Presentation on Investment Environment and its Recent Trends

By: Group A

Deependra GhimireKamal AryalShuvkar Regmi

Overview of the PresentationIntroduction of the investment

(Nepalese perspective as well)Risk return relationshipInvestment alternatives available

in the market.Conclusion and recent trend in

Nepal.

Introduction of Investment

Money

consumption saving

Savings are excess of INCOME over Investment

Investment is a commitment of fund to some

assets which takes place at present in an

expectation to receive some direct benefits from

those assets or to increase the value of those

assets which takes place in the future.

Fund can be from saved or borrowed.

Investment involves real assets and financial assets.

Elements of InvestmentReturnRiskTimeMoneySecurity

Importation opinions

“If you were smart in 1807 you moved to London, of you were smart in 1907 you moved to New York city, and if you were smart in 2007you move to Asia”. – Jim Rogers

Investment in NepalGovernment is encouraging to invest in

real assets to investors.The environment for investment is being

made favorable ; ( One window Policy, Investment Policy)

Prospect for investment in real assets is high because of giant neighbors.

Investment in NepalFinancial assets environment is in

growing phase.Secondary market is still young and yet to

be matured.Money market is controlled by central

bank.Stock exchange is dealing with some

hundreds companies.

The Risk-Return Relationship Generally, the higher the risk of an investment, the higher

the potential return. There is no guarantee that you will actually get a higher return by accepting more risk. Higher risk only increases the potential for higher returns – you could get a lower return or even lose money.

Diversification enables you to reduce the risk of your portfolio without sacrificing potential returns. Once your portfolio has been fully diversified, you have to take on additional risk to earn a higher potential return on your portfolio.

Some investments are riskier than others – there’s a greater chance you could lose some or all of your money. For example, Canada Savings Bonds (CSBs) have very low risk because they are issued by the government of Canada

Defining ReturnDefining Return

Income received on an investment plus any change in market price, usually expressed as a percent of the beginning market price of the investment.

Income received on an investment plus any change in market price, usually expressed as a percent of the beginning market price of the investment.

Dt + (Pt - Pt-1 )

Pt-1

R =

Holding Period Return

HPR = (1 + R1)(1 + R2)...(1+ RT) -1

(Geometric) Average Return

GAR = [(1 + R1)(1 + R2)...(1+ RT)]1/T -1

= [1 + HPR]1/T -1

(Arithmetic) Average Return

Returns

T

R

T

...R...RRRR

Tt tT

1321 )(

TttperiodinreturnRt ,...,3,2,1,

Return ExampleReturn Example

The stock price for Stock A was $10 per share 1 year ago. The stock is currently trading at $9.50 per share and shareholders just received a $1 dividend. What return was earned over the past year?

The stock price for Stock A was $10 per share 1 year ago. The stock is currently trading at $9.50 per share and shareholders just received a $1 dividend. What return was earned over the past year?

Return ExampleReturn Example

The stock price for Stock A was $10 per share 1 year ago. The stock is currently trading at $9.50 per share and shareholders just received a $1 dividend. What return was earned over the past year?

The stock price for Stock A was $10 per share 1 year ago. The stock is currently trading at $9.50 per share and shareholders just received a $1 dividend. What return was earned over the past year?

$1.00 + ($9.50 - $10.00 )$10.00R = = 5%

Defining RiskDefining Risk

What rate of return do you expect on your investment (savings) this year?

What rate will you actually earn?Does it matter if it is a bank CD or a

share of stock?

What rate of return do you expect on your investment (savings) this year?

What rate will you actually earn?Does it matter if it is a bank CD or a

share of stock?

The variability of returns from those that are expected.

The variability of returns from those that are expected.

What is risk?Definition: risk is the potential for

divergence between the actual outcome and what is expected.

In finance, risk is usually related to whether expected cash flows will materialize, whether security prices will fluctuate unexpectedly, or whether returns will be as expected.

Sources of RiskBusiness Risk

uncertainty associated with an investment’s earnings and ability to pay returns owed investors.

Affects◦Common stocks ◦Preferred stocks

Examples◦Decline in company profits or market

share◦Bad management decisions

Sources of Risk (cont’d)Currency Exchange Risk

variation in exchange rates.Affects

◦International stocks, ADRs◦International bonds

Examples◦U.S. dollar appreciates against

foreign currency, reducing value of foreign investment

Sources of Risk (cont’d)Financial Risk

uncertainty attributable to the mix of debt and equity used to finance a business;

more debt, greater this risk.Affects

◦Common stocks◦Corporate bonds

Examples◦Company unable to obtain credit to

fund operations◦Company defaults on bonds

Sources of RiskBusiness Risk

uncertainty associated with an investment’s earnings and ability to pay returns owed investors.

