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Hello. This is Dove Byrne
with Humboldt State University. This video is for
BA 360 Principles of Finance
and is a help video for the
final examination. I ask students to
post topics they'd like me to discuss during the help video...
I got a few sent in: the first question was what type of conditions
should be considered for the types of investments and in which chapter should we
focus on to determine the recommendations for each investment?
Is it just going to be a simple invest in or not
type of a recommendation?
The conditions you should consider are
risk versus return. What type of risk
is being taken in a certain investment and is it
providing enough return commensurate to that risk.
So that's what we're really gonna be looking is you're going to
create a series of
spreadsheets that analyze an investment and then you're going to take
into account risk
when deciding whether or not
a certain investment should be pursued.
Now risk is really in the eye of the beholder
to a certain extent, in that
some people are risk-averse - they do not want to take on a lot a risk
and therefore are willing to trade off risk for return.
Lower risk equals lower return.
Other investors are willing to take on
a lot of risk because they want a very high return. So that's we're considering
is risk versus return.
So in this final, you're going to create the spreadsheets
to do the analysis and then you're gonna do a write-up.
And that write-up has to match
your results and when choosing an investment
you're going to have to risk into account.
You can say well, if the client
does not want to take on a lot of risk
then I would recommend investment number one. However, if the client
is the willing to take on risk
then investment two would be considered.
So I don't want to say there's a right and a wrong answer...
Well, there certainly is, but as long as your analysis is correct, and as long as you
say, for example,
I am recommending that the client keep their money in a savings account
because is the least risky
of the options... so that analysis
matches
they client's ability or
willingness to take on risk. So as long as your analysis
matches the principles and the concepts we've learned
throughout the book in terms of risk and
and will consider other things like the efficient frontier... we certainly
wouldn't want to
recommend an investment portfolio that did not fall
on the efficient frontier... so
I'm really be making a simple invest an or not
recommendation I yes in now
I'm you certainly gonna analyze each individual investment to see if it is a
I'm interesting investment if it's an investment that could be considered
now if you find after your house is that all for investments could be considered
you're gonna need to pick one and you can make some assumptions you can say
I'm going to assume that the client does not want to take on any risk and
therefore I'm going to recommend
I'm this recommendation now if you recommend
I'm the client put all the money
to leave all the money in a savings account I'm that's okay
I'm by urinalysis for all the other options
is going to have to be correct and I also want you to
I'm suggest the conditions under which
you might consider another investment and what conditions might you
recommend to the investment to buy a business or what I'm condition should
exist for you to recommend
invested in the options market so this guy I guess there's lotsa right answers
is is that your
analysis has to be right on and
I don't want you to ignore I'm the other options I certainly want you to discuss
conditions in which
each before an investment options
how would be agreeable if you find that they are all quote-unquote
interesting investments and interest in investment being an investment
that a reasonable investor would consider and uninteresting investment
would be an investment that falls
on the official printer that does not fall on the efficient frontier
the next to on requests were for
Obama video talking about investing in this us talking to our bond market
was with those before so I'm gonna spend most of his time
I'm you looking at our portfolios
the capital market line the security market line and
minimum periods purple
so here's on your final study guide on the first auction was keepin
on the money in a savings bank could be pretty someone else is there
on in again I'm
you're going to want to present this seizing houses
if the client I'm has no tolerance for risk
I might recommend keeping money in the city's be
short quick analysis I'm but that does not mean you can ignore the other
options
if you find that by name a business is an interesting investment
and then you have to say well if the client it was willing to take on
I'm some significant risk then they could get a return
love axe by combine
and business and the same progress in the stock market what a different
options
on in the final you're gonna be given
um three different combinations that you can create
a portfolio other or that you can and just invest in the evening
those three of you basically give us that one two or three
love the different stock in or bond auctions will be given
the S&P 500 now beer market rate
I'm so if you want to find the expected return on the market
you make to go back get five years among we
returns average them annualized those returns then take the average return on
this will be 500 over the last five years
that would be expected return on the market we could use that for both the
