John Doe will be lecturing on corporate finance. The lecture will cover 10 topics including portfolio and capital market theory, stock and portfolio analysis, and corporate governance. In the first unit on portfolio and capital market theory, the lecturer will define key terms like capital markets and discuss concepts such as perfect capital markets, different forms of information efficiency, portfolio theory including diversification and the capital asset pricing model. Key formulas for portfolio return, risk, and the correlation coefficient will be explained. The goals are to understand different forms of information efficiency and how risk and return are related.
John Doe will be lecturing on corporate finance. The lecture will cover 10 topics including portfolio and capital market theory, stock and portfolio analysis, and corporate governance. In the first unit on portfolio and capital market theory, the lecturer will define key terms like capital markets and discuss concepts such as perfect capital markets, different forms of information efficiency, portfolio theory including diversification and the capital asset pricing model. Key formulas for portfolio return, risk, and the correlation coefficient will be explained. The goals are to understand different forms of information efficiency and how risk and return are related.
John Doe will be lecturing on corporate finance. The lecture will cover 10 topics including portfolio and capital market theory, stock and portfolio analysis, and corporate governance. In the first unit on portfolio and capital market theory, the lecturer will define key terms like capital markets and discuss concepts such as perfect capital markets, different forms of information efficiency, portfolio theory including diversification and the capital asset pricing model. Key formulas for portfolio return, risk, and the correlation coefficient will be explained. The goals are to understand different forms of information efficiency and how risk and return are related.
John Doe will be lecturing on corporate finance. The lecture will cover 10 topics including portfolio and capital market theory, stock and portfolio analysis, and corporate governance. In the first unit on portfolio and capital market theory, the lecturer will define key terms like capital markets and discuss concepts such as perfect capital markets, different forms of information efficiency, portfolio theory including diversification and the capital asset pricing model. Key formulas for portfolio return, risk, and the correlation coefficient will be explained. The goals are to understand different forms of information efficiency and how risk and return are related.
− Name − Employer − Position/responsibilities − Fun Fact − Previous knowledge? Expectations? TOPIC OUTLINE
Portfolio and Capital Market Theory 1
Stock and Portfolio Analysis 2
What is the Optimal Capital Structure? 3
Types of Financing 4
Capital Budgeting 5 TOPIC OUTLINE
Business Valuation 6
Corporate Control and M&A 7
Specific Forms of M&A, Private Equity, Due Diligence, and IPOs 8
Corporate Governance 9
Financial Planning 10 UNIT 1
PORTFOLIO AND CAPITAL MARKET THEORY
STUDY GOALS
On completion of this unit, you will be able to…
− understand which forms of informational efficiencies
exist and how these are related to capital markets. − understand how risk and return are interrelated. EXPLAIN SIMPLY
