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According to amity mba project guidelines you have to submit the synopsis after
getting it signed by the guide of the same relevant field .The synopsis should have










7.Chapter Scheme.

23rd June, 2015

The Manager
Finance Bank
Kabwe Branch

Dear Sir,
Ref: Request for Clearance Letter










My names are Derick Mwansa, holder of savings account number 0255374605002, as

indicated in the above subject, I write to your office requesting for a clearance letter which
should be addressed to the personnel department Zambia Prisons Service.

Yours faithfully,

Derick Mwansa.

23rd June, 2015

The Personnel Department
Zambia Prisons Service

Dear Sir,
Ref: Request For Change of Pay Point From Finance Bank To Barclays Bank Account
number 006-1223843

With reference to the above mentioned subject, I write to your office requesting for a change
in the pay point. My preferred pay point is Barclays Bank account number 006-1223843.
Attached is a clearance letter from the Bank Manager, Finance Bank Kabwe.

Yours faithfully,

Derick Mwansa.

Parts of a computer
Windows 7

In this page

System unit








If you use a desktop computer, you might already know that there isn't any single part called
the "computer." A computer is really a system of many parts working together. The physical
parts, which you can see and touch, are collectively called hardware. (Software, on the other
hand, refers to the instructions, or programs, that tell the hardware what to do.)
The following illustration shows the most common hardware in a desktop computer system.
Your system might look a little different, but it probably has most of these parts. A laptop
computer has similar parts but combines them into a single, notebook-sized package.

Desktop computer system

Let's take a look at each of these parts.

System unit
The system unit is the core of a computer system. Usually it's a rectangular box placed on or
underneath your desk. Inside this box are many electronic components that process
information. The most important of these components is the central processing unit (CPU), or
microprocessor, which acts as the "brain" of your computer. Another component is random
access memory (RAM), which temporarily stores information that the CPU uses while the
computer is on. The information stored in RAM is erased when the computer is turned off.

Almost every other part of your computer connects to the system unit using cables. The
cables plug into specific ports (openings), typically on the back of the system unit. Hardware
that is not part of the system unit is sometimes called a peripheral device or device.

System unit
Top of page

Your computer has one or more disk drivesdevices that store information on a metal or
plastic disk. The disk preserves the information even when your computer is turned off.

Hard disk drive

Your computer's hard disk drive stores information on a hard diska rigid platter or stack of
platters with a magnetic surface. Because hard disks can hold massive amounts of
information, they usually serve as your computer's primary means of storage, holding almost
all of your programs and files. The hard disk drive is normally located inside the system unit.

Hard disk drive

CD and DVD drives

Nearly all computers today come equipped with a CD or DVD drive, usually located on the
front of the system unit. CD drives use lasers to read (retrieve) data from a CD; many CD
drives can also write (record) data onto CDs. If you have a recordable disk drive, you can
store copies of your files on blank CDs. You can also use a CD drive to play music CDs on
your computer.

DVD drives can do everything that CD drives can, plus read DVDs. If you have a DVD
drive, you can watch movies on your computer. Many DVD drives can record data onto blank


If you have a recordable CD or DVD drive, periodically back up (copy) your

important files to CDs or DVDs. That way, if your hard disk ever fails, you won't lose
your data.

Floppy disk drive

Floppy disk drives store information on floppy disks, also called floppies or diskettes.
Compared to CDs and DVDs, floppy disks can store only a small amount of data. They also
retrieve information more slowly and are more prone to damage. For these reasons, floppy
disk drives are less popular than they used to be, although some computers still include them.

Floppy disk
Why are these disks called "floppy" disks? The outside is made of hard plastic, but that's just
the sleeve. The disk inside is made of a thin, flexible vinyl material.
Top of page

A mouse is a small device used to point to and select items on your computer screen.
Although mice come in many shapes, the typical mouse does look a bit like an actual mouse.
It's small, oblong, and connected to the system unit by a long wire that resembles a tail. Some
newer mice are wireless.

A mouse usually has two buttons: A primary button (usually the left button) and a secondary
button. Many mice also have a wheel between the two buttons, which allows you to scroll
smoothly through screens of information.

Mouse pointers
When you move the mouse with your hand, a pointer on your screen moves in the same
direction. (The pointer's appearance might change depending on where it's positioned on your
screen.) When you want to select an item, you point to the item and then click (press and
release) the primary button. Pointing and clicking with your mouse is the main way to
interact with your computer. For more information, see Using your mouse.
Top of page

A keyboard is used mainly for typing text into your computer. Like the keyboard on a
typewriter, it has keys for letters and numbers, but it also has special keys:

The function keys, found on the top row, perform different functions depending on
where they are used.

The numeric keypad, located on the right side of most keyboards, allows you to enter
numbers quickly.

The navigation keys, such as the arrow keys, allow you to move your position within
a document or webpage.

You can also use your keyboard to perform many of the same tasks you can perform with a
mouse. For more information, see Using your keyboard.
Top of page

A monitor displays information in visual form, using text and graphics. The portion of the
monitor that displays the information is called the screen. Like a television screen, a
computer screen can show still or moving pictures.
There are two basic types of monitors: CRT (cathode ray tube) monitors and the newer LCD
(liquid crystal display) monitors. Both types produce sharp images, but LCD monitors have
the advantage of being much thinner and lighter.

LCD monitor (left); CRT

monitor (right)
Top of page

A printer transfers data from a computer onto paper. You don't need a printer to use your
computer, but having one allows you to print e-mail, cards, invitations, announcements, and
other material. Many people also like being able to print their own photos at home.
The two main types of printers are inkjet printers and laser printers. Inkjet printers are the
most popular printers for the home. They can print in black and white or in full color and can

produce high-quality photographs when used with special paper. Laser printers are faster and
generally better able to handle heavy use.

Inkjet printer (left); laser

printer (right)
Top of page

Speakers are used to play sound. They can be built into the system unit or connected with
cables. Speakers allow you to listen to music and hear sound effects from your computer.

Computer speakers
Top of page

To connect your computer to the Internet, you need a modem. A modem is a device that sends
and receives computer information over a telephone line or high-speed cable. Modems are
sometimes built into the system unit, but higher-speed modems are usually separate

Cable modem

Thesis Methodology Part

What is a thesis methodology? Methodology comes from the root word method. It
describes the procedures that were executed by the researcher. This way, he can
increase his credibility towards presenting a reliable set of information coming from
his research. When the readers know how the research was undertaken, they can
easily understand and give opinions about the results of the thesis paper and probably
learn how to write a thesis paper in a more general perspective.
What are the contents of the thesis methodology chapter? The chapter usually
contains explanations of processes in paragraph form. But you can easily divide the
chapter into two general parts. The first part should involve the explanation of things
related to data gathering procedures. You should be able to provide detailed
information about how you have gathered data. The second part involves the
presentation of information related to data analysis. It means you need to provide
details that will relate to how you used the data gathered and what implications the
results have made to the conclusion.
A thesis methodology will always be a significant part of the thesis paper. It provides you the
opportunity to increase your results reliability and at the same time gives clear delivery of details
about how you processed the research paper. If you need help in writing this part, you may take a
look at our thesis online samples in this website. Or, you can simply order for a complete research
paper of any thesis topics from us and let our writers do the job for you so you can have a more
relaxing weekend.

In order to clarify your thoughts about the purpose of your thesis and how you plan to reach your
research goals, you should prepare a synopsis. A synopsis is a short, systematic outline of your
proposed thesis, made in preparation for your first meeting with your supervisor. It serves to
ensure that your supervisor gets a clear picture of your proposed project and allows him or her to
spot whether there are gaps or things that you have not taken into account.
Your synopsis will work as a kind of protocol for the further steps you need to take to ensure that
your thesis reaches the required academic level and that you finish on time.
Although there are no rigid rules for how a synopsis should look, it must contain:

Set the stage by addressing the scientific background: How will your proposed research
contribute to the existing body of knowledge? Use your own words and be as specific as

Rationale should address the gaps/problems/issues observed as part of the

background section and thus present the argument/justification for completing the study
as described in the lesson of the same name.

Problem formulation the problem you aim to address in your thesis,as

described in the lesson of the same name.

Overall and specific objectives the actions to be taken in order to address the
problem, as described in the lesson of the same name.

Method outline:
What type of study is best suited to support the actions stated in the specific objectives?
What kind of data (qualitative, quantitative) will your study require? What is your geographical
study area and who is your target group(s)? Are there ethical considerations you have to
make? Etc.

Time plan:
In the beginning, a rough timeline showing a plan on how your work will be divided over time.
When is your deadline for e.g. literature search, potential fieldwork (e.g. interviews and/or
questionnaire administration), data analysis, writing and layout? Once your problem
formulation and objectives are approved by your supervisor, all details should be added to
your time plan.

Create a short list of the major references on which your rationale is based. Make sure that
your in-text citations and reference list are completed correctly, both in support of your
subsequent work, but also to demonstrate that you have a serious, scientific and methodical
approach to your work. See how to use references correctly in the lesson of the same name
in the module: Writing process.

At the beginning of your thesis period, your synopsis will be limited in scope and detail, but as
you work your way deeper into your topic and you get a clearer picture of your objectives,
methods and references, the more complete and detailed your synopsis will become.

A rule of thumb is that the length of your synopsis can vary from two to five pages, but the
precise length and exact requirements of your synopsis can vary from institute to institute and
from supervisor to supervisor.
Most study programmes will require that you present a final synopsis before starting data
collection. However, the first version of your synopsis for discussion with your supervisor should
not be an informal draft. Carefully performed work creates respect and motivation and saves a lot
of you and your supervisors time.
A good approach from the very beginning is to establish a practice of how to write headings,
references, names of species, etc. And be consistent. This will help you save time and
importantly, lead to a better overall assessment of your final work.
- See more at:

Concept of Working Capital

0 Vinod Kumar August 8, 2011

Concept of working capital includes meaning of working capital and its nature. Working capital is
the investment in current assets. Without this investment, we can not operate our fixed assets
properly. For getting good profits from fixed assets, we need to buy some current assets or pay
some expenses or invest our money in current assets. For example, we keep some of cash
which is the one of major part of working capital. At any time, our machines may need repair.
Repair is revenue expense but without cash, we can not repair our machines and without
machines, our production may delay. Like this, we need inventory or to invest in debtors and
other short term securities.
On the basis of Concept, we can divide our working capital into two parts:

1. Gross Working Capital

In this concept of working capital, we study gross working capital. We do not deduct current
liabilities in this concept but we use current liabilities as source of fund. Suppose, if we buy goods
on credit, it means our save our cash and we can use this as working capital for paying other
2. Net Working Capital
Under this concept we use net working capital. For this, we first deduct all our current liabilities
from our current assets. Excess of current assets over current liabilities will be current assets.
We have to maintain minimum level of working capital in our business for operation of business

activities. This concept is also used for preparation of balance sheet. In the vertical form of
balance sheet, we show excess of current assets over current liabilities.
Operating Cycle Concept of Working Capital
In this concept of working capital, we make the operating cycle. In this cycle,
we calculate inventory conversion period. To know this, we can estimate when we need cash for
buying our inventory. We also calculate debtor or receivable conversion period. To know this, we
can estimate when we receive cash from our debtors.
If inventory conversion period is less than debtor conversion period, we have to manage other
sources for buying our inventories. If we buy good on credit, we also take care creditors'
conversion period.

Meaning And Concept Of Working Capital





Business organization require adequate capital to establish business and operate their activities.
The total capital of a business can be classified as fixed capital and working capital. Fixed capital
is required for the purchase of fixed assets like building, land, machinery, furniture etc. Fixed
capital is invested for long period, therefore it is known as long-term capital.Similarly, the capital,





in current






The capital which is needed for the regular operation of business is called working capital.
Working capital is also called circulating capital or revolving capital or short-term capital. Working
capital is used for regular business activities like for the purchase of raw materials, for the
payment of wages, payment of rent and of other expenses. Working capital is kept in the form of

cash, debtors, raw materials inventory, stock of finished goods, bills receivable etc.





