3102 Case Debrief
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Case Comments 1) Investment evaluation was not deep 2) Hybrid fund? Nope confused 3) Active management, not momentum trading. 4) Normalize ratios Debrief 1) Due diligence process – not just fundamental analysis but to propose a profitable investment strategy, do the investment, and then look back at the end of the investment horizon to evaluate what they have done 2) At time of decision (t=0): you make decisions based on ENTIRELY expectations, and then evaluate actual performance against expectation. 3) Need to justify why expectation is formed. Based on what? Investment decision has to be made based on expectations. Is there a time horizon attached to expectation? YES. Need to have forecast for different time horizons, when you will come out of the market 4) Expectation has to be consistent with time horizon 5) Whatever model you use is based on expectations or historical numbers until NOV2013. 6) If use DDM, dividend forecasted until infinity. 7) Increase in dividend payout is indication that company is running out of investment options, just pay back to investors 8) How to calculate expected risk? OPTIONS. Black scholes pricing model. Current stock price, time to maturity and future price is known. Only known is volatility. Therefore expected risk is derived by options price assuming market is at least weakly efficient. 9) REALISED. Realized return = profits. 10) What is realized risk? Actual – expected. Different sources of realized risk: wrong mode used to forecast expected, firm specific, macro/industry risk futures market tells you risk, exchange rate risk 11) Earnings announcement: in 3 months company will release next quarter earnings, look at analyst forecast.
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Case debrief
Transcript of 3102 Case Debrief
Case Comments1) Investment evaluation was not deep2) Hybrid fund? Nope confused 3) Active management, not momentum trading.4) Normalize ratios
Debrief1) Due diligence process not just fundamental analysis but to propose a profitable investment strategy, do the investment, and then look back at the end of the investment horizon to evaluate what they have done2) At time of decision (t=0): you make decisions based on ENTIRELY expectations, and then evaluate actual performance against expectation.3) Need to justify why expectation is formed. Based on what? Investment decision has to be made based on expectations. Is there a time horizon attached to expectation? YES. Need to have forecast for different time horizons, when you will come out of the market4) Expectation has to be consistent with time horizon5) Whatever model you use is based on expectations or historical numbers until NOV2013.6) If use DDM, dividend forecasted until infinity. 7) Increase in dividend payout is indication that company is running out of investment options, just pay back to investors8) How to calculate expected risk? OPTIONS. Black scholes pricing model. Current stock price, time to maturity and future price is known. Only known is volatility. Therefore expected risk is derived by options price assuming market is at least weakly efficient. 9) REALISED. Realized return = profits.10) What is realized risk? Actual expected. Different sources of realized risk: wrong mode used to forecast expected, firm specific, macro/industry risk futures market tells you risk, exchange rate risk11) Earnings announcement: in 3 months company will release next quarter earnings, look at analyst forecast.