1. What are perfect capital markets?
2. How can portfolio theory help in optimizing risk and return? 3. What is the Capital Asset Pricing Model? CAPITAL MARKETS: DEFINITIONS
− Capital refers to the financial resources available to a company
in the form of equity or debt. − The capital market is a market in which investors provide borrowers with medium- to long-term financing. − On the money market money is lent to borrowers on a short- term basis for a period of up to one year. − The perfect capital market is a theoretical concept used in economic theory to enable financial problems to be analysed as clearly and coherently as possible. PERFECT CAPITAL MARKETS
Perfect capital markets:
Frictionless
Perfect competition
Market participants operate
with absolute rationality
Informational efficiency exists INFORMATION EFFICIENCY
Information efficiency is distinguished according to the quantity of
information processed by market participants:
Weak-form of Semi-strong form Strong form of
informational of informational informational efficiency efficiency efficiency PORTFOLIO THEORY
− Markowitz portfolio theory: diversification strategy is the
foundation for reducing risk when creating a portfolio − The overall volatility (or dispersion of return) of a financial asset or investment is a function of its share of diversifiable variance or risk (unsystematic risk), and its share of non-diversifiable variance (systematic risk or market risk) − Unsystematic risk in a portfolio can be reduced by adding an asset that is likely to fluctuate in its performance in ways that do not fully correlate with the remainder of the portfolio PORTFOLIO THEORY – EXAMPLE
Portfolio theory is best illustrated by the two-asset portfolio example:
− It assumes that two assets (A und B) have different rates of expected return and different standard deviations − If the proportion of asset A in the portfolio is a, the proportion of asset B in the portfolio is 1–a − To determine the level of dependency between two assets, the correlation coefficient is used, which is derived from the quotient of the covariance and the standard deviations of both investments PORTFOLIO THEORY – RISK/RETURN CORRELATION
risk (σ) Source of the graphic: IU International University, Course Book DLMINRE01. PORTFOLIO THEORY – FORMULAS
− Portfolio return: µp = a ∗ µi + 1 − a ∗ µj
− Portfolio risk: σP = a2 ∗ σ2i + 1 − a 2 ∗ σ2j + 2k ij ∗ a ∗ 1 − a ∗ σi ∗ σj
covij − Correlation coefficient: k ij = σi σj
µp /µi /µj = expected return of portfolio P/asset i resp. asset j
a = proportion of asset A in the portfolio P σp/σi/σj = standard deviation of portfolio P/asset i resp. asset j σ2i/σ2j = variance of asset i resp. asset j kij = correlation coefficient between asset i und asset j covij = covariance between asset i und asset j PORTFOLIO THEORY – CORRELATION & DIVERSIFICATION
Correlation of returns Diversification effect
k=0 A combination of A and B will achieve greater uncorrelated returns due to a lower standard deviation k = -1 Due to a combination of A and B the returns perfect negative correlation can achieve a positive expected return k=1 No diversification effects possible perfect positive correlation CAPITAL ASSET PRICING MODEL (CAPM)
CAPM is about the way decisions aggregate to create a market
equilibrium Central assumptions: Single-period transaction horizon
Homogenous expectations of the market participants regarding their returns
Existence of a risk-free investment and risk-free returns
Existence of a perfect capital market
CAPITAL ASSET PRICING MODEL (CAPM) – BETA AND EXPECTED RETURN
− The concept of a stock´s beta is − The return expected by investors (=
central to the model. It measures cost of equity) in accordance with the sensitivity of the return of an CAPM is determined as follows: asset to the return of the market portfolio − Calculation: covjm σj E R j = rf + β ∗(E(R m ) − rf ) β = 2 = k jm ∗ σm σm
covjm = covariance between asset j and market
portfolio E(Rj) = expected rate of return on the security j σ2m = variance of the market portfolio rf = risk-free rate of return kjm = correlation coefficient between asset j und E(Rm) = expected market returns market portfolio β = the β coefficient of the security σj/σm = standard deviation of asset j/market portfolio REVIEW STUDY GOALS
You are now able to…
− understand which forms of informational efficiencies
exist and how these are related to capital markets. − understand how risk and return are interrelated. UNIT 2