Generally, there are two concepts of working capital i.e. gross concept and net concept.





According to gross concept, working capital refers to all the current assets and represents the
amount of funds invested in current assets. Thus, gross working capital is the capital invested
incurrent assets. Current assets are those assets which can be converted into cash within the





Total current


In this way, gross working capital refers to the firm's investment in current assets. Gross working
capital represents total of current assets which includes cash in hand, cash at bank,

inventory,prepaid expenses, bills receivable etc.

Human resource managements
Business Activities
Business Organizations






According to the net concept, working capital is the excess of current assets over current
liabilities. In other words, the difference between current assets and current liabilities is called net





= Current

Assets -



In this way, net working capital is the difference of current assets and current liabilities.

Concept of working Capital


There are two definitions of working capital (1) Gross

working capital (2) Net working capital
Gross working capital refers to working capital as the
total of current assets, whereas the net working
capital refers to working capital as excess of current

assets over current liabilities. In other words net

working capital refers to current assets financed by
long term funds.
Gross working capital = Total current assets
Net working capital = Current assets Current
The net working capital position of the firm is an
important consideration, as this will determine the
firms profitability and risk. Here the profitability refers
to profits after expenses and risk refers to the
probability that a firm will become technically
insolvent where it will be unable to meet obligations
when they become due for payment.
A finance manager has to make an appropriate
financing mix, which will limit the risk and increase
the profitability. Financing mix refers to the proportion
of current assets financed by current liabilities and
long term funds.
There are two approaches which determine the
financing mix (1) Aggressive approach (2)
Conservative approach.
According to aggressive approach the long term
funds are used to finance only the core or fixed
portion of current assets (e.g., minimum level of
finished goods inventory, raw material etc) and the
other portion i.e. temporary and seasonal

requirements are financed by short term funds. This

is of high risk and high profit financing mix.
According to conservative approach the total current
assets are financed from long term sources and short
term sources are used only in emergency situation
i.e. when there is an unexpected cash outflow. This is
of low-risk and low-profit financing mix.
As we observed two methods of financing mix, one
method is of high risk high profit and other is of risk
low profit. A finance manager has to trade off
between these two extremes.
Operating Cycle:
The objective of financial management is to maximize
the shareholders wealth. So it is needed to generate
sufficient profits. The profits generated depend mainly
on sales volume. When the goods are being sold on
credit as is the normal practice of business firms
today to cope with increased competition the sale of
goods cannot be converted into cash instantly
because of time lag between sales and realization of
As there is a time lag between sales and realization
of receivables there is a need for sufficient working
capital to deal with the problem which arises due to
lack of immediate realization of cash against goods
sold. The operating cycle is the length of time
required for conversion of non-cash assets into cash.

This operating cycle refers to the time taken for the

conversion of cash into raw material, raw materials
into work-in-progress, work-in-progress into finished
goods, finished into receivables into cash and this
cycle repeats.
The operating cycle length differs from firm to firm. If
a firm has lengthy production process or a firm has
liberal credit policy the length of operating cycle will
be more. On the other hand, if a firm does not extent
credit or the firm is not a manufacturing concern i.e.
where cash will be converted into inventory directly
then the length of operating cycle will be reduced to a
greater extent.
The length of operating cycle can be calculated by
calculating periods of raw material storage, work in
process, finished gods storage and debtors collection
1. Raw materials storage period
= Average stock of raw materials and stores/ Average
daily consumption of raw material and stores
2. Work in process period
= Average work in process inventory /Average cost of
production per day
3. Finished goods storage period
= Average finished goods inventory / Average cost of
goods sold per day

4. Debtors collection period

= Average book debts / Average credit sales per day
Length of operating cycle = 1+2+ 3+4

more at

What are the components of

working capital ?
by Dinayak Shenoy | category Economics

The main components of working capital are :

Image Source:

Cash. Cash is one of the most liquid and important components of

working capital. Holding cash involves cost because the worth of cash
held, after a year will be less than the value of cash as on today. Excess of
cash balance should not be kept in business because cash is a non-earning
asset.-Hence, a proper and judicious cash management is of utmost
importance in business.

Marketable Securities. These securities also dont give much yield

to the business because of two reasons, (i) Marketable securities act as a
substitute for cash, (ii) These are used are temporary investments. These
are held not for speculative balances, but only as a guard against possible
shortage of bank credit.

Accounts Receivable. Too many debtors always lock up the firms

resources especially during inflationary tendencies. This is a two step
account. When goods are sold, inventories are reduced and accounts
receivables are created. When payment is made, debtors reduce and cash
level increases. Thus, quantum of debtors depends on two things, (i)
volume of Credit sales (ii) average length of time between sales and
collections. The entrepreneur should determine the optimal credit
standards. An optimal credit policy should be established and the firms
operations should be continuously monitored to achieve higher sales and
minimum bad debt losses.

Inventory. Inventories represent a substantial amount of firms

assets. Inventories must be properly managed so that this investment
doesnt become too large, as it would result in blocked capital which could
be put to productive use elsewhere. On the other hand, having too little or
small inventory could result in loss of sales or loss of customer goodwill.
An optimum level of inventory, therefore, should be maintained.
Master's Thesis Guidelines
Thesis Submission Checklist
When turning in your thesis, please make sure to include the following:

A signed cover page -- original signature required


A reader sheet, filled out by you and signed by your advisor -- original signature


A second reader sheet with your name, ID, and department added, but the rest left
blank (Draper provides the second reader)


Your thesis abstract


Your Draper Exit Questionnaire

Please also see our Thesis and Graduation FAQs.

To receive a masters degree, the Draper Program and GSAS require that you successfully
complete 32 points of course work and write a thesis. Please read the below thoroughly;
these guidelines explain the thesis-writing process and related graduation
requirements. Draper also offers periodic workshops for thesis writers, listed on our News
and Events page. If you then have further questions, please call the office at (212) 998-8070
or email draper.program[at] To download a pdf of the thesis guidelines, please
click here.
What is a masters thesis?
The masters thesis is a carefully argued scholarly paper of approximately 12,000 13,000
words (roughly 50 pages). It should present an original argument that is carefully documented
from primary and/or secondary sources. The thesis must have a substantial research
component and a focus that falls within arts and science, and it must be written under the
guidance of an advisor. As the final element in the masters degree, the thesis gives the
student an opportunity to demonstrate expertise in the chosen research area.
When should I start thinking about the thesis?
You should be thinking about your thesis, if only abstractly, from your first enrollment in the
Draper Program. At the latest, you should have a clear idea of your topic and have found an
advisor by the end of the semester before the one in which you will complete the thesis (see
the timetable and deadlines chart, below).
Who can be my advisor?
Any regular NYU faculty member can be your thesis advisor, although individual faculty are
not required to advise masters theses. It is your responsibility to find an advisor. Your advisor
will provide general guidance, and will help you refine your topic and develop your argument.
Most students choose faculty members they have worked with in courses. Thesis advisors
must be approved by the Program (along with the thesis topic).
What is the process and protocol?
After doing the initial research on your topic, prepare a 1-2 paragraph abstract, a preliminary
bibliography (approximately ten to fifteen books or journal articles), and a brief outline before
approaching a possible advisor. These will help you to convince your future advisor of the
value and interest of your project. Once a faculty member has agreed to advise you, discuss

your anticipated graduation date and agree on a timetable for meetings and submission of
drafts. It is your responsibility to keep your advisor apprised of your progress.
After you have refined your topic and your advisor has approved it, complete the Application
for Approval of Masters Thesis Topic, have your advisor sign it, and submit it to the Draper
offices. This form must be submitted by the thesis due date for the semester before the one in
which you intend to graduate (e.g., December 16 for May graduation; see the chart, below).
We will notify you via email when your topic has been approved by Draper. Do not start
writing the thesis until you have an advisor who has approved your topic.
In most cases, students and advisors need to meet three or four times: initially, to finalize a
topic, and to review the first or second draft. Keep in mind that your advisor must have
enough time to read and evaluate your work before returning it to you with comments, and
that you must have time to incorporate those comments. Dont expect your advisor to return
your thesis in a day or two, whether it is an early draft or the final copy. It is appropriate to
ask your advisor when you can expect comments, but not to pressure her or him to respond
quickly. You should also be prepared for the possibility that your advisor will request
substantial changes in the thesis. Do not expect that your draft will require only minor
corrections, or that the proposed final version you submit will necessarily be approved without
further changes. It is your responsibility to see that the final copy is free from spelling and
grammatical errors; your advisor is not responsible for line-by-line editing.
Theses involving interviews, surveys, or other research on human subjects often require prior
approval. Because approval can take time, you should begin the application process as early
as possible. Further information is available at or from the Office
of Sponsored Programs, 212-998-2121.

Are there particular thesis formatting requirements?

Yes, theses must conform to the following guidelines:

The cover page must include the thesis title, your name, and your student ID number;
your advisors name and a space for her or his approval signature; the month and year the
degree will be conferred (not the month in which the thesis is submitted); and the statement:
A thesis in the John W. Draper Interdisciplinary Masters Program in Humanities and Social
Thought in partial fulfillment of the requirements for the degree of Master of Arts at New York
University (a sample cover page can be found here).

All sources for quotations and paraphrases must be documented. You may use any of
the standard citation styles (MLA, Chicago, social science, etc.), subject to your advisors
approval, provided you consistently follow a single style throughout the thesis.

The thesis should be printed or typewritten on standard paper.

We prefer unbound theses -- a simple binder clip is sufficient. If you decide to bind
your thesis, please make sure that your original, signed cover page is unbound.
What are the administrative requirements to graduate?
You must be enrolled in the semester in which you graduate, which means you must either
take a course or maintain matriculation. Matriculation is not required during the summer
term. You must also apply for graduation (set your graduation date) using Albert
( within the period the Registrar has specified for that semester
How do I submit the thesis?
You must first give a clean copy of the finished thesis to your advisor. After your advisor has
read and approved the thesis, it is your responsibility to submit the final copy, signed by your
advisor on the cover page, to the Draper Program by the deadline listed below. You must also
submit two Thesis Reader Sheets (one signed by your advisor, one blank), a thesis abstract,
and the Draper Exit Questionnaire. Your advisor is the first reader and the Program will
provide a second reader, usually the director or associate director. Students must have met all
graduation requirements, including timely submission of the thesis, to participate in
commencement ceremonies.
What happens after that?
Draper will assign your second reader, generally one of our directors. Once your thesis has
been countersigned by the second reader, we will file the necessary paperwork with the
registrar's office and they will process your graduation. This series of steps takes
approximately one month. Once your degree has been conferred, you will see it appear at the
top of your online transcript. Eight weeks after that, the registrar will mail your diploma to
you, so please be sure that your mailing address is correct in Albert. If you do not receive your
diploma and request a new one, it will incur a fee.
What is a typical thesis-writing timetable?

September - October
October - November
November - December
By December 16th
February - March
April 1
April 16th

Begin research; prepare abstract, bibliography, and outline.

Meet with prospective advisor.
Apply for graduation (set graduation date using Albert).
Submit Application for Approval of Thesis Topic, signed by advisor.
Give first draft to advisor.*
Give revised, final version to advisor.*
Submit to Draper Program:
Final, clean copy of thesis, with title page signed by advisor
Two Thesis Reader Sheets:
1st should be signed by advisor
2nd, unsigned, for second reader

Draper Program Exit Questionnaire

Thesis abstract
* Schedule for submission of drafts and approval of the final version is at the advisors
Thesis and Graduation Deadlines
Graduation Date Apply for Topic Approval

Apply for Graduation

Submit Final Aproved Thesis


See Registrars Web site.

December 16*
April 16*
August 16*

August 16*
December 16*
April 16*

See Registrars Web site.

See Registrars Web site.

