Management Notes

Reference Notes for Management

Reasons for Issuing Warrants – 5 Major Reasons for Issuing Warrants | Warrants and Convertibles

5 Major Reasons for Issuing Warrants

Warrant is long term right in which warrant holder can purchase certain number of common stock at pre-determined price within specific duration. It is right option to buy the common stock not the obligation. It is also called sweeter because it makes debt and preferred stock more attractive and marketable. Warrant is attached with bond and preferred stock generally to encourage investors to invest in it.

Debt and preferred stocks are less attractive investment as compare to common stocks. When marketability of preferred stock and bond are low at that time warrant can be attached to encourage investors to invest on it. Price of securities attached warrant is higher than the straight bonds.

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Money Market Instruments – What is Money Market | Investment Management

Money Market Instruments

Money Market Instruments | What is Money Market | Assets Classification and Financial Instruments | Investment Management What is Money Market The market for trading short-term securities is known as the Money market. Money market securities are issued by high quality (that is, low default risk) economic units such as governments, financial institutions, and other … Read more

Security Market Line – Capital Assets Pricing Model | Investment Management

Security Market Line

Security Market Line 

Security Market Line

The security market line is the graphical representation of the capital assets pricing model.

The model SML is a graph or line that shows the relationship between the risk-adjusted required rate of return of risky assets and systematic risk measured by beta coefficient.

Security Market Line(SML) is the graphical representation of CAPM which shows the relationship between the required return on individual security as a function of systematic, non-diversifiable risk.

Security Market Line(SML) measures the risk through beta, which helps to find the security’s risk contribution to the portfolio. 

Security Market Line has asset-pricing implications for both portfolios and individual securities.

The securities lying above SML are said to be underpriced as it indicates that the return from the security is greater than what is required to compensate for the systematic risk associated with the security.

Similarly, all the securities lying below SML are considered to be overpriced as it fail to give sufficient returns to compensate against the systematic risk of the security.

Based on the asset-pricing implication shown by SML, investors prefer to buy all underpriced securities and sell overpriced securities.

The logic of the SML or CAPM equation is that the required return on any investment is the risk-free return plus a risk adjustment factor.

The risk adjustment factor is simply the risk premium required for market return, multiplied by the riskiness of the individual security. 

The slope of the Security Market Line reflects the degree of risk aversion on the part of the investors.

If the degree of risk aversion is higher for average investors, the slope of the security market line is relatively steeper.

As a result, the risk premium on any security will be larger and consequently, the required return will also be higher.

Illustration,

Suppose the risk-free rate of return is 6%, the expected rate of return on the market is 15 percent, the beta of asset A is 0.5 and the beta of asset B is 1.5. Calculate the required rate of return for each asset.

Solution:

  • Rm = 15 %
  • Rf = 6%
  • βA= 0.5
  • βB= 1.5

RA = 6+ (15-6) × 0.5 = 10.5

RB = 6 + (15-6) × 1.5 = 19.5

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Objectives of Federal Reserve System – Quantitative Easing | Investment Analysis

Federal Reserve System

Objectives of Federal Reserve System | Quantitative Easing | Investment Analysis   U.S Federal Reserve System (Fed) Fed is considered to be the world’s most powerful central bank which provides the nation with a safe, flexible, and stable monetary and financial system. Fed was established after the crisis of 1907 after the repeated financial panics … Read more

Callable Bonds – Difference between Callable and Non Callable Bonds | Investment Analysis

Callable Bonds

Callable Bonds | Difference between Callable and Non Callable Bonds | Investment Analysis   When the business corporation or governments are looking forward to raising capital or say borrow money on a long-term basis, they issue long-term negotiable promissory notes called bonds (Kevin Voigt, 2020). Some of the basic terms that are associated with the … Read more

Investment Theory and Systematic Risk – Risk Reward Ratio | Investment Analysis

Investment Theory and Systematic Risk

Investment Theory and Systematic Risk | Risk Reward Ratio | Investment Analysis| Week 3 DQ1 | Discussion Question | | Westcliff University  Question : Why investment theory relates reward for the risk only with systematic portion of total risk? Explain. Answer:  Investment theory relates rewards for the systematic risk only because we know that the … Read more

Monetary Policy Tools – Federal Reserve System | Investment Analysis

Monetary Policy Tools

Monetary Policy Tools | Expansionary Monetary Policy | Contractionary Monetary Policy | Federal Reserve System | Investment Analysis | Management Notes Federal Reserve System which is also called “The Fed” is the central bank of the United States (US) and is considered to the world’s most powerful financial institution. Fed was established after the US … Read more

Portfolio Management – Risky & Risk Free Assets | Investment Management

Portfolio Management

Portfolio Management | Investment Management Every investor expects to have a higher level of return for the level of risk they take while investing. And to have a higher level of return, the investors need to carefully allocate their funds in risky and risk-free assets. Because of the power of diversification, forming a portfolio does … Read more