• Equity financing Equity financing is the source of finance that is generated by issuing

shares and creating ownership of the firm having no specified maturity date to pay back the
amount.
• Debt financing Debt financing is borrowed by the firm from the creditors on the specified
terms and conditions i.e. specified time and principal plus interest amount.
Advantages and disadvantages of equity financing: Advantages
• No maturity period.
• Equity parts the risk and liabilities of the firm owners.
• Use of cash flows in the growth of firm or in diversification instead of paying interest.
Disadvantages
• Control problem. • Demanding higher positions. • Increasing tax expenses.
Advantages and disadvantages of debt financing. Advantages
• No ownership so no control on the firm.
• An aggressive growth strategy can be developed if the interest rates are low.
• Decrease in tax expenses .
Disadvantage
 Repayment of the loan (principal) and the interest amount.
• Covenants and restriction (terms and conditions) on the firm.
• In the case of failure bankruptcy and liquidation.
Factors to consider when choosing equity financing
• When small and new firms having no solid record of sales and earnings.
• When firm’s credit ratings is low.
• When the interest rates are relatively high.
• Firm has not much issue of control.
Factors to consider when choosing debt financing: • When a firm is enough established
and stable in profit earnings.
• When the firm has steady sales. back of collateral and profitable growth.
• When interest rates are relatively low.
• If control problem exists.
Capital structure.
Capital structure It is the method a firm can finance its all assets by the mix of funding
sources i.e. debt, equity or hybrid securities. Capital structure can be said as total finance of
the firm consisting of or divided into the proportions of all possible funding sources. Thus the
capital structure is the composition of its liabilities and equities structured on the ratios of the
sources i.e. the firm raises 30 billion from equity and 70 billion from debt would said to be
30% of fund is got from equity (equity-financed) and the 70% of fund is received from debt
(debt-financed). So the debt to total finance ratio of this firm is 70% as this example would be
said as the leverage of the firm.
Why does capital structure irrelevant?
MM theory of irrelevance of Capital structure. • In the view point of the theorem
proposed by Modigliani-Miller, it nullifies the effect of different factors such as uncertainties
of the situation and fluctuations that may emerge in financing.
• It is considered as purely theoretical results and it disregards various important elements in
the capital structure process e.g. uncertainties and fluctuations, asymmetric information that
occur in real world.
• The theory states that assuming a perfect market, it is irrelevant to its value that how a firm
is financed. This provides the base to the real world to examine such reasons that how and
why the capital structure is relevant to affect the value of firm by the firm’s decision about
capital structure.
Why is capital structure relevant?
• While the capital structure is said to be irrelevant in perfect market by M&M theory, but the
real world’ imperfections and asymmetric information are the reason of the relevance. For
understanding that concept the main three theories focus that concept of relevance of the
capital structure. Those theories are trade off- theory, Pecking order theory and agency cost
theory. • Trade off theory states that the use of debt is beneficial because of the tax
deductibility. There is also the cost of debt financing i.e. the cost of bankruptcy and the cost
of financial distress due to debt. As the debt is further increased the marginal return will
decrease and the marginal cost will increase. Firm should focus trade off between the
proportions of the two sources for optimizing the overall value of firm (Myers, 1984). •
Pecking order theory suggests financing on the preference basis i.e. firms prioritize the
internal equity initially and then debt while in the last equity. It suggests equity as the “last
resort” in the hierarchy of sources. This theory attempts to capture the cost of asymmetric
information (Myers and Majluf, 1984) • Agency Cost is concerned with “principal” (owner),
when an owner hires a manager “agent” to work on its behalf. As these parties have different
interests and manager / agent has relatively more information/knowledge, the owners may not
ensure the agents act according to their interests (Jensen and Meckling, 1976).
GLOBAL EQUITY
• In financial markets, the large number of available mutual funds and exchange
traded funds (ETFs) leads to the division of funds into different categories based on
the types of investments a particular fund owns. The two broad categories are stock
and bond funds.
• The term "global equity" typically describes a sub-category of funds in the stock
funds.
• "Global equity" funds incorporate shares of companies based anywhere in the world.
Global funds can include either single or multiple asset classes.
• An asset class breakdown provides the percentages of core asset classes found within
a mutual fund, exchange-traded fund, or another portfolio. Asset classes generally
refer to broad categories such as equities, fixed income, and commodities.
 • A global fund is a fund that invests in companies located anywhere in the world
including the investor's own country. A global fund seeks to identify the best
investments from a global securities.