*Or the next day on which the Draper office is open, should these dates fall on a weekend or holiday.
Contact Us | Photo Credits | New York Univ

4 Key components of an inventory

management system
Nov 24, 2014



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Inventory management system is a package of hardware and software tools that helps in
better management of the inventory. It essentially deals in efficiently tracking the item flow in
& out of the inventory, tracking the location of items in the inventory and automating the
bookkeeping responsibilities of warehouses. Though, different inventory management
systems can vary a lot, depending on the functionalities they offer to the users, almost all
such systems must have the following four key constituents:
1. Barcode printer: Barcodes greatly simplify the item automating process. Different
items in the inventory are assigned different items. These barcodes are printed on the
item cover on their arrival in the inventory with the help of barcode printers. These

printers are available in different sizes to adhere to varying printing needs of differentsize organizations. For example, a small company will have lower barcode printing
needs due to less volume of products, whereas a larger organization will have more
printing needs due to a higher volume of items.
2. Barcode scanner: To scan the barcodes printed on items it is imperative to have
barcode scanners. Independent of the application type & the business environment,
scanners are used for reading the barcode printed on the items. The read value is
entered directly to the computer system for further processing.
3. Inventory management software solution: This is the heart of any automated
inventory management system. The software maintains a database of all the items
available in the stock, updating it, real-time with every new stock entry and dispatch.
It is very important that the business owner is sure about the management software
he/she chooses as there are many such solutions available, all of which might not
integrate with an organization that well. It is advisable that one selects an inventory
management software tool from a reliable vendor only. GOIS-Pro, Inventoria,
Fishbowl are a few reputed inventory management software solutions.
4. Mobile computers: Computers are required to host the management solutions, and
display the inventory data to the managers. However, usual computers cannot perform
the task that well because mobility is a key criterion for warehouse management
computers. Hence, mobile computers with Wi-Fi accessibility are a must for every
good inventory management system. Some management solutions also offer inventory
access through mobile devices like iPhone, iPads, Android smartphones & tablets, etc.
You can opt for these devices if you have such solutions; this will add to the mobility
attribute and allow you access to vital inventory data even when you are on the move.
The four constituents mentioned above are by no means the complete list of constituents for a
good inventory management system; instead they are only the main constituents that every
good system must possess. Additionally, advanced management systems may include
constituents like barcode labels, Automated Replenishment Routines, Inter-Warehouse &
Inter-Company Transfers, Backorder Management systems, etc. for enhancing their
efficiency as inventory management system.

All investors:

Aim to maximize economic utilities (Asset quantities are given and fixed).

Are rational and risk-averse.

Are broadly diversified across a range of investments.

Are price takers, i.e., they cannot influence prices.

Can lend and borrow unlimited amounts under the risk free rate of interest.
Assumptions of CAPM[edit]
All investors:[7]

1. Aim to maximize economic utilities (Asset quantities are given and fixed).
2. Are rational and risk-averse.
3. Are broadly diversified across a range of investments.
4. Are price takers, i.e., they cannot influence prices.
5. Can lend and borrow unlimited amounts under the risk free rate of interest.
6. Trade without transaction or taxation costs.
7. Deal with securities that are all highly divisible into small parcels (All assets are perfectly
divisible and liquid).
8. Have homogeneous expectations.
9. Assume all information is available at the same time to all investors.

Capital Asset Pricing Model

(CAPM): Definition, Formula,
Advantages & Example
Chapter 1 / Lesson 12 Transcript



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Lesson Transcript
Instructor: Jay Wagner

Learn about the Capital Asset Pricing Model (CAPM), one of the foundational models in finance.
We'll look at the underlying assumptions, how the model is calculated, and what it can do for you.

The Capital Asset Pricing Model

In finance, one of the most important things to remember is that return is a function of risk. This
means that the more risk you take, the higher your potential return should be to offset your
increased chance for loss.
One tool that finance professionals use to calculate the return that an investment should bring is
the Capital Asset Pricing Model which we will refer to as CAPM for this lesson. CAPM
calculates a required return based on a risk measurement. To do this, the model relies on a risk
multiplier called the beta coefficient, which we will discuss later in this lesson.
Like all financial models, the CAPM depends on certain assumptions. Originally there were nine
assumptions, although more recent work in financial theory has relaxed these rules somewhat.
The original assumptions were:

1. Investors are wealth maximizers who select investments based on expected return and
standard deviation.
2. Investors can borrow or lend unlimited amounts at a risk-free (or zero risk) rate.
3. There are no restrictions on short sales (selling securities that you don't yet own) of any
financial asset.
4. All investors have the same expectations related to the market.
5. All financial assets are fully divisible (you can buy and sell as much or as little as you like)
and can be sold at any time at the market price.
6. There are no transaction costs.
7. There are no taxes.
8. No investor's activities can influence market prices.
9. The quantities of all financial assets are given and fixed.
Obviously, some of these assumptions are not valid in the real world (most notably no transaction
costs or taxes), but CAPM still works well, and results can be adjusted to overcome some of
these assumptions.

The Beta Coefficient

Before we can use the CAPM formula, we need to understand its risk measurement factor known
as the beta coefficient. By definition, the securities market as a whole has a beta coefficient of
1.0. The beta coefficients of individual companies are calculated relative to the market's beta. A
beta above 1.0 implies a higher risk than the market average, and a beta below 1.0
implies less risk than the market average. Most companies' betas fall between 0.75 and 1.50, but
any number is possible, including negative numbers; a negative beta would be highly unlikely,
however, since it would imply less risk than a 'risk free' investment.
For actual use, the beta coefficients of most companies can be found on financial websites as
well as in electronic publications. You can do a quick search to find companies' beta coefficients.

Formula and Examples

The CAPM formula is sometimes called the Security Market Line formula and consists of the
following equation:
r* = kRF + b(kM - kRF)
It is basically the equation of a line, where:
r* = required return

kRF = the risk-free rate

kM = the average market return
b = the beta coefficient of the security
You will sometimes see the kM - kRF term replaced by kMRP. kMRP (the market risk premium)
= kM- kRF, so this is just a shortcut when the market risk premium has already been calculated.
Remember again that the beta of the market is 1.0, so kMRP is just the additional return required
from the market as a whole.
We should also take a moment to talk about the risk-free rate, kRF. Investments are subject to
many risks that may come from the economy, the nature of the market, the industry in which a
company operates, or the company itself. Of these risk factors, the only one that is universal is
the risk that inflation will decrease an investor's purchasing power. In theory, the risk-free rate is
the return that an investment with no risks should earn, but in practice it includes the ever-present
risk of inflation.
Let's calculate a couple of required returns using fictional companies X and Z to see how this
works. For our calculations, we will use the return on Company X as the risk-free rate and the 1year return on Company Z as the market return. Let's hypothetically use beta coefficients for
Company X and Company Z as 0.10% and 20.63%, respectively. Hypothetically, let's also
provide Company R, S, and T with these current beta coefficients:
Company R = 0.25
Company S = 1.82
Company T = 0.68
Based on these figures, Company R, with a beta of 0.25, should have a required return of 5.2325
or 5.23%.
Company S, on the other hand, would have a required return of 37.4646 or about 37.46%.
That's quite a gap, but it reflects the additional risk an investor accepts when investing in
Company S rather than Company R.

Capital Asset Pricing Model and Its Assumptions

Vinish Parikh December 15, 2009
Capital asset pricing model (CAPM) is one which establishes the relationship
between the required rate of return of a security and its systematic risk also known
as risk which is not diversification. It can be represented mathematically as
For example if we know the risk free rate of return is 5 percent and beta of security is
2 and excepted market return is10 percent then we can compute the excepted return
of stock will be 15 percent which can be calculated as 5 + 2(10-5)

Here are some of the assumptions of CAPM

1. Investors are risk averse as well as rational and use standard deviation and
expected rate of return for measuring the risk and return for their portfolios. Hence
higher the risk of a portfolio higher will be the return excepted by the investors.
2. Investors make their investment decision based on a single period horizon rather
than multiple period horizons. Also taxes do not affect the buying choice of the
3. Transactions costs in the financial markets are assumed to be very low and also
assets can be bought and sold in any division desired by the investor. Hence
investors can lend and borrow unlimited amount of money at the risk free rate of
interest prevailing in the market.
4. It assumes that all information is available to all investors at the same time.
Hence from the above one can see that CAPM is based on assumptions which
cannot be possible in real world but still it has wide applications in security market
and hence it is very important concept as far as stock markets are concerned.

The capital asset pricing model (CAPM) is a widely-used finance theory that
establishes a linear relationship between the required return on an investment
and risk. The model is based on the relationship between an asset's beta,
the risk-free rate (typically the Treasury bill rate) and the equity risk
premium (expected return on the market minus the risk-free rate).

At the heart of the model are its underlying assumptions, which many criticize
as being unrealistic and might provide the basis for some of the major
drawbacks of the model.
Despite the aforementioned drawbacks, there are numerous advantages to the
application of CAPM.
Ease-of-use: CAPM is a simplistic calculation that can be easily stresstested to derive a range of possible outcomes to provide confidence
around the required rates of return.
Diversified Portfolio: The assumption that investors hold a diversified
portfolio, similar to the market portfolio, eliminates unsystematic
(specific) risk.
Systematic Risk (beta): CAPM takes into account systematic risk, which
is left out of other return models, such as the dividend discount
model (DDM). Systematic or market risk is an important variable
because it is unforeseen and often cannot be completely mitigated
because it is often not fully expected.
Business and Financial Risk Variability: When businesses investigate
opportunities, if the business mix and financing differ from the current
business, then other required return calculations, like weighted average
cost of capital (WACC) cannot be used. However, CAPM can.

Advantage and Disadvantages

Finding cost of equity with CAPM model is widely used. the primary advantage of this model
is that it relates return to the risk which is a general behavior of all the rational investors. The
disadvantage is that it is difficult to estimate the market return and the beta.

The CAPM is often criticised as being unrealistic because of the assumptions on which it is based, so it is
important to be aware of these assumptions and the reasons why they are criticised. The assumptions are as
follows (Watson D and Head A, 2007, Corporate Finance: Principles and Practice, 4th edition, FT Prentice Hall,
Investors hold diversified portfolios

This assumption means that investors will only require a return for the systematic risk of their portfolios, since
unsystematic risk has been removed and can be ignored.
Single-period transaction horizon
A standardised holding period is assumed by the CAPM in order to make comparable the returns on different
securities. A return over six months, for example, cannot be compared to a return over 12 months. A holding
period of one year is usually used.
Investors can borrow and lend at the risk-free rate of return
This is an assumption made by portfolio theory, from which the CAPM was developed, and provides a minimum
level of return required by investors. The risk-free rate of return corresponds to the intersection of the security
market line (SML) and the y-axis (see Figure 1). The SML is a graphical representation of the CAPM formula.
Perfect capital market
This assumption means that all securities are valued correctly and that their returns will plot on to the SML. A
perfect capital market requires the following: that there are no taxes or transaction costs; that perfect information
is freely available to all investors who, as a result, have the same expectations; that all investors are risk averse,
rational and desire to maximise their own utility; and that there are a large number of buyers and sellers in the

While the assumptions made by the CAPM allow it to focus on the relationship between return and systematic
risk, the idealised world created by the assumptions is not the same as the real world in which investment
decisions are made by companies and individuals.
For example, real-world capital markets are clearly not perfect. Even though it can be argued that well-developed
stock markets do, in practice, exhibit a high degree of efficiency, there is scope for stock market securities to be
priced incorrectly and, as a result, for their returns not to plot on to the SML.
The assumption of a single-period transaction horizon appears reasonable from a real-world perspective,
because even though many investors hold securities for much longer than one year, returns on securities are
usually quoted on an annual basis.
The assumption that investors hold diversified portfolios means that all investors want to hold a portfolio that
reflects the stock market as a whole. Although it is not possible to own the market portfolio itself, it is quite easy
and inexpensive for investors to diversify away specific or unsystematic risk and to construct portfolios that track
the stock market. Assuming that investors are concerned only with receiving financial compensation for

systematic risk seems therefore to be quite reasonable.