capital market line
in the security market line you'll be also be given
a five-year treasury bond as your
risk-free investment options will be a risk-free rate
I'm you don't have to look up other treasury bombing you know who I give you
the v yield to maturity over the next five years and you can use that as your
risk free rate
I'm for the security market line for the capital market I'm
calculations and then I'll give your company a prior are a publicly held
company
that you can also invest and so what can you do with these three
different investment opportunities well you can create a portfolio
of the S&P 500 and the publicly held company they give you that's mostly what
we did
arm in our project is a Mercer we flew to the portfolio project
and you could certainly calculate the minimum variance portfolio because that
what that will do will
tell you all the interests team I'm
investment opportunities those are these efficient frontier points
so are based on this company looks like
investing in the S&P 500 alt way from 0 percent
all the way to 66 point 68 percent
and therefore I'm investing in
a the combination on
it was your personal SP 500 of course a good 100 percent
company was sixty 6.68 percent and the S&P 500
be you can invest in 30 3.32 percent
is a publicly held company so all of these investments are interested in you
can pick one you can sit well
if other clients I'm concert Lee
choose a I'm portfolio and the
is I'm some person S&P 500 some
percent the publicly held company I'm but
and the percent invested $500 has to be between 0
and sixty-seven percent I'm any investment beyond
sixty-seven percent the S&P 500 will
not give you a better return for the risks they are taking on
that those investments just do not exist on efficient frontier
to lose the interest investments so we will need to take all these investments
if we're gonna recommend a portfolio of the S&P 500
and the company are you can also say well
I wouldn't recommend that you do invest in just the company
you can you expect to 2.67 percent return
I'm or you can invest
just in the
I'm S&P 500 so does that various
I expect a 1.71 percent return if you just miss the company
he just invest in the S&P 500 you can expect 6 percent return
if you invest in some combination I your returns will range from
7.9 percent over eleven-point someone
are you can also invest invest in in
optimum portfolio remember not to look for folio
is the capital market wine that's reinvest in the S&P 500 some percent the
S&P 500
and some percent in a risk-free security
so that would be a another investment you can look at that return
you could look at just investing in
the risk-free bonds and see what kind of return you could expect
Matt I could so you can invested one
just the risk-free bonds just S&P 500
just the company or you can
group the S&P 500 with the risk-free rate
with the risk-free loans or you can group the S&P 500
with other company if you're a.m.
feeling so inclines you can certainly also invest in the S&P 500
the company and p I risk-free
our bonds and you could work in your believe that since
chapter you love Jersey
to work no you could certainly work
the the Sharpe ratio if you want to get to some
advanced portfolio statistics on page 59
I'm but certainly wouldn't expect it or require
so you can use the portfolio analysis that we learned you can use the security
market line
you can use the capital market line you're going to be just calculating
returns
in calculating risk in the UK to present all the options
and you're going to choose an option you choose the conditions under which you
it's like that option
for example you say I'm assume that the client I'm
is that risk does not bother the clients were gonna go for the highest return
and therefore taken a high-stress is in this case for a performer lose a few
on we're expecting for investing only in
the company they were expecting return 11 points on 1 percent
with a standard deviation 16.34
purser for the higher standard deviation
out the higher the risk on the higher the average
higher the return you can expect
here's your portfolio with your the capital market line
in the security market line again your risk free rate
that's the rate a vote your 5 year Treasury bond that will be given to you
the expected return on the market would be the average
annual I return up the S&P 500 over the last five years
this is the average up the S&P 500
that you see ok actually you look at five years returns accounts do it five
annual returns from 2008 2009 2010 2011 to
12 need to take the average those five years
returns to get your expected return on the market
something at the same numbers others percent invested
in the market again it could be from 0 to 100 percent
I'm just depending on how much risk
tolerants individual has you could create a range
do little data table and create a range the show the different
I'm how the expected return the company changes
based on I'm how much you invest
on the market so this is a company expected features
say part
from
slipped
extinct creatures so the capital much animators and Mark Mobius
some person interview invest because the S&P 500
market summer view or investment
goes into a five-year treasury or in this case the risk-free
the security market line to measure the expected return that you would get
for just investing in the company again we take the risk free rate
as the five-year treasury bond rate we take the expected return on the market