Mutual Funds and Exchange Traded Funds (ETF)
(a) Mutual Funds: Individuals who purchase mutual funds pool their money with other
investors to purchase shares of securities including corporate stocks, bonds, municipal
bond issues or government treasuries. Mutual funds seek to outperform the market
through active management investment strategies within the fund, and a team of
professional fund managers manage the fund.
(b) An exchange-traded fund (ETF) is an investment fund traded on stock exchanges,
much like stocks. An ETF holds assets such as stocks, commodities, or bonds and
generally operates with an arbitrage mechanism designed to keep it trading close to its
net asset value, although deviations can occasionally occur.
Net Asset Value (NAV)
Each investment fund calculates the net asset value -- NAV -- of a share by adding up the
value of all the securities owned by the fund divided by the number of outstanding shares.
Mutual funds, closed-end funds, exchange-traded funds -- ETFs -- and unit investment
trusts all have a net asset value. The net asset value of a fund is calculated once a day,
usually soon after the stock market closes. The NAV can be viewed as the amount of
money investors would receive per share if all of the securities owned by a fund were sold
and distributed to the shareholders.
OR
• To figure out a fund's total assets, we add the market value of all securities held by
that fund to its total cash and cash equivalents.
Whereas, Net Asset Value (NAV) of an ETF represents the value of all the securities
held by the ETF - such as shares or bonds and cash minus any liabilities such as Total
Expense Ratio (TER), and divided by the number of shares outstanding. NAV is most
often expressed as the value per share.
Total expense ratio (TER)
• The total expense ratio (TER) is a measure of the total cost of a fund to the investor.
• Total costs may include various fees e.g. (purchase, redemption/buy back, auditing)
and other expenses.
• The TER, calculated by dividing the total annual cost by the fund's total assets
averaged over that year, is denoted as a percentage.
ETF
In the most basic sense, an ETF is a type of fund that owns assets — like stocks,
commodities, or futures — but has its ownership divided into shares that trade on stock
exchanges. In other words, investors can buy and sell ETFs whenever they want during
trading hours.
Types Equity funds, Fixed Income funds, Commodity funds, currency funds, real estate
funds, special funds
Types of ETFs.
• Bond ETFs might include government bonds, corporate bonds, and state and local
bonds—called municipal bonds.
• Industry ETFs track a particular industry such as technology, banking, or the oil and
gas sector.
• Commodity ETFs invest in commodities including crude oil or gold.
• Currency ETFs are exchange-traded funds that track the relative value of a currency
or a basket of currencies. Currency ETFs allow ordinary individuals to gain exposure
to the forex market through a managed fund without the burdens of placing individual
trade
Making money by investing on ETFs
• If you own a stock ETF that focuses on high-dividend stocks, you are hoping to make
money from a combination of capital gains (an increase in the price of the stocks your
ETF owns) and dividends paid out by those same stocks. Likewise, if you own a bond
fund ETF, you hope to make money from interest income.
To start buying ETFs
• First, you need to open a brokerage account. • Once you decide which ETF you want to buy,
go to the section of the brokerage firm's Web site for trading stocks and ETFs. Insert the
symbol (or get it from the Web site) and the number of shares you want to buy • The most
common types of orders are market orders, limit orders, and stop-loss orders. (1) A market
order is an order to buy or sell a security immediately. (2) A limit order is an order to buy or
sell a security at a specific price or better.
Buy Limit Order
• Both buy and sell limit orders allow a trader to specify their own price rather than taking the
market price at the time the order is placed. Using a limit order for a buy allows a trader to
specify the exact price they want to buy shares at. This price is typically a calculated entry
point. • A buy limit order comes with a few important considerations. With a buy limit order,
the brokerage platform will buy the stock at the specified price or a lower price if it arises in
the market. A limit order is not guaranteed to be executed. It will not execute if the market
never reaches the price level specified.
Sell Stop Order
• A sell stop order is a stop order used when selling. • Sell stop orders have a specified stop
price. In the case of a sell stop order, a trader would specify a stop price to sell. If the stock’s
market price moves to the stop price then a market order to sell is triggered.
Example:
• A trader has bought a stock at $35 a share but wishes to risk no more than a $5 per share
loss on the trade. He places a sell stop order just below the $30 a share level, perhaps at
$29.50. If the market price falls to the $29.50 level, then the sell stop order is triggered, and
the trader's stock is sold at the next available market price.
