Investment Meaning, Nature and Scope: Decision Process

Investment

In finance, the purchase of a financial product or other item of value with an expectation of favorable future returns. In general terms, investment means the use money in the hope of making more money.

Objective of SAPM

To improve decision-making skills in management of investment through better understanding of modern theories on portfolio management and functioning of capital market. To get better return on portfolio with lesser risk

Nature and Scope of Investment Decision

To understand various investment decision rules. To know what are the good investments decisions rules. To know the category of investment decision rules. You can take investment decision only after analyzing entire process of investment that starts with funds contribution and ends with getting expectations fulfilled.

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The investment decision rules allow you to formalize the process and specify what condition or conditions need to be met to accept the project. You will take decision only after ensuring that the required expectations in terms of returns are ensured at any cost.

Decision Process

Understand characteristics of good investment decision rules. Decide basis of calculation of return based on required condition. Use constrain to eliminate investment alternatives. Follow decision rules to accept or reject investment opportunity.

Characteristics of Good Investment Decision Rules

It should maintain a fair balance between allowing manager to analyze the project and bring-in subjective assessment into the decision and ensuring that different projects are judged consistently. It must maximize the value of the firm and minimize risk. It should work across a variety of investments.

Category of Investment Decision Rules

Accounting Income-based decision rule

Return on Capital Return on Equity Cash Return on capital Cash Return on Equity

Cash flow-based decision rule