A more serious problem is that, in reality, it is not possible for investors to borrow at the risk-free rate (for which
the yield on short-dated Government debt is taken as a proxy). The reason for this is that the risk associated with
individual investors is much higher than that associated with the Government. This inability to borrow at the riskfree rate means that the slope of the SML is shallower in practice than in theory.
Overall, it seems reasonable to conclude that while the assumptions of the CAPM represent an idealised rather
than real-world view, there is a strong possibility, in reality, of a linear relationship existing between required return
and systematic risk.
The weighted average cost of capital (WACC) can be used as the discount rate in investment appraisal provided
that a number of restrictive assumptions are met. These assumptions are that:

the investment project is small compared to the investing organisation

the business activities of the investment project are similar to the business activities currently
undertaken by the investing organisation

the financing mix used to undertake the investment project is similar to the current financing mix (or
capital structure) of the investing company

existing finance providers of the investing company do not change their required rates of return as a
result of the investment project being undertaken.

These assumptions essentially state that WACC can be used as the discount rate provided that the investment
project does not change either the business risk or the financial risk of the investing organisation.
If the business risk of the investment project is different to that of the investing organisation, the CAPM can be
used to calculate a project-specific discount rate. The procedure for this calculation was covered in the second
article in this series (Project-specific discount rates, Student Accountant, April 2008).
The benefit of using a CAPM-derived project - specific discount rate is illustrated in Figure 2. Using the CAPM will
lead to better investment decisions than using the WACC in the two shaded areas, which can be represented by
projects A and B.
Project A would be rejected if WACC was used as the discount rate, because the internal rate of return (IRR) of
the project is less than that of the WACC. This investment decision is incorrect, however, since project A would be
accepted if a CAPM - derived project-specific discount rate were used because the project IRR lies above the
SML. The project offers a return greater than that needed to compensate for its level of systematic risk, and
accepting it will increase the wealth of shareholders.
Project B would be accepted if WACC was used as the discount rate because its IRR is greater than the WACC.
This investment decision is also incorrect, however, since project B would be rejected if using a CAPM-derived
project-specific discount rate, because the project IRR offers insufficient compensation for its level of systematic
risk (Watson and Head, pp2523).


The CAPM has several advantages over other methods of calculating required return, explaining why it has
remained popular for more than 40 years:

It considers only systematic risk, reflecting a reality in which most investors have diversified portfolios
from which unsystematic risk has been essentially eliminated.

It generates a theoretically-derived relationship between required return and systematic risk which has
been subject to frequent empirical research and testing.

It is generally seen as a much better method of calculating the cost of equity than the dividend growth
model (DGM) in that it explicitly takes into account a companys level of systematic risk relative to the stock
market as a whole.

It is clearly superior to the WACC in providing discount rates for use in investment appraisal.


The CAPM suffers from a number of disadvantages and limitations that should be noted in a balanced discussion
of this important theoretical model.
Assigning values to CAPM variables
In order to use the CAPM, values need to be assigned to the risk-free rate of return, the return on the market, or
the equity risk premium (ERP), and the equity beta.
The yield on short-term Government debt, which is used as a substitute for the risk-free rate of return, is not fixed
but changes on a daily basis according to economic circumstances. A short-term average value can be used in
order to smooth out this volatility.
Finding a value for the ERP is more difficult. The return on a stock market is the sum of the average capital gain
and the average dividend yield. In the short term, a stock market can provide a negative rather than a positive
return if the effect of falling share prices outweighs the dividend yield. It is therefore usual to use a long-term
average value for the ERP, taken from empirical research, but it has been found that the ERP is not stable over
time. In the UK, an ERP value of between 2% and 5% is currently seen as reasonable. However, uncertainty
about the exact ERP value introduces uncertainty into the calculated value for the required return.

Beta values are now calculated and published regularly for all stock exchange-listed companies. The problem
here is that uncertainty arises in the value of the expected return because the value of beta is not constant, but
changes over time.
Using the CAPM in investment appraisal
Problems can arise when using the CAPM to calculate a project-specific discount rate. For example, one common
difficulty is finding suitable proxy betas, since proxy companies very rarely undertake only one business activity.
The proxy beta for a proposed investment project must be disentangled from the companys equity beta. One way
to do this is to treat the equity beta as an average of the betas of several different areas of proxy company activity,
weighted by the relative share of the proxy company market value arising from each activity. However, information
about relative shares of proxy company market value may be quite difficult to obtain.
A similar difficulty is that the ungearing of proxy company betas uses capital structure information that may not be
readily available. Some companies have complex capital structures with many different sources of finance. Other
companies may have debt that is not traded, or use complex sources of finance such as convertible bonds. The
simplifying assumption that the beta of debt is zero will also lead to inaccuracy in the calculated value of the
project-specific discount rate.
One disadvantage in using the CAPM in investment appraisal is that the assumption of a single-period time
horizon is at odds with the multi-period nature of investment appraisal. While CAPM variables can be assumed
constant in successive future periods, experience indicates that this is not true in reality.
Research has shown the CAPM to stand up well to criticism, although attacks against it have been increasing in
recent years. Until something better presents itself, however, the CAPM remains a very useful item in the financial
management toolkit.


As there are pricing models that help Portfolio managers in taking investment decisions,
there are various measures as well that helps in measuring the performance of the
managers and their Portfolio. These performance measures ofportfolio performance serve a
great help in the investment area. Two of the most commonly used performance measures of
portfolio performance are Treynor measure and Sharpe measure. Lets discuss about the
same in this post.
Treynor Measure
Treynor measure is used to normalize the risk premium or the expected return over the riskfree rate which is done by dividing the premium with the beta of the portfolio. This implies
that one has the premium that is independent of the portfolio risk which means one can
compare two portfolios performances even though they have different betas. This is
important because some portfolios may give higher excess return but at the same time might
have more risk and higher beta.
Sharpe Measure
Like Treynor measure, Sharpe measure too is used to normalize the risk premium or the

expected return over the risk-free rate. This measure is done by dividing the premium with
the portfolio-standard deviation. This implies that one is left with the premium that is
independent of the portfolio risk. This suggests that one can compare two portfolios
performances even though they have different standard deviation or risk. A portfolio that is
very risky or volatile might give better return.
Comparing Treynor Measure and Sharpe Measure
Treynor and Sharpe measures are pretty much similar performance measures with very few
differences. While one uses the relative market risk or beta to normalize the performance the
other uses the standard deviation or the absolute risk. While Sharpe ratio is applicable to all
portfolios, Treynor is applicable to well-diversified portfolios. While Sharpe is used to
measure historical performance, Treynor is a more forward-looking performance measure.
Thus, both these performance measures work in different ways towards better representation
of the performance. To know more about Treynor measure and Sharpe measure, you can
explore our training courses on Financial Risk Manager exam preparation. Simplilearn offers
both online and classroom training courses on FRM Part 1 Exam prep.

The Sharpe ratio and the Treynor ratio (both named for their creators, William
Sharpe and Jack Treynor), are two ratios utilized to measure the risk-adjusted
rate of return on either an investment portfolio or an individual stock. They
differ in their specific approaches to evaluating investment performance.
The Sharpe ratio aims to reveal how well an equity investment portfolio
performs as compared to a risk-free investment. The common benchmark
used to represent a risk-free investment is U.S. Treasury bills or bonds. The
Sharpe ratio calculates either the expected or the actual return on investment
for an investment portfolio (or even an individual equity investment), subtracts
the risk-free investment's return on investment, and then divides that number
by the standard deviation for the investment portfolio. The primary purpose of
the Sharpe ratio is to determine whether you are making a significantly greater
return on your investment in exchange for accepting the additional risk
inherent in equity investing as compared to investing in risk-free instruments.
The Treynor ratio also seeks to evaluate the risk-adjusted return of an
investment portfolio, but it measures the portfolio's performance against a
different benchmark. Rather than measuring a portfolio's return only against
the rate of return for a risk-free investment, the Treynor ratio looks to examine
how well a portfolio outperforms the equity market as a whole. It does this by

substituting beta for standard deviation in the Sharpe ratio equation, with beta
defined as the rate of return that is due to overall market performance. For
example, if a standard stock market index shows a 10% rate of return, that
constitutes beta; an investment portfolio showing a 13% rate of return is then,
by the Treynor ratio, only given credit for the extra 3% return that it generated
over and above the market's overall performance. The Treynor ratio can be
viewed as determining whether your investment portfolio is significantly
outperforming the market's average gains.

The Best Way to Invest:

Fundamental or Technical
By Kim Petch
Posted in: Stocks
Comments 4

Ralph Seger once said, One way to end up with

$1 million is to start with $2 million and use technical analysis. I find this quote
amusing. A lot of people feel very strongly that technical analysis is about as useful
as voodoo for helping you figure out the best investments for your money. I happen
to disagree, but before I tell you why, lets take a look at some of the differences
between fundamental and technical analysis of investments.
In a nutshell, you can think about fundamental analysis as the more logical,
pragmatic part of investing in which you are looking at the financial soundness of a
company and its business prospects. Technical analysis, on the other hand, can tell

us a lot about the psychological aspects of the market by analyzing past market
movements in the companys stock to forecast future movement. You can buy a
position in a fundamentally sound company, but if its shares have already run up a
lot, you could still find yourself in a losing position on a pullback, something you
could have potentially avoided through the use of technical analysis.

Fundamental Analysis
If you use fundamental analysis to decide where to invest your money, there are
many different metrics you can use. Here are a few of the basics:
This is just the amount of sales a company has taken in over a set period of time,
usually reported on a quarterly and annual basis. The key here is to look at the
direction of revenues. Obviously, rising sales are a good thing. If sales have fallen,
its important to note why that might be. Does it look like the drop is a one-time glitch,
or is it possible that sales could continue to fall due to the success of a competitor, or
decreasing demand for the companys products? Does a rise in sales in the fourth
quarter necessarily mean the companys prospects are looking up, or is it simply a
seasonal uptick due to the holiday season.
Earnings Per Share (EPS)
While revenue is important, earnings are really the bread and butter of corporate
success. If a companys sales are increasing, but they are not able to retain those
revenues due to excessive expenses or poor management, thats a red flag. You
want to invest in companies with rising margins, and therefore rising EPS. You can
find historical EPS for most companies as well as EPS estimates for future quarters
on most investing websites.
P/E Ratio
The price to earnings ratio of a company is simply the current stock price divided by its
annual earnings per share. So if company XYZ is trading at $27 and it earned $1.50 per share
during the past 12 months, its P/E ratio would be 18. That means its trading at 18 times its
annual earnings.

When analysts refer to a companys valuation, they are often referring to its P/E
ratio. Whats a good P/E ratio? That can depend on who you ask, and it can also
vary by sector. For example, high growth stocks like those of technology companies
often trade at much higher P/E ratios whereas stable, lower growth companies trade
at lower valuations. This should make sense intuitively because if a company has
huge growth prospects, then one should be willing to pay a much higher price
relative to its current earnings. Analysts often disagree on what constitutes a cheap
stock because there is so much debate about what a specific P/E ratio actually
means for a given company or industry. There is no one size fits all when it comes
to P/E ratios.
Sector Fundamentals
A single companys performance can be heavily influenced by the sector in which it operates.
During economic slowdowns, for example, defensive sectors like consumer staples and
utilities tend to do better, whereas technology, transportation and financials do better when
the economy is on an upswing.
The Big Picture
Its always a good idea to keep the macroeconomic climate in mind when choosing
your asset allocation as well as your specific investments. Where are we in the
economic cycle? Are we at the beginning, middle, or end of a recession or boom? I
like to think about the macro view like the weather; it may not change what you need
to do, but it should affect how you do it.

Technical Analysis
While fundamental analysis is much more qualitative and involves more subjectivity,
charts are the main tool of technicians. Here are a few chart-watching basics:
Price Trends
Is the price of the stock moving higher or lower? How long has it been doing so?
Many chartists will only buy securities that are in uptrends. They may wait for a
short-term downtrend to enter, but wont even consider the stock if the longer-term
trend is lower.