Sell and buy limit order
• A limit order sets a specified price for an order and executes the trade at that price. A buy
limit order will execute at the limit price or lower. A sell limit order will execute at the limit
price or higher. Overall, a limit order allows you to specify a price.
Domestic ETFs
• The index of a domestic ETF must include at least 13 different securities. The most heavily
weighted security in the index may not exceed 30 % of the fund's total portfolio. The value of
the five most heavily weighted securities may not exceed 65 %of the portfolio. Ninety % of
the fund's stock holdings must have a total trading volume of at least 250,000 shares and a
minimum value of $75 million.
Fixed-Income ETFs
• Fixed-income ETFs may contain only fixed-income securities. Convertible securities are
allowed until they are converted into a variable income security. The most heavily weighted
security may not represent more than 30 % of the fund's entire portfolio. The five most
heavily weighted securities may not exceed 65 % of the total portfolio. Seventy-five percent
of the fund's portfolio must have a minimum outstanding original principal of $100 million.
Specialty Fund.
• Specialty Fund is a ETF fund, mutual fund or other fund that invests predominantly or
exclusively in a single industry, sector, or region of the world. For example, a specialty fund
may invest only in energy companies, or, even more narrowly, only in natural gas companies
etc.
Global Equity ETFs
• To qualify as a valid global equity ETF, the fund must contain at least 20 foreign
investments. Ninety percent of the total stock must have a value of $75 million and a trading
volume of at least 250,000 shares. The most heavily weighted security must form no more
than 25 percent of the total of all holdings. The five most heavily weighted securities may not
exceed 60 percent of the total.
ETFs investments
• Making money from ETFs is essentially the same as making money by investing in mutual
funds because they operate almost identically. Just like mutual funds, the way your ETF
makes money depends on the type of investments it holds. • Likewise, if you own a bond
fund ETF, you hope to make money from interest income.
Mutual Fund
A mutual fund is essentially a professionally managed investment fund. Here, the funds of the
investors are pooled, which are then invested or diversified in various securities like:
• Government securities
• Shares
• Debt securities
• Corporate bonds
• Money market instruments
Differences between mutual funds and ETFs
• The key differences between mutual funds and ETFs is in how they trade and their costs. •
Mutual funds trade at the end of the day, while ETFs trade intra-day. • Stock orders can be
made with ETFs but not with mutual funds. • ETFs often have lower expense ratios than
mutual funds. • Unlike mutual funds, which price quarterly or even yearly, exchange-traded
funds (ETF) price daily.
Unit investment trust (UIT)
• A unit investment trust (UIT) is an investment company that offers a fixed portfolio,
generally of stocks and bonds, as redeemable units to investors for a specific period of time.
It is designed to provide capital appreciation and/or dividend income
Unit Investment Trusts (UITs)
• Unit Investment Trusts (UITs) are a fixed portfolio of stocks, bonds or other securities. • As
a point of contrast, while many actively managed funds (e.g. mutual funds, ETFs etc.)
continually buy and sell securities, thereby changing their investment mix, the securities held
in a UIT generally remain fixed. • UITFs allow you to invest according to your risk tolerance.
Low risk for bond or fixed-income funds, high risk for stock or equity funds and moderate for
balanced funds, which can be a combination of bonds and stocks. Most banks will allow you
to invest for as low as P10,000.
Differences between mutual funds and unit investment trust funds (UITFs)
• The main difference between these two is that UITFs are offered by banks, while mutual
funds are their own companies. By buying into a mutual fund, you own shares and become a
shareholder in the mutual fund company. • Investment trusts are 'closed-ended', that they
have a fixed pool of capital. This makes them easier to manage, as investors buy shares on
the stock market rather than by buying them from the fund manager.
Domestic and International/Global
• Equity funds that only invest in one country e.g. Pakistan Stock Market Fund, Germany
stocks or U.S. stocks are categorized as domestic stock funds. • International equity funds
own stock shares of companies from other countries excluding domestic stocks. • A global
equity fund has the latitude/freedom to buy shares of companies from any country including
the domestic stocks. • The typical global equity fund will keep a certain portion of its assets
invested in domestic stock funds e.g. Pakistan stocks and the balance invested in international
stocks such as U.S, U.k or any country.
