 2018-2021 was 11.8% (Rf = 0.118). Source: Authors’ calculation
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  Table 2. PerformanceOf Mutual Funds In Pakistan For The Period 2018-2021 Name of funds 2018 2019 2020 2021 Ri Rf RM Ri- Rf RM-RF b SD SR TR ALPHA Abbott Lab (Pakistan) Ltd. -0.287 -0.019 -0.049 -0.051 -0.102 0.118 -0.063 -0.22 -0.18 -0.50 0.125 -1.76 0.444 0.310 Alfalah Consumer Index ETF -0.263 -0.133 -0.103 -0.162 -0.165 0.118 0.072 -0.28 -0.05 -0.37 0.069 -4.10 0.775 0.300 Al-Ghazi Tractors Ltd 0.026 -0.021 0.109 -0.083 0.008 0.118 0.041 -0.11 -0.08 -0.28 0.081 -1.36 0.394 0.131 Air Link Communication. -0.158 0.002 -0.202 -0.131 -0.122 0.118 -0.052 -0.24 -0.17 0.11 0.088 -2.73 -2.162 0.221 Atlas Battery Ltd. -0.217 -0.056 -0.085 -0.179 -0.134 0.118 0.066 -0.25 -0.05 -0.34 0.076 -3.32 0.748 0.270 Altern Energy Ltd. -0.060 -0.078 -0.212 -0.021 -0.093 0.118 0.083 -0.21 -0.03 0.42 0.083 -2.54 -0.502 0.196 Aisha Steel Ltd. 0.017 -0.041 0.254 -0.434 -0.051 0.118 -0.032 -0.17 -0.15 -0.90 0.285 -0.59 0.188 0.304 Aisha Steel Ltd. Balance 0.102 -0.004 -0.101 -0.022 -0.006 0.118 0.063 -0.12 -0.05 0.46 0.084 -1.48 -0.271 0.099 Atlas Honda Ltd. 0.174 -0.018 -0.234 0.050 -0.007 0.118 0.035 -0.13 -0.08 1.00 0.171 -0.73 -0.125 0.042
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  Thank you 1 9