Affects◦Common stocks ◦Preferred stocks

Examples◦Decline in company profits or market

share◦Bad management decisions

Sources of Risk (cont’d)Currency Exchange Risk

variation in exchange rates.Affects

◦International stocks, ADRs◦International bonds

Examples◦U.S. dollar appreciates against

foreign currency, reducing value of foreign investment

Sources of Risk (cont’d)Financial Risk

uncertainty attributable to the mix of debt and equity used to finance a business;

more debt, greater this risk.Affects

◦Common stocks◦Corporate bonds

Examples◦Company unable to obtain credit to

fund operations◦Company defaults on bonds

Sources of Risk (cont’d)Purchasing Power Risk

changing price levels (inflation or deflation) that adversely affect investment returns.

Affects◦Bonds (fixed income)◦Certificates of deposit

Examples◦Barrel of oil $66.00 last year is

$89.00 this year

Sources of Risk (cont’d)Interest Rate Risk

changes in interest rates that adversely affect a security’s value.

Affects◦Bonds (fixed income)◦Preferred stocks

Examples◦Market values of existing bonds decrease

as market interest rates increase◦Income from an investment is reinvested

at a lower interest rate than the original rate

Sources of Risk (cont’d)Tax Risk

Congress may introduce unfavorable tax laws, driving down the after-tax returns and market values of certain investments.

Affects◦Municipal bonds◦Real estate

Examples◦Lower tax rates reduce the tax benefit of

municipal bond interest◦Limits on deductions from real estate

losses

Sources of Risk (cont’d)Liquidity Risk

not being able to liquidate an investment conveniently and at a reasonable price.

Affects◦Some small company stocks◦Real estate

Examples◦Selling a low volume stock reduces

the price of the stock, consider blockage discounts

Sources of Risk (cont’d)Market Risk

decline in investment returns because of market factors independent of the given investment.

Affects◦All types of investments

Examples◦Stock market decline on bad news◦Political upheaval◦Changes in economic conditions

Determining Expected Return (Discrete Dist.)Determining Expected Return (Discrete Dist.)

R = S ( Ri )( Pi )

R is the expected return for the asset,Ri is the return for the ith possibility,

Pi is the probability of that return occurring,

n is the total number of possibilities.

R = S ( Ri )( Pi )

R is the expected return for the asset,Ri is the return for the ith possibility,

Pi is the probability of that return occurring,

n is the total number of possibilities.

n

i=1

How to Determine the Expected Return and Standard Deviation

How to Determine the Expected Return and Standard Deviation

Stock BW Ri Pi (Ri)(Pi)

-.15 .10 -.015 -.03 .20 -.006 .09 .40 .036 .21 .20 .042 .33 .10 .033 Sum 1.00 .090

Stock BW Ri Pi (Ri)(Pi)

-.15 .10 -.015 -.03 .20 -.006 .09 .40 .036 .21 .20 .042 .33 .10 .033 Sum 1.00 .090

The expected return, R, for Stock BW is .09

or 9%

Determining Standard Deviation (Risk Measure)Determining Standard Deviation (Risk Measure)

s = S ( Ri - R )2( Pi )

Standard Deviation, s, is a statistical measure of the variability of a distribution around its mean.It is the square root of variance.Note, this is for a discrete distribution.

s = S ( Ri - R )2( Pi )

Standard Deviation, s, is a statistical measure of the variability of a distribution around its mean.It is the square root of variance.Note, this is for a discrete distribution.

n

i=1

How to Determine the Expected Return and Standard Deviation

How to Determine the Expected Return and Standard Deviation

Stock BW Ri Pi (Ri)(Pi) (Ri -

R )2(Pi)

-.15 .10 -.015 .00576 -.03 .20 -.006 .00288 .09 .40 .036 .00000 .21 .20 .042 .00288 .33 .10 .033 .00576 Sum 1.00 .090 .01728

Stock BW Ri Pi (Ri)(Pi) (Ri -

R )2(Pi)

-.15 .10 -.015 .00576 -.03 .20 -.006 .00288 .09 .40 .036 .00000 .21 .20 .042 .00288 .33 .10 .033 .00576 Sum 1.00 .090 .01728

Determining Standard Deviation (Risk Measure)Determining Standard Deviation (Risk Measure)

s = S ( Ri - R )2( Pi )

s = .01728

s = .1315 or 13.15%

s = S ( Ri - R )2( Pi )

s = .01728

s = .1315 or 13.15%

n

i=1

Coefficient of VariationThe ratio of the standard deviation of a distribution to the mean of that distribution.