Benefits of global investment
• A fund with a global investment objective has several advantages over funds limited to the
domestic stock market. • The stock markets of different countries may provide better
performance at different periods of time. • The global fund manager can choose from the
most attractive markets as well as individual stocks. • In the global economy, some regions
provide the top companies for certain sectors, such as Asia for tech manufacturers, Australia
for mining companies or Switzerland for banks and drug manufacturers.
Investment Risks
• Along with the diversification of a combination of domestic and international stocks, global
equity funds add some risk factors compared to domestic stock funds. • A major risk is
currency fluctuations. A strong dollar against foreign currencies will result in lower
international stock values when converted to Rupee/dollars etc • International stock markets
may experience higher levels of volatility than the domestic markets with bigger swings to
both the upside and downside. Investors must be willing to accept a higher level of
uncertainty from a global stock portfolio.
Investors should consider the following risk factors before making any investment.
• Currency Risk. Investment in mutual funds, ETFs and UITFs that have exposure to foreign
investments may be exposed to • currency risk. • Inflation Risk. • Interest Risk. • Liquidity
Risk. • Market Risk. • Management Risk.
Global Investing: Analysis and Behaviour
GLOBAL INVESTMENT BENEFITS
 Global stock market moves differently from domestic markets:  Some international
markets grow much faster than domestic markets  Global diversification: potential to
cushion investor portfolios from downward fluctuations in domestic markets  Adding
foreign stocks to portfolio may enhance total returns while reducing overall volatility.
TRACKING GLOBAL MARKETS
◼ For global equity, global market indices are available for investors.
◼ But, local indices are computed in the local currency, using different computing methods
in different countries which create a problems.
◼ However, Morgan Stanley Capital International Inc provides consistent information for
global market.
◼ MSCI Inc., is an American finance company headquartered in New York City and serving
as a global provider of equity, fixed income, hedge fund stock market indexes, multi-asset
portfolio analysis tools. It publishes the MSCI BRIC, MSCI World and MSCI EAFE Indexes.
◼ The company is currently headquartered at 7 World Trade Center in Manhattan, New York
City, U.S.
MSCI
◼ The Morgan Stanley Capital International, which compiles influential indices tracked by
thousands of fund managers.
◼ MSCI's indexes cover of stocks under various categories and are used as benchmarks to
measure the performance of portfolios.
◼ MSCI Inc maintains and uses as a common benchmark for 'world' or global stock funds
intended to represent a broad cross-section of global markets.
◼ The index includes a collection of stocks of all the developed and developing/emerging
markets in the world, as defined by MSCI.
◼ MSCI applies the same criteria for company selection and calculation methodology across
all markets. ◼ It provides individual country coverage, regional and composite indexes for
developed markets, emerging markets and all countries by region. ◼ It uses full market
capitalization weights. ◼ ( Cap Wt = Price x number of outstanding shares)
01 MSCI BRIC INDEX
 It is an index measuring the equity market performance of the emerging market indices of
Brazil, Russia, India and China (BRIC).
 The MSCI BRIC Index is one of MSCI's Regional Equity Indices, and is a free float-
adjusted, market capitalization weighted index of four of the biggest emerging market
economies.
 Prior to this index, MSCI launched the first Emerging Markets Index in 1988, focusing on
21 markets.
02 MSCI ALL COUNTRY WORLD INDEX (ACWI)
 Morgan Stanley Capital International (MSCI) ‘s All Country world Index (ACWI) is a
market capitalization weighted index designed to provide a broad measure of equity-market
performance throughout the world.
 Hence, the MSCI ‘s ACWI is maintained by Morgan Stanley Capital International (MSCI),
and is comprised of stocks from both developed and emerging markets.
03 MSCI EM Emerging markets index
 The MSCI Emerging Markets Index is an index created by Morgan Stanley Capital
International (MSCI) designed to measure equity market performance in global emerging
markets.  It is a float-adjusted market capitalization index that consists of indices in 23
emerging economies: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece,
Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Qatar,
Russia, South Africa, Taiwan, Thailand, Turkey and the United Arab Emirates.
04 MSCI EAFE (EUROPE, AUSTRALASIA AND FOR EAST)
 EAFE (Europe, Australasia and Far East)  The MSCI EAFE Index is a stock market
index that is designed to measure the equity market performance of developed markets
outside of the U.S. & Canada. It is maintained by MSCI Inc., a provider of investment
decision support tools.