Ive often said that charts are like a Rorschach (ink blot) test for the market, but
volume is its lie detector. Volume can tell us how strong the prevailing trend might
be. Decreasing volume can be a sign that the trend might be on the verge of a
Moving Averages
Adding moving average lines to a chart can help determine the overall trend direction. A
moving average line simply plots the average price of a security over a set period of time. For
example, the 50-day moving average indicates the average price over the past 50 days.
Technicians like to buy when the moving average is trending upward and the price pulls back
a touch to allow for a good entry point into the stock.
You will often see a variety of technical indicators above or below a chart. These can
indicate whether a security is overbought or oversold as well as the strength of its
momentum. There are too many indicators out there to follow all of them. A few of the
most common are: stochastics, Moving Average Convergence-Divergence (MACD),
and Relative Strength Index (RSI).

Which Is Better?
For decades, fundamental analysis was the only investment method that was given
any credibility. That has changed as the advent of high-speed computing has made
technical analysis easier and more widely available. Many large investment firms use
black box trading, or computer modeling, to determine their entry and exit points.
That means that many of the largest market players are making their trading
decisions based on computer algorithms. In fact, some estimate that computerized
trading represents up to 70% of the volume on exchanges today. Like it or not, your
investments are moving based on technical factors as much as fundamental ones.
The markets have changed, and we need to change our strategies with them.

The best approach to investing likely involves some combination of fundamental and
technical analysis. I like to choose stocks or sectors that have strong fundamentals
and then use technical analysis to help me decide when to buy or sell them.

Fundamental and Technical

Analysis: What is the Difference?
by KenFaulkenberry | Investment Analysis

Fundamental and Technical Analysis

The difference between fundamental and technical analysis is large. Most

investors, if they understand the differences, believe they are one or the
In reality, most investors use a combination of the two types of analysis.
Personally, I consider myself an 90% fundamental value and 10%
technical investor. Investment decisions should be based primarily on

Fundamental Stock Analysis

Fundamental stock analysis is the process of financial statement analysis,
and an examination of company products, management, competitors,
markets, and economic environment to determine the value of its stock.
Both historical and present data can be used, with the goal being to
forecast how the stock will perform in the future.
The most common data used in fundamental research and analysis would
be revenues, expenses, profits, earnings per share, assets, liabilities,
book value, dividends, cash flow, and projected earnings growth rates.
Key ratios would include price/earnings ratio (P/E), dividend yield,

dividend payout ratio, enterprise value ratios, return on equity, price to

sale, price to book value, and return on capital ratios.
An analyst would evaluate the data and ratios in comparison to the
universe of stocks available. The goal of the investor is to invest with
an margin of safety. That means attempting to buy investments that sell
below their fundamental value.
Related Reading: 7 Investment Concepts Fundamental to Value Portfolio

Technical Analysis
Technical analysis is the forecasting of the future price of a financial asset
using primarily historical price and volume data. Technical analysts believe
that all information is reflected in the price; making fundamental analysis
unnecessary. Information from the analysis of price is used to predict
what the future price will be.
There are several different popular schools of technical analysis, including
Elliott Wave Theory, Dow Theory, and Candlestick Charting. All attempt to
use price patterns and price trends to make forecasts of future prices. The
central idea is to estimate the likelihood of price movements and make
trades based on those with the best risk/reward ratio.
When evaluating price, technicians frequently use overall trend, areas of
support and resistance on the charts, price momentum, volume to
determine buy/sell pressure, and relative strength compared to the
market. They would also look for price patterns, study moving averages,
and examine indicators such as put/call ratios.

Fundamental analysis is employed to find the intrinsic value of a stock by

looking at the macroeconomic factors, industry specific factors and finally the
company specific factors. Technical Analysis on the other hand does not care
about the value of a stock or the financial instrument. Technical analysis
looks at the price movements and by using charts and other tools it helps to
make profit on the trends shown. Both stock analysis methods are used to
find top stocks for investments or trading and profit from the trade.

Fundamental And Technical Analysis: Major Differences

A major difference between both the stock analysis methods is the time frame
over which they are conducted. Fundamental analysis looks at a companys
balance sheet, cash flow statement and income statement whereas technical
analysts believe that all the available information is already priced in which
leaves further analysis about the financial information superfluous.
Fundamental analysts read the quarterly statements which are released
quarterly and hence have to look at a longer time frame of a couple months or
years to see how the company is performing. Technical analysts simply look at
the price and volume fluctuations which can be done on a weekly, daily or
even minute by minute basis. Hence any investment through fundamental
analysis would be a longer term commitment whereas technical analysts are
known to close their trades within a week.

Differences In Terminology
The difference in timeframe has also given different terms to how market
views their work. A fundamental analyst would generally recommend an
investment for a given stock after thorough investigation and for a period of
at least couple of months to several years. A technical analyst after going
through the charts and other tools can give recommendation for a trade in a
particular instrument. Although the end objective of both the investment or
trade is to profit from the mispricing of the underlying instrument, both are
done in a completely different manner with a different time horizon.
So what are the major differences between the two? Lets do some comparisons:

Fundamental analysis has a core purpose to produce a value that an investor

can then compare with the current stock price of a given company. That value

then becomes a buy, sell, hold type rating. But technical analysis? There are
no such things as buy, sell, and hold ratings.

Fundamental analysis will focus on the economy, typically macroeconomics to

help determine intrinsic value. What that means in 101 terms is this, hey,
interest rates may be affected later this year, this will surely affect
xxxxxxxxxxx. Technical analysis on the other hand does not care what the
economy is up to. 10% Gap ups are more important than interest rate hikes
and war.

Fundamental analysis focuses on financial ratios and numbers such as debt,

EPS, cash flow forecasts, etc. where as technical analysis focuses on
historical price movements to determine possible short term or long term
moves to come.


I would simply say that in order to make a wise investment, one needs to
know in what they are investing. When buying stock, it is important to know
the competitive position of a company and their products so that future
decisions can be made. For example, will there be future purchasing of
stock in larger volume or quantity? Is there an significant growth potential
to the company in terms of their products? These are but a few of the
questions that have to be assessed before purchasing stock. Part of
knowing this comes from the fact that everyone involved in the game of
investment and venture capital analysis is there to make money for
themselves. This self-interest sometimes precludes full disclosure. For
example, stock brokers are thrilled to facilitate a sale of a large volume of
stock. They might assert that they would like to see you, as the investor,
make a pot of money. However, in the end, they are not going to cover the
losses nor will they explain to one's spouse how Junior's college fund just
disappeared as a company declared bankruptcy. I seem to be in a movie
suggesting mood, but I would suggest that you watch the film, "Boiler
Room" for a great depiction of how painful this world can be. Had Harry
Renard done some level of homework in understanding the competitive

position of FarrowTech, he might not have wound up in the pathetic position

he did having been manipulated by Seth.

The 8 Most Important Facts To Know About A Company

Before You Invest
December 21, 2012
By swamper

Investing in a stock isn't throwing your money into a poker pot and betting you'll magically
become rich overnight.
When you "buy" a stock, you're not buying a piece of paper -- you are becoming an owner of the
company that stock represents.
If you buy, for example, stock in Apple (NASDAQ: APPL(link is external)) and profits grow for
the next few years, you'll be treated to a rising share price and grow wealthier along with your
fellow owners. But if you invest in Apple and the company does poorly over the next few years,
your shares will lose value -- and you'll lose money on your investment.
While this concept may sound simple, it's surprising how many investors overlook key indicators
about a company before they invest. As a result, they become owners of lousy companies that
lose money year after year.
You want to be an owner of a successful company that gives you a return, so why wouldn't you
take some time to research it first?
Don't worry, it's easier than you think. Using just eight key termsand spending 15 minutes to
analyze a company can mean the difference between reaping healthy investment gains
and losing your shirt.
Straight from the InvestingAnswers Financial Dictionary -- the industry's most investor-friendly
resource used by hundreds of thousands of investors every month -- here are eight key financial
terms that will make you a more successful stockinvestor.

And for a more detailed explanation of each term -- including examples, formulas and more -just click on it.
1. Chief Executive Officer (CEO)
Like a ship captain, a company's executive officer steers, rights and can sometimes sink the
ship, so it's important to know a company's CEO before you buy.
What to look for: You don't need the CEO's biography, just a brief overview of their business
background (Morningstar can help with this -- here's Apple CEO Tim Cook's overview(link is
external), for example). Ask yourself things like: Do you believe the CEO has the right experience
to run a car company for the next 10 years if he ran a retail chain before for the last 10 years? Is
the company's success heavily tied to this person like Steve Jobs was to Apple or Warren
Buffett is toBerkshire-Hathaway (NYSE: BRK-B(link is external))? And if so, do you feel
comfortable that the business can do well after that person leaves the company?
2. Business Model
A business model is essentially the strategy that a company uses to maximize its profit in its
Wal-Mart (NYSE: WMT(link is external)), for example, offers the lowest possible price so it can
sell more products. By contrast, another retailer like Coach (NYSE: COH(link is external)) sells
fewer, higher-quality items but earns a larger profit per product sold.
What to look for: While there is no "right" strategy, be sure you understand and agree with the
company's business model. Think about how well the company's business model might work in
recessions or economic booms. Dollar Tree's (NASDAQ: DLTR(link is external)) business
model of selling products for just $1 in a sluggish economy has given the company recordbreaking profits each year from 2007 through 2012 -- and a stock price that has soared 352%
over the same period.
[Note: Some companies' business models are more difficult to pinpoint. Sound, unbiased
financial newsletters (such as the financial newsletters offered by our parent
company, StreetAuthority(link is external)) can give you great insight on how a company profits
and rewards shareholders, but you can find brief outlines of a company's business model on
Morningstar -- as an example, here's Dollar Tree's profile(link is external).]
3. Competitive Advantage
Sometimes called an economic moat, a competitive advantage is when a company has a leg up
over its competitors through its superior products, patents, brand power, technology or operating

What to look for: Be sure the company you're thinking about buying has a competitive
advantage. For example, Wal-Mart offers super-low product prices that are hard for competitors
to beat. Coca-Cola (NYSE: KO(link is external)) has strong brand name recognition and sells a
popular product that's hard for competitors to replicate. A competitive advantage is the wall that
keeps competitors from taking market share and keeps that company more profitable -- and
makes it a betterinvestment for you -- over the long term.
4. Revenue
Revenue is simply the raw amount of money the company made from sales of its product or
service. Revenue is sometimes called a company's "top line" as it's always listed as the first line
of every company's income statement. [See where to find an income statement and an example
of one here.]
What to look for: A company with its revenue trending up each year for the past few years. While
it's not realistic to expect a company to increase its sales every single year (especially in a
struggling economy), a company with a trend of falling annual revenues signals it has trouble
selling its products and services or finding other sources of revenue.
5. Net Income
More casually called profit, earnings or "the bottom line," net income is simply the amount
of money a company earned from sales after expenses and taxes have been paid. As its
nickname suggests, you can find a company's net income listed on the bottom line of the
company's income statement.
What to look for: Net income growth from year to year. A company with growing net income each
year shows that the company knows how to effectively sell its products, slash or control its
business operating costs or a combination of both. Companies like AutoZone (NYSE: AZO(link
is external)) and Ross (NASDAQ: ROST(link is external)) have managed to grow their net
incomes for the past three years, and both stocks have returned well over 100% during the same
6. Profit Margin
Profit margin (sometimes referred to as net profit margin) is simply the percentage of revenue the
company takes in as profit (after expenses, interest and taxes have been paid). Apple, for
example, has a profit margin of 26% -- for every $100 iWidget it sells, it makes $26 profit. A
company's profit margin is net income divided by total revenue.
What to look for: A company with steady or growing profit margins every year, even during
a recession. Companies with growing profit margins signal that the company can command
higher prices because consumers are willing to pay for their product (Apple enjoys healthy profits
because it can sell its devices for a much higher price than competitors). Companies that can
maintain steady profit margins show the company can effectively control its operating costs,

keeping the company efficient (Wal-Mart has been able to keep its product prices low and its
profit margins steady even through recessions). Steady or growing profit margins ensure that a
company is profitable and can reward shareholders with returns.
7. Debt-to-Equity Ratio
With the debt-to-equity ratio, you can find out how much debt a company carries compared to the
amount of equityshareholders have in the company.
What to look for: A company with a low amount of debt in relation to its equity (total debt levels
that are no higher than the company's total equity levels; a ratio of 1:1 or lower). Used as a
safety measure, it tests how well the company can repay its debt obligations in the event that the
company runs into serious financial problems. Generally, the lower the debt-to-equity ratio a
company has, the less risky it is to you as an investor.
8. Price-to-Earnings Ratio (P/E)
Finding a company with strong financials is not enough. Just like you can pay too much for a
great car, you can pay too much for a great company -- and that
can mean limited upside potential on your gains (and even a loss). With a stock's price-toearnings ratio (P/E), you can find out if a stock is overpriced. The P/E ratio compares a stock's
price to the amount of profit per stock share (earnings per share) the company generated.
What to look for: A company with a P/E ratio that is on par with or lower than the
overall market's P/E ratio (which has historically been between 14 and 17) and the company's
peers in the industry. In general, a well-run company with a relatively low P/E ratio signals that
the company's stock is trading at a fair price or even a bargain. [Warren Buffett uses this
"value" investing approach and has been wildly successful. Learn more about this strategy
in Warren Buffett's Golden Rule of Investing.]
The Investing Answer: While these terms won't guarantee success with stock investing every
time, they will help you avoid the pitfalls that less experienced and even sometimes veteran
investors run into. Find companies that a) you understand and agree with from a leadership and
business perspective, b) operate with strong management and financial health and c) are trading
at a good value. These will be key to your investing success.
Happy Investing!