as the average of the last 5 years our Returns that the S&P 500 produced
I you will get your company's baby now I am
you can you know calculate this piece on
a regression to have it done but you can do your aggression you can
have the equation shown in you can look at those
book that beat up from the equation or you can calculate the slope
are I love your data for its love your regression line
and to get your baby or regular contributor on Yahoo
took your will you be done ya know the company statistics you grab
beta you put in here missiles you expect a richer
you would get if you I'm just invested
in the company so the capital market lines for
optimum investment combination I love
risk-free bonds and market
the sp500 security market line just
measures the expected return for the company
using the company's beta risk-free rate in the expected return
market again you'll be given the risk-free rate
you have to calculate the expected return arm
on the market the you can present all of these different
investment opportunities other
the investment opportunities we the range
I love in portfolio investments that exists
along the efficient frontier so we might say
here this would be from
7.9 to 11.71 percent 7.9 percent har
so nine-percent all have to
points
some what's 1 percent
we could just look at just a mess in the capital market I'm
and then we could look at those ranges I'll
those Rangers look like little from 3 percent of course all work
hundred-person poverty percent lose money
two different rates so here we would see 3 percent words
to 8 percent of its
and we can also make a well-known here
million max demand
look at the first ***
for five years of
a.m. the security market line
that would give us let's assume it was one tree
twelve-point 5 percent
of Windsor 5 percent its I'm we can look at this the five-year treasury bond
five-year treasury
five-year treasury bond this case that your risk re re 3 percent
3 percent for five-year treasury and we could just invest in S&P 500
you invested just in the S&P 500 you expected
average return I'm
and the ski season the real number so be careful but the average return six
percent
you just invested in the S&P 500 I'm
and then you could invest in company
the company's I return here the company
average is a lump sum one percent
you know I'm and then you could look at the fish in fridge
here we were to be a fish you're ready it's a combination
portfolio the capital market crime on
is the optimum investment
not remain to be depend on how much you must miss P five-hundred
security market line is just the expected return just the company
and on these two numbers arm basically arguing in the same number are
calculating the same thing to speculate in it two different ways
so I'm those are the Rangers a those are the investments needed to our
talk about which one I'm you could go after
dependent on how much risk
over risk tolerance the
in testers have so can just create your
on Excel spreadsheets prickly um
use good information in good numbers don't try to do too much
and give me the expected returns I'm talk about
%uh the risk if you want to include this minimum variance
I'm information here are the members per folio we could just
sets are percent invested
in the market to our
million members portfolio me good
but should just be its own will miss it minimum
periods of a little with be a portfolio that creates the lease them on a risk
that powerful will be 6 creepers
so we have are expected returns
our average returns and then we can start talking about the different risk
Associated with these as different
investments in all I'll leave that up to you in the readings
could do that so really just try to be efficient
on don't give me more information than I mean
on your rates can be to the points
on and greenhouses I'm should cover
different models over starts I'm for example if
the kind is not very is not risk averse they might
I'm so just a certain range I'm investments
if the client is willing to take on risk
it might suggest a different range invests
so if you make an assumption might I'm gonna assume the client is very
risk-averse the
state to com in your analysis
I hope this video is hope for I'm just remind everything you learned you've got
the book this is an open book final
I'm take your time don't on
don't give me joke what I mean by that is not just give me information don't
just read 'em
pack as much information as you can you just give me the information
that you need to perform I'm your
analysis in your write-up I'm
you know trying to ramble on don't learn a lot of filler I just get to the point
state your assumptions state the conditions under which certain
investments
arm will be good or would not be good and then just not without
a a recommendation I'm
you could talk about the different types of recommendations and different 07
assumptions
in Europe Bohemia just come up with some way
to invest that money and then put some thought into it and tell me why
and I'm as long as you make correct assumption so long as you create your
spreadsheet critically
you'll do fine on the slime I really enjoyed
teaching this class this semester hope you enjoyed it too
who can use on all these tools and everything you learned
I'm your life in your career and
school if you'd like to come me in person
I'll be on campus in the fall I was confirming office
I'd be more than happy to talk to you about anything
I have a great final enjoy the rest of your summer