EAFE include:  Europe: All European countries.  Australasia: is a region of Oceania,
comprises Australia, New Zealand, neighbouring islands in the Pacific Ocean and,
sometimes, the island of New Guinea.  Far East: The Far East is an alternate geographical
term, that usually refers to East Asia, the Russian Far East, and Southeast Asia. South Asia
sometimes for economic reasons.
 East Asia
 China  Japan  North Korea  South Korea  Mongolia  Taiwan
 South Asia
 India
 Southeast Asia
 Brunei  Cambodia  Timor-Leste (East Timor)  Indonesia  Laos  Malaysia 
Myanmar  Philippines  Singapore  Thailand  Vietnam
DEVELPING AND EMERGING MARKETS
 Developed markets: Securities markets in countries with advanced economics. 
Emerging markets: Securities markets in countries with rapidly evolving economics. 
Problems with investing in emerging markets: Amount of investable assets availability. 
much of the equity in emerging markets is not available to international investors.  MSCI
designates free index and non-free index
A. Developed Markets
USA 47.2%
JAPAN 12.1%
UNITED KINGDOM 8.3%
GERMANY 4.0%
FRANCE 3.6%
CANADA 2.3%
SWITZERLAND 2.1%
OTHER DEVELOPED MARKETS 13.9%
EMERGING MARKETS 6.4%
B. Emerging Markets
TAIWAN 13.4%
BRAZIL 7.7%
SOUTH AFRICA 13.6%
KOREA 18.9%
INDIA 4.9%
MEXICO 7.9%
RUSSIA 4.9%
MALAYSIA 6.0%
CHINA 7.0%
OTHER EMERGING MARKETS 15.7%
COUNTRIES VS SECTROS
◼ Diversifying globally is especially useful when countries have segmented markets ◼
Alternative to country diversification: is the global sector diversification ◼ MSCI developed
the All Country Sector Indices using Global Industry Classification Standard (GICS) system.
◼ ETF (Exchange Trade Funds) iShares available in global sectors.

ISHARES
 iShares are a family of exchange-traded funds managed by BlackRock. The first iShares
were known as World Equity Benchmark Shares but were since rebranded. Each iShares fund
tracks a bond or stock market index.
 Barclays Global Investors: leader in Index shares (iShares)  International iShares: track
market movements around the world.  Most popular international iShares based on well-
known MSCI indexes.  Good options for international exposure in an easy and cost
effective way.
 iShares, Inc. is a global leader in exchange-traded funds (ETF) with over $1 trillion
invested in 800 different products. The funds are managed and brought to market by
BlackRock, the world's largest asset management company. iShares is the largest issuer of
ETFs in the US and globally.
 Founded in 2000, the initial listings were established on major exchanges such as the
NYSE Euronext, Chicago Board Options Exchange, Nasdaq and NYSE Arca. (NYSE Arca,
previously known as ArcaEx, an abbreviation of Archipelago Exchange, is an exchange on
which both stocks and options are traded. It is owned by Intercontinental Exchange and is
headquartered in Chicago)
 Today, almost all the major global marketplaces list iShares funds; London Stock
Exchange, Hong Kong Stock Exchange, and Toronto Stock Exchange among other well-
established exchanges. At any given time, iShares and Vanguard represent over 50% of the
total ETF market.
BLACKROCK
 BlackRock, Inc. is an American global investment management corporation based in New
York City.
 Founded in 1988, initially as a risk management and fixed income institutional asset
manager, BlackRock is the world's largest asset manager with $5.7 trillion in assets under
management as of July 2017, and with $6.96 trillion in assets as of September 2019.
 BlackRock operates globally with 70 offices in 30 countries and clients in 100 countries.
Due to its power and the sheer size and scope of its financial assets and activities. 
BlackRock has been called the world's largest shadow bank
GLOBAL EQUITY: AT A GLANCE
 The sharp drop in bond yields is pushing more investors towards equities. • Investors are
emphasising particular themes including a wariness/trust towards sectors where low bond
yields have helped push up valuations. • Equity managers tend to be good at analysing
companies but are less skilled at selecting regions or countries that are likely to outperform in
the short run. • In a lacklustre/no interest market environment there is more emphasis on fund
manager skill and less on market-related returns.
TOP MARKETS INDICES OF A WORLD
 The Dow Jones, S&P 500, and 7 Other Stock Market Indices -- and What They Mean 
Dow Jones Industrial Average (DJIA) The Dow Jones Industrial Average, or "the Dow," is
the most well-known stock market index, and is often quoted as a barometer of market
performance.  Nasdaq Composite.  Russell 2000.  S&P 500 Value Index etc
ELECTRONIC EXCHANGE NASDAQ
 Nasdaq is the National Association of Securities Dealers Automated Quotations exchange,
the first electronic exchange that allowed investors to buy and sell stock on a computerized,
speedy and transparent system, without the need for a trading floor.