How to Calculate Weighted

Average Price per Share
Calculating your weighted average price per share can help
you assess the performance of an investment that was
made in several transactions.
If you bought all of your stock in a single transaction, it's easy to determine how your
investment is performing. Simply look at the current share price and compare it to the
price you paid.
However, if you bought your shares in several transactions at different price points,
and bought a different number of shares each time, evaluating your investments'
performance is a little more complicated. In this case, the best method is to calculate
a "weighted average" of the prices you paid.
What is a weighted average?
A weighted average is a method of finding the average value of a group of numbers,
which takes into account how many times each number occurs, or its importance. A
common real-world example is the calculation of a grade-point average in schools,
where an "A" carries a greater weight than a "B", which carries a greater weight than
a "C", and so on.
How to calculate your weighted average price per share
When it comes to buying stock, a weighted average price can be used when shares
of the same stock are acquired in multiple transactions over time. This is necessary if
the transactions were for different numbers of shares, since the larger purchases
contribute more to the average. For example, the mathematical average of $100 and
$200 is $150, but if you bought 10 shares of stock at $100 and only one share at
$200, the lower-priced shares carry more weight when calculating the average price
you paid.
In order to calculate your weighted average price per share, you can use the
following formula:

In words, this means that you multiply each price you paid by the number of shares
you bought at that price. Then, add up all of these results. Finally, divide by the total
number of shares you purchased.
This may sound a little complicated, so let's look at an example to illustrate how it
An example
Let's say that you own 500 shares of Microsoft, and you acquired your shares in
three separate transactions. You bought the following number of shares at each of
the following price points.
150 shares at $100
250 shares at $200
100 shares at $300
In order to calculate your weighted average price per share, simply multiply each
purchase price by the amount of shares purchased at that price, add them together,
and then divide by the total number of shares. Written as an equation, it looks like

Why it's useful

Knowing the weighted average price you paid for each share of stock can help you
determine how your investment is performing as a whole, relative to the current share
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Dollar cost averaging

From Wikipedia, the free encyclopedia

Dollar cost averaging (DCA) is an investment strategy for reducing the impact of volatility on
large purchases of financial assets such as equities. By dividing the total sum to be invested in
the market (e.g. $100,000) into equal amounts put into the market at regular intervals (e.g. $1000
over 100 weeks), DCA reduces the risk of incurring a substantial loss resulting from investing the
entire "lump sum" just before a fall in the market. Dollar cost averaging is not always the most
profitable way to invest a large sum, but it minimises downside risk.
In essence, the technique works in markets undergoing temporary declines because it exposes
only part of the total sum to the decline. The technique is so-called because of its potential for
reducing the average cost of shares bought. As the amount of shares that can be bought for a
fixed amount of money varies inversely with their price, DCA effectively leads to more shares
being purchased when their price is low and fewer when they are expensive. As a result, DCA
can lower the total average cost per share of the investment, giving the investor a lower overall
cost for the shares purchased over time.[1]
Dollar cost averaging is also called the constant dollar plan (in the US), pound-cost
averaging (in the UK), and, irrespective of currency, as unit cost averaging or the cost
average effect.[2]






6Further reading

7External links

In dollar cost averaging, the investor decides on two parameters: the fixed amount of money
invested each time, and the time horizon over which all of the investments are made. With a
shorter time horizon, the strategy behaves more like lump sum investing. One study has found
that the best time horizons when investing in the stock market in terms of balancing return and
risk have been 6 or 12 months.[3]
One key component to maximizing profits is to include the strategy of buying during a
downtrending market, using a scaled formula to buy more as the price falls. Then, as the trend

shifts to a higher priced market, use a scaled plan to sell. Using this strategy, one can profit from
the relationship between the value of a currency and a commodity or stock. [citation needed]

Assuming that the same amount of money is invested each time, the return from dollar cost
averaging on the total money invested is[4]

is the final price of the investment and
is the harmonic mean of the purchase
prices. If the time between purchases is small compared to the investment period, then
be estimated by the harmonic mean of all the prices within the purchase period.

The pros and cons of DCA have long been a subject for debate among both commercial and
academic specialists in investment strategies.[5] While some financial advisors such as Suze
Orman[6] claim that DCA reduces exposure to certain forms of financial risk associated with
making a single large purchase, others such as Timothy Middleton claim DCA is nothing more
than a marketing gimmick and not a sound investment strategy.[7] The financial cost and benefit of
DCA have also been examined in many studies using real market data. [8][9][10]
Recent research has highlighted the behavioural economic aspects of DCA, which allows
investors to make a trade-off between the regret caused by not making the most of a rising
market and that caused by investing into a falling market, which are known to be asymmetric.
Middleton claims that DCA helps investors to enter the market, investing more over time than
they might otherwise be willing to do all at once. Others supporting the strategy suggest the aim
of DCA is to invest a set amount; the same amount you would have had you invested a lump

Dollar cost averaging is not the same thing as continuous, automatic investing. This confusion of
terms is perpetuated by some articles (AARP,[13] Motley Fool[14]) and specifically noted by others
(Vanguard[15]). The argued weakness of DCA arises in the context of having the option to invest a
lump sum, but choosing to use DCA instead. If the market is expected to trend upwards over
time,[16] DCA can conversely be expected to face a statistical headwind: the investor is choosing
to invest at a future time rather than today, even though future prices are expected to be higher.
But most individual investors, especially in the context of retirement investing, never face a
choice between lump sum investing and DCA investing with a significant amount of money. The
disservice arises when these investors take the criticisms of DCA to mean that timing the market
is better than continuously and automatically investing a portion of their income as they earn it.
For example, stopping one's retirement investment contributions during a declining market on
account of the argued weaknesses of DCA would indicate a misunderstanding of those
The weakness of DCA investing applies when considering the investment of a large lump sum,
and DCA would postpone investing most of that sum until later dates. Given that the historical
market value of a balanced portfolio has increased over time, starting today tends to be better
than waiting until tomorrow. However, for the average retirement investor's situation where only
small sums are available at any given time, the historical market trend would support a policy of
continuous, automatic investing without regard to market direction.

The Dangers Of Dollar Cost

Averaging Strategy

Dollar cost averaging is a popular investment strategy for many retail

However, these retail investors do not know of the many flaws of this particular
investment strategy that are detrimental to their financial health.
And my experiences have convinced me that there are numerous risks and
downsides about using this methodology.
In summary, the key disadvantages are as follows:
1. You could be cost averaging on a company that looks great on the surface
but actually dying from within (eg. Enron, Lehman Brothers)
2. You never know for sure how long you would have to hold on to a downtrending stock before it finally starts to trend up (if it ever does)

3. You are incurring huge opportunity costs by executing the dollar cost
averaging strategy
Lets explore in details the above points before you judge for yourself if this
strategy is worth pursuing.

How do people use dollar cost averaging

Basically, what it means to execute dollar cost averaging is to first identify a
supposedly good and fundamentally sound company.
A sum of capital is then allocated to regularly buy the shares of this company
as its stock price falls.
The objective of this strategy is to lower the overall purchase price of this stock over the
longer term. This will help the investor break even or make profit earlier when the stock price
finally ends its down-trend and starts to trend up. On paper, this sounds like a great strategy.
The commonly accepted benefit is that a good company will sooner or later start to see its
stock price increase and trend higher. As such, to keep buying the shares as the price keeps
falling seems like a great way to buy the shares cheaper.

Why dollar cost averaging could be a losers

You never know for sure whether a company is on its way to financial ruins no
matter how solid it may look on its financial reports or in the public at a certain
point in time.
The only common sign that all doomed to fail companies will show ahead of its
demise is that its stock price will keep sliding lower and lower.
Imagine this: You identify a solid yet cheap company. You buy its stock and
average down as the price keeps falling.
After you have nearly ploughed your entire fortune into this supposedly solid
cheap stock, it went bankrupt.

Cant believe that this could happen to you? Just check out how Enrons stock
price kept plunging way before the fraud was finally discovered!

Never underestimate how prolong a stocks

price down-trend can be
Putting individual companies aside, history has also proven that a countrys
economy is not infallible to a prolong period of recession and stock market
Another example of how detrimental dollar cost averaging can be for an
investor who ploughs his money into a specific market is by observing the
Japanese market since 1990s.
An investor who has been doing dollar cost averaging on the Nikkei 225 index
since 1990 is still making a loss in the year 2012.
Now, who would have expected a power economy like Japan to be trapped in
a recession for more than 20 years?
Imagine how worst off will you be had you been steadily investing in the
Japanese market via dollar cost averaging strategy and still holding on to
paper loss 20 years later?

Nikkei 225 Index From Year 1985 to 2013

Giving up the entire forest for a tree

Dollar cost averaging also has another big disadvantage.
There are huge opportunity costs when you adopt this investment strategy.
Lets assume that you have really identified a truly good Stock A that is worth
investing in at the start of the year.
Due to some unforeseen circumstances, this stock was under constant selling
pressure at that point in time.
However, you determined that it is a worthy venture to dollar cost average this
good stock as its stock price declined.
1 month passed. 3 months passed. 6 months passed.
After losing nearly 30% from the point you started to purchase and average
this stock, it finally started to show signs of bottoming during the middle of the

As the stock started to recover, you slowly broke even and before you know it,
you were holding on to a gain of 10% by the end of the year!
This annualized return of 10% on Stock A seems to suggest that you have
made the right decision to dollar average this stock at the start of the year.
But hold on!
Has it ever occurred to you that during the first six months of the year, while
you were averaging down on this Stock A as its price falls, there could be ten
other stocks which climbed 30% within the same period?
Can you imagine how much more annualized returns you would have gotten if
you had invested in any of those ten other stocks for the first half of the year,
took your profit and switch your investment to Stock A during the middle of the
year after it has showed signs of bottoming?

In conclusion, what do all these mean for

All in all, dollar cost averaging might seem on the surface, a good strategy for
the average investor.
But if you really sit down and think through it, the risk of doing so and the
opportunity costs that this strategy has, far outweigh the benefits of getting the
stock at a cheaper average price.
If you have been doing dollar cost averaging on your investments but never
seem to be able to make any significant profits out of it, maybe its time for you
to rethink your investment strategies.
From my experience, the best strategy is to buy only when the stock is ready
to go on an up-trend, not when it is on a down-trend or going sideways.
By buying when the up-trend starts, you incur the least opportunity cost and
also, you can maximise the returns on your capital within the shortest time.
And how best to identify stocks that are primed for a price appreciation from
your point of entry?
Use technical analysis to identify those moments!
Watch out for more posts from me with regards to this topic!