It is a measure of RELATIVE risk.

CV = s / R

Total Risk = Systematic Risk + Unsystematic RiskTotal Risk = Systematic Risk + Unsystematic Risk

Systematic Risk is the variability of return on stocks or portfolios associated with changes in return on the market as a

whole.

Unsystematic Risk is the variability of return on stocks or portfolios not

explained by general market movements. It is avoidable through diversification.

Systematic Risk is the variability of return on stocks or portfolios associated with changes in return on the market as a

whole.

Unsystematic Risk is the variability of return on stocks or portfolios not

explained by general market movements. It is avoidable through diversification.

Total Risk = Systematic Risk + Unsystematic Risk

Total Risk = Systematic Risk + Unsystematic RiskTotal Risk = Systematic Risk + Unsystematic Risk

TotalRisk

Unsystematic risk

Systematic risk

STD

DEV

OF

PO

RTFO

LIO

RE

TU

RN

NUMBER OF SECURITIES IN THE PORTFOLIO

Factors such as changes in nation’s economy, tax reform by the Congress,or a change in the world situation.

Total Risk = Systematic Risk + Unsystematic Risk

Total Risk = Systematic Risk + Unsystematic Risk

TotalRisk

Unsystematic risk

Systematic risk

STD

DEV

OF

PO

RTFO

LIO

RE

TU

RN

NUMBER OF SECURITIES IN THE PORTFOLIO

Factors unique to a particular companyor industry. For example, the death of akey executive or loss of a governmentaldefense contract.

What is Beta?What is Beta?

An index of systematic risk.

It measures the sensitivity of a stock’s returns to changes in returns on the

market portfolio.

The beta for a portfolio is simply a weighted average of the individual

stock betas in the portfolio.

An index of systematic risk.

It measures the sensitivity of a stock’s returns to changes in returns on the

market portfolio.

The beta for a portfolio is simply a weighted average of the individual

stock betas in the portfolio.

Characteristic Lines and Different BetasCharacteristic Lines and Different Betas

EXCESS RETURNON STOCK

EXCESS RETURNON MARKET PORTFOLIO

Beta < 1(defensive)

Beta = 1

Beta > 1(aggressive)

Each characteristic line has a

different slope.

Security Market LineSecurity Market Line

Rj is the required rate of return for stock j,

Rf is the risk-free rate of return,

bj is the beta of stock j (measures systematic risk of stock j),

RM is the expected return for the market portfolio.

Rj is the required rate of return for stock j,

Rf is the risk-free rate of return,

bj is the beta of stock j (measures systematic risk of stock j),

RM is the expected return for the market portfolio.

Rj = Rf + bj(RM - Rf)

Security Market LineSecurity Market Line

Rj = Rf + bj(RM - Rf)

bM = 1.0

Systematic Risk (Beta)

Rf

RM

Req

uir

ed

Retu

rn

RiskPremium

Risk-freeReturn

Recent Trends of Investment In Nepal ‘Development Bond 2087’

“Development Bond 2087” worth Rs. 5 billion which was issued by Nepal Rastra Bank on Ashad 10 with a maturity period of 15 years have received over whelming response from the different BFI’s, thankx to the surplus liquidity of Rs 102 billion in the market.  In total NRB has received bid applications worth Rs 38.42 billion for the same. It was oversubscribed by almost 7.68 times than the actual requirement.

An interest rate of 2.65% has been fixed for the “Development Bond 2087” which is less than the interest rates of four development bonds worth Rs 25 billion, issued in a series.

Investment AlternativesA. Financial assets Sheet of paper or computer entries. Claims on real assets and income. More liquid than real assets.

Traded in organized stock or OTC.

1. Money Market Instrumentsi) T Bills Issued by government for short term borrowing. It is most liquid and free from default and maturity

risk. No fixed interest rate. It has maturity period of 28 days to 364 days. The bidding on T-bills must be at least of Rs. 50,000 or

the multiple of Rs.50,000. It is Sold at discount redeem at par. For example a Treasury bill of Rs. 100 face value

issued for Rs.91.50 gets redeemed at the end of it's tenure at Rs. 100.

ii) Certificates of Deposits CD is a certificate issued by a bank as

evidence that a certain amount of money has been deposited for a period of time.