STOCK AND PORTFOLIO ANALYSIS
STUDY GOALS
On completion of this unit, you will be able to…
− understand how to measure the risk and return of
stocks. − know what key ratios in a stock analysis indicate. EXPLAIN SIMPLY
1. Which market risks should an investor take into account?
2. How are risk and return of a stock calculated? 3. What do individual measures of risk reveal? RISK MANAGEMENT – TYPES OF RISK
− The risk of a business activity is described as the failure to achieve a
planned result − There are many different types of risks a company has to deal with in their risk management − Market price risks are changes in the price of stocks, bonds, and currencies due to market movements and/or changes in the yield curve and volatilities market price risks
− A portfolio’s Sharpe ratio is calculated as the quotient of its excess return and its total risk − It provides a measure of the excess return generated per added unit of absolute risk − The Sharpe ratio is also referred to as reward-to-variability ratio − The higher the Sharpe ratio, the higher the portfolio’s performance − The advantages of the Sharpe ratio are its intuitive interpretation of performance, and the simplicity of calculation. Moreover, the comparability with other portfolios and benchmarks is possible − Disadvantages are the accurate selection of the benchmark, the lack of comparability with overall risk as well as the missing insight into the composition of a portfolio risk − Calculation: SR P = rP − rf σP
SRP = Sharpe ratio of the portfolio
rP = portfolio return rf = risk-free rate of return σP = standard deviation RISK MEASUREMENT – TREYNOR RATIO
− A portfolio's Treynor ratio is calculated as the quotient of its excess return and its systematic or undiversifiable risk − It is a measure of the excess return generated per unit of added undiversifiable risk − The Treynor ratio is also referred to as reward-to-volatility ratio − Performance increases along with the increase in value of the Treynor ratio − The advantage of the Treynor ratio is the possibility of comparing it with other portfolios − Used in connection with the Sharpe ratio, this results in insights into the structure of the portfolio − A drawback of this performance measure is that it disregards unsystematic risks − Calculation: TR P = rP − rf βP
TRP = Treynor ratio of the portfolio
rP = portfolio return rf = risk-free rate of return βP = Beta of the portfolio PERFORMANCE MEASUREMENT – STOCK ANALYSIS
− Main goal of stock analysis: Facilitate decision-making for selection, timing, and asset allocation − Main task of stock analysis: Compile and analyse all information pertaining to a company and its environment to develop short- and long-term forecasts of the company’s stock price trends − Fundamental analysis assumes that each share has an intrinsic value (fair value). To calculate this intrinsic value macro- and microeconomic data is analysed − Typical key ratios of the fundamental analysis are the price/earnings ratio and the price/cashflow ratio: price PE = earnings per share
price PCF = cashflow per share REVIEW STUDY GOALS
You are now able to…
− understand how to measure the risk and return of stocks.
− know what key ratios in a stock analysis indicate. SESSION 1
TRANSFER TASK TRANSFER TASK – PORTFOLIO RETURN AND RISK
Calculate the portfolio return and the portfolio risk based on the following information. The portfolio consists of 60% ABC30 certificates and 40% DAX certificates
expected return standard deviation correlation
ABC30 10.1% 33.4% 0.25 DAX 8.5% 19.8% 0.25 TRANSFER TASK – CAPITAL ASSET PRICING MODEL
Calculate the missing values in the table. The central assumptions
underlying the CAPM all apply
Asset E(R) 𝛔 ρ with the β
market portfolio A 7.8% 0.48 B 31.0% 0.63 1.2 market portfolio 12.9% 12.5% 1.00 risk-free asset 7.4% 0.0% 0.00 TRANSFER TASK – RISK MEASUREMENT
Your stock portfolio includes two funds. The following data applies:
expected return risk-free interest standard deviation beta
rate Fund A 2.9% 15.2% 0.75 0.9% Fund B 7.3% 46.3% 1.39
Based on this information, calculate the Sharpe ratio and the
Treynor ratio for both funds and explain your results. TRANSFER TASK – STOCK ANALYSIS
Calculate the price/earnings ratio and the price/cashflow ratio of the
ABC-AG
price expected earnings expected cashflow number of shares
ABC-AG 37.98€ 79,500€ 92,875€ 275,000 TRANSFER TASK PRESENTATION OF THE RESULTS
Please present your
results. The results will be discussed in plenary. LEARNING CONTROL QUESTIONS
1. Which of the following is not a characteristic of
perfect capital markets? a) Frictionless b) Perfect competition c) Market participants operate with absolute rationality d) Informational efficiency does not exist LEARNING CONTROL QUESTIONS
2. Which of the following are central assumptions of the
capital asset pricing model? a) Single-period transaction horizon b) Risk averse, utility maximising market participants c) Investors are price makers d) Heterogenous expectations of the market participants regarding their returns e) Existence of a risk-free investment and risk-free returns f) Existence of an imperfect capital market LEARNING CONTROL QUESTIONS
3. Which statement(s) regarding the Treynor ratio are