The main downside of DCA is that there is an opportunity cost to be paid for holding
money in cash while it waits to be invested in the market. If the market goes up while
you're dollar-cost averaging into it, you've lost out on any gains you would have had
by investing the entire amount right away. Also, even if the markets do go down in
the short term, as long as you are invested, you could still be earning dividends and
interest to either reinvest or withdraw for income.
In the 2012 Vanguard study, Dollar-cost averaging just means taking risk later, the
authors looked at historical monthly returns for $1 million invested as a lump sum
and through dollar-cost averaging over periods as short as 6 months and as long as
36 months, assuming that funds were kept in cash before being invested. They
tested various stock/bond allocations ranging from an all-equities portfolio to an allbond portfolio in the United States, United Kingdom and Australian markets.
Figure 1: Relative historical probability of outperformance for LSI versus 12-month
DCA at varying allocations

Source: July 2012 Vanguard study Dollar-cost averaging just means taking risk
later. Vanguard calculations based on benchmark data. See page 7 of Vanguard
study for a list of the benchmarks used.
The result was that the lump-sum method delivered higher returns about 66% of the
time compared with the 12-month dollar-cost averaging method, regardless of
whether an all-equities, all-bond, or 60% equity/40% bond allocation was used (See
Figure 1). The authors also note that the longer the dollar-cost averaging time frame,
the greater the chance of the lump-sum method outperforming. For example, dollarcost averaging over 36 months underperformed the lump-sum method 90% of the
time for U.S. markets.
In terms of dollars, the difference can significantly impact a portfolio. The authors
calculated the average ending values for a $1 million portfolio invested all at once in
a mix of 60% stocks and 40% bonds turned into $2,450,264 on average, compared
to $2,395,824 when dollar-cost averaged over the course of a year a difference of
more than $54,000.

One last factor to consider is investing costs, which can also be a disadvantage for
the DCA method. For example, using DCA could require paying multiple brokerage
fees to buy shares of a stock in several lots rather than just once, which would
further diminish your returns as compared with the lump-sum method.

Immunization (finance)
From Wikipedia, the free encyclopedia

In finance, interest rate immunization, as developed by Frank Redington is a strategy that

ensures that a change in interest rates will not affect the value of a portfolio. Similarly,
immunization can be used to ensure that the value of a pension fund's or a firm's assets will
increase or decrease in exactly the opposite amount of their liabilities, thus leaving the value of
the pension fund's surplus or firm's equity unchanged, regardless of changes in the interest rate.
Interest rate immunization can be accomplished by several methods, including cash flow
matching, duration matching, and volatility and convexity matching. It can also be accomplished
by trading in bond forwards, futures, or options.
Other types of financial risks, such as foreign exchange risk or stock market risk, can be
immunized using similar strategies. If the immunization is incomplete, these strategies are
usually called hedging. If the immunization is complete, these strategies are usually
called arbitrage.

1Cash flow matching

2Duration matching

3Calculating immunization

4Immunization in practice



7See also


9External links

10Recommended reading

Cash flow matching[edit]

Conceptually, the easiest form of immunization is cash flow matching. For example, if a financial
company is obliged to pay 100 dollars to someone in 10 years, it can protect itself by buying and
holding a 10-year, zero-coupon bond that matures in 10 years and has a redemption value of

$100. Thus, the firm's expected cash inflows would exactly match its expected cash outflows,
and a change in interest rates would not affect the firm's ability to pay its obligations.
Nevertheless, a firm with many expected cash flows can find that cash flow matching can be
difficult or expensive to achieve in practice. That meant that only institutional investors could
afford it. But the latest advances in technology have relieved much of this difficulty. Dedicated
portfolio theory is based on cash flow matching and is being used by personal financial advisors
to construct retirement portfolios for private individuals. Withdrawals from the portfolio to pay
living expenses represent the stream of expected future cash flows to be matched. Individual
bonds with staggered maturities are purchased whose coupon interest payments and
redemptions supply the cash flows to meet the withdrawals of the retirees.

Duration matching[edit]
See also: Duration gap
A more practical alternative immunization method is duration matching. Here, the duration of
the assets is matched with the duration of the liabilities. To make the match actually profitable
under changing interest rates, the assets and liabilities are arranged so that the total convexity of
the assets exceed the convexity of the liabilities. In other words, one can match the first
derivatives (with respect to interest rate) of the price functions of the assets and liabilities and
make sure that the second derivative of the asset price function is set to be greater than or equal
to the second derivative of the liability price function.

Calculating immunization[edit]
Immunization starts with the assumption that the yield curve is flat. It then assumes that interest
rate changes are parallel shifts up or down in that yield curve. Let the net cash flow at time t be
denoted by Rt, i.e.:
Rt = At - Lt ; t = 1,2,3,...,n
where At and Lt represent cash inflows (At) and outflows or liabilities (Lt)
We will assume that the present value of cash inflows from the assets is equal to the present
value of the cash outlfows from the liabilities. Thus, we have:
P(i) = 0

Immunization in practice[edit]
Immunization can be done in a portfolio of a single asset type, such as government bonds, by
creating long and short positions along the yield curve. It is usually possible to immunize a
portfolio against the most prevalent risk factors. A principal component analysis of changes along
the U.S. Government Treasury yield curve reveals that more than 90% of the yield curve shifts
are parallel shifts, followed by a smaller percentage of slope shifts and a very small percentage
of curvature shifts. Using that knowledge, an immunized portfolio can be created by creating long
positions with durations at the long and short end of the curve, and a matching short position with
a duration in the middle of the curve. These positions protect against parallel shifts and slope
changes, in exchange for exposure to curvature changes.[citation needed]

Immunization, if possible and complete, can protect against term mismatch but not against other
kinds of financial risk such as default by the borrower (i.e., the issuer of a bond).
Users of this technique include banks, insurance companies, pension funds and bond brokers;
individual investors infrequently have the resources to properly immunize their portfolios.
The disadvantage associated with duration matching is that it assumes the durations of assets
and liabilities remain unchanged, which is rarely the case.

Further information: Dedicated Portfolio Theory History
Immunization was discovered independently by several researchers in the early 1940s and
1950s. This work was largely ignored before being re-introduced in the early 1970s, whereafter it
gained popularity. See Dedicated Portfolio Theory#History for details.


May1906 23 May1984)was a noted Britishactuary.Redington was best
known for his development of Immunisation Theory which specifies how a
fixed income portfolio can be "immunised" against changing interest rates.
Redingtons Immunization Theory is a theory that has greatly benefited
investors and investment firms alike. The theory he created finds a constant
interest rate for investors to pay rather than the ever changing, and difficult to
calculate current interest rate. In order to find a constant interest rate one must
subtract the liability cost from the asset cost and come up with a difference that
is zero. Seeing as how this is nearly impossible, Redington used Taylors
Expansion Formula to make it as close to zero as possible. This enables the
interest rate to remain static instead of fluid, which leads to either a gain, loss,
or nothing at all. Interest is a very tricky thing to calculate in real life scenarios,
it is more complicated than basic1+1. This is so because interest rates are
always subject to change. But F.M. Redington created a theory where the
investor is immunized from the change of rates. This theory was called
Redingtons Theory of Immunization. Immunization is defined as, A technique
of investing in bonds such that the portfolio's target return is protected against
interest rate fluctuations. Changes in returns at which cash flows can be
reinvested are offset by changes in the value of the securities in the
portfolio.Redington created this theory by the use of Taylor Expansion. Taylor
Expansion is expressed by the formula:


The efficient markets theory is a proposition that the prices of stocks, bonds, and
other securities fully reflect all available information at any point in time. This is
the result of profit-maximizing investors painstakingly searching for information
and using what they know, including what they think will happen in the future,
when trading securities. Active trading moves prices until the risk-adjusted
expected returns are equal for all securities. Further changes are due to events not
known beforehand, which are quickly built into prices.

In an efficient market, investment capital is allocated to its most productive use.

Market efficiency also implies that investors cannot "beat the market" or find
securities that are mispriced such that their portfolios consistently perform better
than the market.

Efficient Market Theory

The efficient market theory states that the stock market reacts very quickly to new
information, so at any given time the market contains the sum of all investors views of
the market.
What does this mean to the average investor? Imagine you are reading an article in the
Wall Street Journal. Dell is going to release a new computer in three months that will blow
away the competition. You think maybe tomorrow youll call your broker and buy Dell,
because obviously the price will go up. The efficient market theory states, in no uncertain
terms, you are too late! If you bought Dell stock as soon as soon as you read the article,
or even as soon as it was printed, you are still too late. A lot of more savvy investors and
traders bought the stock before you, and drove the price up. It doesnt matter that the
new computer wont be released for 3 more months. Whoever buys the stock first wins.
What does this mean to the savvy trader? Even if you have the fastest tools and the best
information, you still have to work for it. Trading is a competition. No strategy will always work.
Thats impossible, because in order for someone to win, someone else has to lose.
Trade-Ideas offers a number of tools to help you prepare for that competition. Our tools help you
find trends long before they hit the newspaper.
Recently the efficient market theory has been misquoted a lot. The efficient market theory
does not say that the market is always correct. It says that the market represents the sum of the
information available and the choices made by traders and investors. Traders and investors can
be wrong. Information can be wrong. The best opportunities come when the market is
temporarily wrong. The smart traders will find the difference between the market value of a stock
and the ideal value before the rest of the crowd does.
One successful strategy that many of our customers use is called mean reversion. This strategy
is based on the idea that the market is not 100% efficient. Time after time, the market will
overreact to bad news. Prices will move much further than they should. Then they will move
back toward normal. Our tools are set up to help you see interesting events in the market as
they happen. And our tools also help you with the statistics to know whats normal and whats
out of range.

What is an efficient market

and how does it affect
individual investors?
By Investopedia Staff


When people talk about market efficiency they are referring to the degree to
which the aggregate decisions of all the market's participants accurately reflect
the value of public companies and their common shares at any moment in
time. This requires determining a company's intrinsic value and constantly
updating those valuations as new information becomes known. The faster and
more accurate the market is able to price securities, the more efficient it is said
to be.
This principle is called the efficient market hypothesis, which asserts that the
market is able to correctly price securities in a timely manner based on the
latest information available and therefore there are no undervalued stocks to
be had since every stock is always trading at a price equal to their intrinsic
value. However, the theory has its detractors who believe the market
overreacts to economic changes, resulting in stocks becoming overpriced or
underpriced, and they have their own historical data to back it up.
For example, consider the boom (and subsequent bursting) of the
dotcom bubble in the late nineties and early noughties. Countless technology
companies (many of which had not even turned a profit) were driven up to
unreasonable price levels by an overly bullish market. It was a year or two

before the bubble burst, or the market adjusted itself, which can be seen as
evidence that the market is not entirely efficient, at least not all of the time. In
fact, it is not uncommon for a given stock to experience an upward spike in a
short period, only to fall back down again (sometimes even within the same
trading day). Surely, these types of price movements do not entirely support
the efficient market hypothesis.
It is reasonable to conclude that the market is considerably efficient
most of the time. However, history has proved that the market can
overreact to new information (both positively and negatively). As an
individual investor, the best thing you can do to ensure you pay an
accurate price for your shares is to research a company before
purchasing their stock, and analyze whether or not the market appears
to be reasonable in its pricing.