TOPICS TO BE FOCUSED
 Nasdaq (National Association of Securities Dealers Automated Quotations exchange) and
Nasdaq Composite Index.  NASDAQ 100  NYSE  Dow Jones indices (DJI) and Dow
Jones Industrial Average (DJIA)  BSE SENSEX (Sensex 30 index)  S&P 500  NIKKEI
225  Russell 2000 and 3000  Financial Times Stock Exchange (FTSE) index.  'Zacks
Investment Research'  American Depository Receipts (ADRs) Negotiable instruments that
represent ownership in the equity securities of a non-US company.  Traditional and shadow
banking systems  Comparison of major indices
INTERNATIONAL INVESTMENT
 International investing is an investing strategy that involves selecting global investment
instruments as part of an investment portfolio. People often invest internationally to broaden
diversification and spread investment risk among foreign markets and companies.
PORTFOLIO BALANCE CHARACTERISTICS
 The worldwide investment reach of a global equity fund can be divided into three type of
country categories: domestic stocks, established economy stocks and emerging market stocks.
 Most global equity funds will report how the assets are divided based on different or
similar categories.  A particular fund may go with a balanced approach or be willing to
overweight in one area if the fund manager believes the investment potential is better.
STOCK MARKET INDEX
 A stock index or stock market index is a measurement of the value of a section of the stock
market.  It is computed from the prices of selected stocks (typically a weighted average). It
is a tool used by investors and financial managers to describe the market, and to compare the
return on specific investments.
TRADING VOLUME
 In capital markets, volume, or trading volume, is the amount (total number) of a security
(or a given set of securities, or an entire market) that was traded during a given period of
time. Therefore, the unit of measurement for average volume is shares per unit of time,
typically per trading day.
INDEX CALCULATION
 The index is computed with a 'Weighted Average Market Capitalization'. The Market
Capitalization is based on multiplying the stock price and the shares outstanding.
 Each stocks weight is calculated by dividing the market capitalization of each stock by the
total market capitalization.
STEPS TO CALCULATE THE INDEX E.G: SENSEX INDEX
 1. The market capitalization of each of the 30 companies comprising the index is first
determined by multiplying the price of their stocks with the number of shares issued by that
company.  2. The market capitalization is then multiplied to the free-float factor to derive
the free-float market capitalization. (The free-float factor of a company is the multiple with
which the total market capitalization of that company is adjusted to arrive at its free-float
market capitalization. It is determined by the BSE based on the information submitted by the
companies. The value of the free-float factor lies between 0.05 and 1.00. A free-float factor
of say 0.55 means that only 55 pct of the market capitalization of the company will be
considered for index calculation.)
 3. The free-float market capitalization of the Index constituents is then divided by a
number known as the Index Divisor. This index divisor is the sole link to the original base
period value of the index. (For the Sensex, the base value period, is 1978-79) This value
provides for comparison of the index over a period of time.  For example, if the days’
Market Capitalization based on the performance of the 30 key stocks is 8060000 and the base
index of 1978-79 is 60000. The index divisor becomes (100/60000) and the Sensex index
value equals 8060000 x (100/60000) = 13433 for that day.
GLOBAL EQUITY/ STOCK EXCHANGES
 A stock exchange is a regulated marketplace that connects buyers and sellers of various
financial securities such as stocks, bonds, and warrants.  This list of top 10 largest stock
exchanges is based on the market capitalization data from the World Federation of Exchanges
as of November 2018.  *(World Federation of Exchanges (WFE) publishes over 350 market
data indicators, ranging from statistics on exchange traded products such as equities,
derivatives and ETFs).
10 BOMBAY STOCK EXCHANGE, INDIA
Founded in 1875, the Bombay Stock Exchange was the first stock exchange in Asia. As of
November 2018, it had a market capitalization of $2.05 trillion. It is the stock exchange with
the highest number of listed companies on this list. Currently, the BSE has 5,749 listed
companies. However, most of them are small-caps. It is located in Mumbai.