It has fixed interest rate and time period. The certificate can be tradable. If the holder needs money before the

maturity s/he can sell it in the money market. The minimum denomination can be USD

100000. The maturities of CDs usually range from two weeks to one year.

iii) Banker acceptance BA, is a promised future payment guaranteed by bank. It facilitate domestic and foreign commercial trade

transactions. The banker's acceptance specifies the amount of

money, the date and the person. It is sold at discount basis to other.

iv) Commercial paper It is for maximum day of 270. Issue by large well known corporation without

collateral. It is sold at discount and repaid at par.

v) Repurchase Agreements Instrument that gives a promise the buy back the security

at specified price after fixed time. Sold at discount and purchase at par. In Nepal, Repos are conducted at the initiation from NRB.

When there is no liquidity in the economy NRB pumps in money through repos.

vi) Euro Dollars Short term fixed deposits denominated in dollars but held

in foreign banks or in foreign branches of U.S. banks. Par value is at least $100,000. Eurodollar deposits are non-negotiable which means that

they can not be traded in the market.

2.Capital Market Instruments

i) Treasury Notes and Bonds T notes have maturities of ten years or less T bonds have maturity of more than ten years Both issued by government. Coupon payment semiannually or annually No default and liquidity risk but have maturity risk.

ii) Corporate Bonds Issue by corporate body. Fixed interest rate and duration.

iii) Municipal BondsIssue by State and local governments for long

period of time.Fixed interest rate and time period.It can be general obligation and revenue bond.

iv) Common stockit represents ownership of the company.Residual claim in assets an income.Receive dividend and capital gain.For example IPO from Api Hydro.

v) Preferred StockIt is also ownership capitalDividend is distributed after payment of

interest but before distribution of common stock dividend.

Hybrid security which has combined features of both bonds and common stock.

Gets preference in income and assets over common stock holders.

It can be convertible.

3. Derivatives instrumentsi) Options Options are contracts that give their holder the right to buy or sell

an assets or share at predetermined price on certain future date. An option which gives the holder right to purchase the assets is

called call option whereas the option which gives the holder right to sell is called put option.

Holder may not have obligation to execute.

ii) Future Contract between two parties for future delivery of a financial

assets or commodity at an agreed price. Both parties have obligation to execute.

iii) WarrantA long-term option that gives the holders right

but not obligation to purchase specified number of share at specified price.

It is issued with bond or preferred stock.Common types are detachable and naked.

iv) ConvertibleWhich can be converted into stated number of

common stock/s within stipulated period of time.

4. Indirect Investmenti) Unit Investment Trusts It is traditional type of investment company

Owns a fixed set of securities for the life of the

company. UIT has no board of directors, operate on the basis of

Trust Indenture.

ii) Closed-end investment companies They have specific number of share and does not stand

ready to sell and purchase of its own share.

Market demand determine price of stock rather than NAV.

listed and traded like a stock on a stock exchange.

iii) Open-ends funds No predetermined amount of stock outstanding

and they can buyback or issue new share at any time.

An investor will generally purchase shares in the fund directly from the fund itself rather than from the existing shareholders.

which sell and redeem shares at the market value of net asset per share rather than demand.

Return is variable over time period.

B. Real assets

i) Real Estate Land, commercial property, farmland,

developed property, houses etc. are various forms of the real estate.

Market is individual dealer.

ii) Precious Metals and GemsSilver, platinum, and diamond Market is dealer.

iii) CollectiblesCollectibles such as fine art, prints, statue,

stamps, old coins may be good investment alternatives for investors.

These are traded through individual dealer.Dealer can charge fee while selling these

securities.

ConclusionInvestment means the sacrifice of current fund for

future return considering time and risk. Risk is the variability of possible returns around the

expected return of an investment.Generally, the higher the risk of an investment, the

higher the potential return. There is no guarantee that you will actually get a higher return by accepting more risk.

Investment alternatives are option for the investor where they can use their fund. There are different alternatives available in the market.

Cont... RECENT TREND IN NEPALInvestment on share market is on increasing trend.NEPSE has provided primary and secondary

Market mechanism for trading of securities.Computerized trading mechanism is flourishing.Unstable government, small market size, poor

economy, low literacy rate, recent earthquake…are some challenges.

Lack of proper infra structure.Lack of advertisement.

Thank you…