Read more: What is an efficient market and how does it affect individual investors? |
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EMH Tenets and Problems with EMH
First, the efficient market hypothesis assumes that all investors perceive all available
information in precisely the same manner. The numerous methods for analyzing
and valuing stocks pose some problems for the validity of the EMH. If one investor looks
for undervalued market opportunities while another investor evaluates a stock on the
basis of its growth potential, these two investors will already have arrived at a different
assessment of the stock's fair market value. Therefore, one argument against the EMH
points out that, since investors value stocks differently, it is impossible to ascertain what
a stock should be worth under an efficient market.
Secondly, under the efficient market hypothesis, no single investor is ever able to attain
greater profitability than another with the same amount of invested funds: their equal
possession of information means they can only achieve identical returns. But consider
the wide range of investment returns attained by the entire universe of investors,
investment funds and so forth. If no investor had any clear advantage over another,
would there be a range of yearly returns in the mutual fund industry from significant
losses to 50% profits, or more? According to the EMH, if one investor is profitable, it

means the entire universe of investors is profitable. In reality, this is not necessarily the
Thirdly (and closely related to the second point), under the efficient market hypothesis,
no investor should ever be able to beat the market, or the average annual returns that all
investors and funds are able to achieve using their best efforts. (For more reading on
beating the market, see the frequently asked question What does it mean when people
say they "beat the market"? How do they know they've done so?) This would naturally
imply, as many market experts often maintain, that the absolute best investment strategy
is simply to place all of one's investment funds into an index fund, which would increase
or decrease according to the overall level of corporate profitability or losses. There are,
however, many examples of investors who have consistently beat the market - you need
look no further than Warren Buffett to find an example of someone who's managed to
beat the averages year after year. (To learn more about Warren Buffett and his style of
investing, see Warren Buffett: How He Does It and The Greatest Investors.)
Qualifying the EMH
Eugene Fama never imagined that his efficient market would be 100% efficient all the
time. Of course, it's impossible for the market to attain full efficiency all the time, as it
takes time for stock prices to respond to new information released into the investment
community. The efficient hypothesis, however, does not give a strict definition of how
much time prices need to revert to fair value. Moreover, under an efficient market,
random events are entirely acceptable but will always be ironed out as prices revert to
the norm.
It is important to ask, however, whether EMH undermines itself in its allowance for
random occurrences or environmental eventualities. There is no doubt that such
eventualities must be considered under market efficiency but, by definition, true
efficiency accounts for those factors immediately. In other words, prices should
respond nearly instantaneously with the release of new information that can be
expected to affect a stock's investment characteristics. So, if the EMH allows for
inefficiencies, it may have to admit that absolute market efficiency is impossible.

Read more: Efficient Market Hypothesis: Is The Stock Market Efficient? |

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Modern Portfolio Theory

A theory of investing stating that every rational investor, at a given level of risk, will accept only the l
argestexpected return. More specifically, modern portfolio theory attempts to account for risk and exp
returnmathematically to help the investor find a portfolio with the maximum return for the minimum ab
out of risk. AMarkowitz efficient
portfolio represents just that: the most expected return at a given amount of risk (sometimesexcludin
g zero risk). Harry
Markowitz first began developing this theory in an article published in 1952 and receivedthe Nobel pri
ze for economics for his work in 1990. See also: Homogenous expectations assumption, Markowitz
efficient set of portfolios.

Postulated hypothesised
Markowitz postulated that diversification should not only aim at
reducing the risk of a security by reducing Its variability or
156 11.621.3 Copy Right: Rai University
standard deviation, but by reducing the covariance or interactive risk
of two or more securities in a portfolio. As by combination of different
securities, it is theoretically possible to have a range of risk varying
from zero to infinity. Markowitz theory of portfolio diversification
attaches importance to standard deviation, to reduce it to zero, if
possible, covariance to have as much as possible negative interactive
effect among the securities within the portfolio and coefficient of
correlation to have - 1 (negative) so that the overall risk of the
portfolio as a whole is nil or negligible. Then the securities have to be
combined in a m3nner that standard deviation is zero
The Theory of Active Portfolio Management


Treynor-Black portfolio weights are sensitive to large alpha values, which can result in
practically infeasible long/short portfolio positions.


Benchmark portfolio risk, the variance of the return difference between the portfolio and
the benchmark, can be constrained to keep the TB portfolio within reasonable weights.


Alpha forecasts must be shrunk (adjusted toward zero) to account for less-than-perfect
forecasting quality. Compiling past analyst forecasts and subsequent realizations allows
one to estimate the correlation between realizations and forecasts. Regression analysis can
be used to measure the forecast quality and guide the proper adjustment of future
forecasts. When alpha forecasts are scaled back to account for forecast imprecision, the
resulting portfolio positions become far more moderate.


The Black-Litterman model allows the private views of the portfolio manager to be
incorporated with market data in the optimization procedure.


The Treynor-Black and Black-Litterman models are complementary tools. Both should be
used: the TB model is more geared toward security analysis while the BL model more
naturally fits asset allocation problems.


Even low-quality forecasts are valuable. Imperceptible R-squares of only .001 in

regressions of realizations on analysts' forecasts can be used to substantially improve
portfolio performance.

Portfolio Mgt Case Study

prepare a fundamental analysis of an
investment in the stock of a publicly
traded company
BUDGET$30 - $250 USD
Prepare a fundamental analysis of an investment in the stock of a publicly traded company.
You will need the most recent financial statements (annual, not quarterly) from the company
(income statement, balance sheet, and cash flow statement). Do not choose a company in
bankruptcy. Do not choose one of the following:
Abercrombie & Fitch, Accenture, Activision Blizzard, Amazon, AT&T, Baker
Hughes, Barnes & Noble, Cameron International, Catepillar,Charming, Shoppes,
Chevron, Cisco, Coca Cola, Colgate-Palmolive, Corning, Dell, Dick's Sporting Goofs,
Dillards' Inc., ExxonMobil, Fed Ex, Ford, G. E., General Motors, Halliburton, Hewlett
Packard, Intuit Inc., Juniper Networks, Kellogg, Kimberly-Clark, Net App, Nike, Nvidia,
Petsmart, Ralph Lauren, Samuel Adams, Smith & Wesson, Snap-On, Southwest
Airlines, Starbucks, Target, Tiffany & Co., Time Warner, Toyota Motor Corporation,

Under Armour, Walmart, Whiting Petroleum

Included should be:
1. a brief discussion (1/2 to 1 page) of the background, products, and recent business
developments concerning the firm.
2. a 1/2 page description of the industry in which the company operates. Identify other firms
in the industry, and give some sense of the current problems and potentials in the industry.
3. An explanation of what has happened to the price of the stock over the last three years or
so and explain why. Include a Stock price graph. Explain how the company's stock price has
been affected by the economy as well as happenings specific to the firm.
4. Compare PE ratio and the market value/book value ratio to comparable companies and/or
the industry.
5. An analysis of relevant ratios over the last 2 years. ; devise a table, chart, or graph to show
these. Discuss the major categories of ratios - liquidity, debt, management, asset
management, profitability-- by showing trends of comparisons and pointing out the trends
you see. compare ratios to recent industry averages and draw conclusions. Compare ratios to
another firm in the industry and draw conclustions. Fit the profit margin, total asset turnover,
and debt information into a dupont analysis and draw conclusions.
6. Discuss dividend policy-- dividend yield, payout ratio, expected future policy-- as well as
future dividend prospects.
7. Discuss growth rate in EPS. How does this compare with your estimates of growth
8. Using their Statement of cash flow, analyze significant sources and uses of funds. Analyze
any implications these sources or uses of funds. Analyze any implications these sources or
uses have and explain the cash balance increase or decreses in the last year. ( do this in one
9. What is the firm's Beta? compare it to betas of other firms in the industry and explain what
that means relative to market risk.
10. Using at least two sources such as Valueline or Morningstar, tell how other people
evaluate an investment in the firm's stock. also tell if your own evaluation agree.
11. in one to two pages, summarixe by giving a SWOT analysis of the company. then give a
recommendation as to whether or not you consider the company to be a good investment.
Check also:

Are Markets Efficient?

The question concerning the value of analysis begins with the debate on market
efficiency. Just what is represented by the current price of a security? Is a
security's current price an accurate reflection of its fair value? Or, do anomalies
exist that allow traders and investors the opportunity to beat the market by
finding undervalued or overvalued securities?

Aswath Damodaran, of the Stern Business School at New York University,

defines an efficient market as one in which the market price is an unbiased
estimate of the true value of the investment. Fair enough, but it is not quite that
simple. In an efficient market, the current price of a security fully reflects all
available information and is the fair value. All because the price is the sum
value of all views (bullish, bearish or otherwise) held by market participants. It is
the fair value because the market agreed on a price to buy and sell the security.
As new information becomes available, the market assimilates the information
by adjusting the security's price up (buying) and down (selling). In an efficient
market, deviations above and below fair value are possible, but these deviations
are considered to be random. Over the long run, the price should accurately
reflect fair value.
The hypothesis further asserts that if markets are efficient, then it should be
virtually impossible to outperform the market on a sustained basis. Even though
deviations will occur and there will be periods when securities are overvalued or
undervalued, these anomalies will disappear as quickly as they appeared, thus
making it almost impossible to profit from them.
From experience, most of us would agree that the market is not perfectly
efficient. Anomalies do exist and there are investors and traders that outperform
the market. Therefore, there are varying degrees of market efficiency, which have
been broken down into three levels. These three levels also happen to correspond
to the beliefs of the fundamentalists, technicians and random walkers.

Strong-form: Technicians

Fundamental Analysis Definition

Fundamental analysis is a stock valuation method that

uses financial and economic analysis to predict the




The fundamental information that is analyzed can include







information such as estimates of the growth of demand

for products sold by the company, industry comparisons,
and economy-wide changes, changes in government
policies etc..

General Strategy
To a fundamentalist, the market price of a stock tends to
move towards it's real value or intrinsic value. If the
intrinsic/real value of a stock is above the current
market price, the investor would purchase the stock
because he knows that the stock price would rise and







If the intrinsic value of a stock was below the market

price, the investor would sell the stock because he knows
that the stock price is going to fall and come closer to its


All this seems simple. Now the next obvious question is

how do you find out what the intrinsic value of a company

is? Once you know this, you will be able to compare this
price to the market price of the company and decide
whether you want to buy it (or sell it if you already own


To start finding out the intrinsic value, the fundamentalist

analyzer makes an examination of the current and future







After you analyzed the overall economy, you have to

analyze firm you are interested in. You should analyze
factors that give the firm a competitive advantage in its







performance, growth potential, low cost producer, brand

name etc. Find out as much as possible about the




Do they have any core competency or fundamental










What advantage do they have over their competing


Do they have a strong market presence and market


Or do they constantly have to employ a large part of their

profits and resources in marketing and finding new






After you understand the company & what they do, how
they relate to the market and their customers, you will be
in a much better position to decide whether the price of










Having understood the basics of fundamental analysis, let







When investing in the stocks, we want the price of our

stock to rise. Not only do we want our stock price to rise,
we want it to rise FAST! So the challenge is to figure out:








Some stocks are cheap and some are costly. Some are
worth Rs.500 and some are even worth 50paise. But the
price of the stock is not important. The price of the stock
does not make a stock good to buy. What is important is
how much the price of the stock is likely to rise.

If you invest Rs.500 in one stock of Rs.500 and the price

goes up to Rs.540 you will make Rs.40. However, if you
invest Rs.500 in a 50paise stock, you will have 1000

stocks. If the price of the stock goes up from 50paise to

Rs.1, then the Rs.500 you invested is now Rs.1000. You




If you understand this, you can see that the price of the
stock is not important. What is important is the rise in the
stocks price. More specifically the percentage rise in





If the Rs.500 stock becomes worth Rs.540, then that is a

8% rise. This 8% rise only makes us Rs.40. On the other
hand when we invest the same Rs.500 in the 50paise
stock and the stock price goes up to Rs.1, it is a 100%
rise as the stock price has doubled. This 100% rise makes


The point is that when picking a company, we are

interested in a company whose stock price will rise by a


Please note: Looking at the above paragraphs, it may

seem like a good idea to buy all the really cheap 50paise
and Rs.1 stocks hoping that their price will rise by 100%
or more. This sounds good, but it can also be really really
bad some times! These really small stocks are very
volatile and unless you know what you are doing, do NOT




However, the point to be noted is that we are interested

in stocks that will have the highest % rise in the stock
price. Now the question is, how do you compare stocks.
How do you compare a stock worth Rs.500 to a stock
worth 50paise and figure out which one will have a
higher percentage rise.
How do you compare two companies that are in different
fields and different industries? How do you know which
one is fundamentally strong and which one is week?


you try

to compare

two companies

in different

industries and different customers it is like comparing

apples and elephants. There is no way to compare them!
So fundamental analysts use different tools and ratios to
compare all sorts of companies no matter what business







Next let us get into the tools and ratios that tell us about
the companies and their comparison...