09 TORONTO STOCK EXCHANGE, CANADA
Owned and operated by TMX (TrackMania Exchange) Group, the Toronto Stock Exchange
(TSX) has 2,207 listed companies with a combined market capitalization of $2.1 trillion,
therefore, earning it a place among the world’s top 10 largest stock exchanges. It has an
average monthly trade volume of $97 billion. All of Canada’s ‘Big Five’ commercial banks
are listed at the Toronto Stock Exchange. It was founded in 1852. Back in 2011, the TMX
Group was in talks to merge with the London Stock Exchange, but it couldn’t get the
approval of shareholders.
08 SHENZHEN STOCK EXCHANGE, CHINA
Formally established in 1990, the Shenzhen Stock Exchange is one of the only two
independently operating stock exchanges in China. The other one being the Shanghai Stock
Exchange. Its market capitalization is $2.5 trillion as of November 2018. Most of the
companies listed here are based in China and trades shares in Yuan. The Shenzhen Stock
Exchange launched a ChiNext board in 2009 consisting of high-growth, high-tech start ups
similar to NASDAQ.
07 LONDON STOCK EXCHANGE, UNITED KINGDOM
The London Stock Exchange was founded in 1698. It has more than 3,000 listed companies
with a combined market capitalization of $3.76 trillion. It is owned and operated by the
London Stock Exchange Group, which was formed in 2007 following the merger of the LSE
with Borsa Italia. The LSE was the world’s largest stock exchange until the end of the First
World War. Some of the biggest companies listed at the LSE are British Petroleum, Barclays
(in London), and GlaxoSmithKline. Note: (Pharmaceuticals. GSK manufactures products for
major disease areas such as asthma, cancer, infections, diabetes and mental health. Its
biggest-selling products in 2013 were Advair, Avodart, Flovent, Augmentin, Lovaza, and
Lamictal; its drugs and vaccines earned £21.3 billion that year).
06 EURONEXT, EUROZONE
Headquartered in Amsterdam, the Netherlands, Euronext is a European stock exchange is
composed of five market places in Belgium, France, Ireland, the Netherlands, and Portugal It
has approximately 1,300 listed companies with a combined market capitalization of $4.3
trillion. Stocks are listed at Euronext trade in euros. Its monthly trading volume is about $174
billion.
05 HONG KONG STOCK EXCHANGE, HONG KONG
The Hong Kong Stock Exchange was founded in 1891. It has close to 2,000 listed companies,
about half of which are from mainland China. It has a monthly trading volume of around
$182 billion and a market capitalization of $3.93 trillion. In 2017, the exchange closed its
physical trading floor to shift to electronic trading. Some of the biggest companies listed at
the Hong Kong Stock Exchange are AIA (American Institute of Architects) , Tencent
Holdings (Founded in 1998, Tencent is an Internet-based platform company using technology
to enrich the lives of Internet users), PetroChina, China Mobile, and HSBC Holdings
*( HSBC= Hongkongand Shanghai Banking Corporation).
04 SHANGHAI STOCK EXCHANGES, CHINA
The largest stock exchange in China has a market capitalization of $4.02 trillion. It has more
than 1,000 listed companies. Though its origins date back to 1866, it was suspended
following the Chinese Revolution in 1949. The Shanghai Exchange was re founded in 1990.
Stocks listed at the Shanghai Stock Exchange have ‘A’ shares that trade in local currency and
‘B’ shares that are priced in the US dollar for foreign investors.
03 TOKYO STOCK EXCHANGE, CHINA
Founded in 1878, the Tokyo Stock Exchange is among the top 10 largest stock exchanges in
the world. It has close to 2,300 listed companies with a combined market capitalization of
$5.67 trillion. Trading at the Tokyo Stock Exchange was suspended for four years after
World War II. It resumed operations in 1949. The TSE’s benchmark index is Nikkei 225,
which consists of the largest companies including Toyota, Honda, Suzuki, and Sony.
02 NASDAQ, UNITED STATES
The NASDAQ Stock Market was founded in 1971 in New York City. NASDAQ is
considered the Mecca of technology companies because many of the world’s largest
technology companies such as Apple, Microsoft, Facebook, Amazon, Alphabet, Tesla, Cisco
(Commercial & Industrial Security Corporation), and others are listed here. As of November
2018, NASDAQ had a market capitalization of $10.8 trillion with an average monthly trading
volume of $1.26 trillion.
01 NEW YORK STOCK EXCHANGE, UNITED STATES
Founded in 1792, the New York Stock Exchange has been the world’s largest stock exchange
since the end of World War I, when it overtook the London Stock Exchange. It has a market
capitalization of $22.9 trillion and about 2,400 listed companies. According to the 2017 data
from Gallup, more than 54% Americans had invested in stocks listed at the NYSE. The
NYSE alone accounts for roughly 40% of the world’s stock market capitalization.  Note*
(Gallup, Inc. is an American analytics and advisory company based in Washington, D.C.
Founded by George Gallup in 1935, the company became known for its public opinion polls
conducted worldwide)
STOCK MARKET INVESTMENT: 10 THINGS YOU MUST KNOW BEFORE
INVESTING IN STOCK MARKETS
 Never jump blindly into stock markets.  Stock market is not a money-making machine.
 Educate yourself, handle basics first.  Invest only your surplus funds.  AvoidLeverage.
 Avoid herd mentality.  Diversify, but refrain from over diversification.  Don't try to be
impatient in the market, follow a disciplined investment approach.  9. Don’t let emotions
impact your investment  10. Have realistic expectations.
Global Investment
• More investment instruments available in the financial markets are results of technological
advances and new regulations • It provides the ability to invest from a global perspective
thanks to the globalization or integration of domestic and foreign financial markets. •
Investment vehicles with a variety of maturities, risk-return characteristics, and cash flow
patterns being spawned/developed due to competition and deregulations in the financial
sector.
The Case for Global Investment
• Three reasons investors should think of constructing global investment portfolios 1.
Ignoring foreign markets can substantially reduce the investment choices for all investors 2.
Rates of return on foreign securities often substantially exceed those on domestic investments
3. Low correlation between domestic securities markets and many foreign markets can help
to substantially reduce portfolio risk
• Relative Size of Financial Markets • Growing importance of foreign securities in world
capital markets is likely to continue. • Market capitalization (market cap) is the market value
of a publicly traded company's outstanding shares. Market capitalization is equal to the share
price multiplied by the number of shares outstanding. • Overall value of securities available
in world capital market has increased from $2.3 trillion in 1969 to $103 trillion in 2006. • In
2014 and 2015, global market capitalization was US$68 trillion and US$67 trillion,
respectively. • Today the MSCI Emerging Markets Index consists of 24 countries
representing 10% of world market capitalization. The Index is available for a number of
regions, market segments/sizes and covers approximately 85% of the free float-adjusted
market capitalization in each of the 24 countries
The Case for Global Investments: Diversification
•Diversification with foreign securities can help reduce portfolio risk because foreign markets
have low correlation with Domestic capital markets. •The correlation of returns between a
single pair of countries changes over time because the factors influencing the correlation
change over time
•Diversified portfolios reduce variability of returns over time. •Correlation coefficients
measure diversification contribution. •Correlations range from -1.00 to +1.00 •Combining
investments with perfect positive correlation will NOT help diversification. •Combining two
assets with negative correlation is ideal for diversification.
The Case for Global Investment: Global Bond Portfolio
 Low Positive Correlation • Low positive correlations among returns indicates substantial
opportunities for risk reduction • Why? • International trade patterns, economic growth &
fiscal & monetary policies differ between countries
The Case for Global Investment: Global Bond Portfolio
Low Positive Correlation • Opportunities for investors to reduce risk • Correlation changes
over time • Adding non-correlated foreign bonds to a portfolio of domestic bonds increases
rate of return & reduces portfolio risk
The Case for Global Investment: Global Equity Portfolio
Low Positive Correlation
• Correlation of world equity markets resembles that for bonds • Canada–U.S. correlation is
relatively low ranging from .537 to .635 but is a very low .389 when comparing Canada &
Japan
The Case for Global Investment: Global Equity Portfolio & Risk Reduction
• Opportunities to reduce risk of a stock portfolio by including foreign stocks
Global Investment Choices
• Fixed-Income Investments • Bonds and preferred stocks • International Bond Investing •
Eurobond, Maple bonds, international domestic bonds • Equity Instruments • Special Equity
Instruments • Warrants and options • Futures Contracts • Investment Companies • Real Estate
• Low-Liquidity Investments
A Maple Bond is a bond issued in the Canadian fixed income market in Canadian dollars by
a foreign issuer.
A samurai bond is a yen-denominated bond issued in Tokyo by non-Japanese companies, and
is subject to Japanese regulations.
These bonds provide the issuer with an access to Japanese capital, which can be used for
local investments or for financing operations outside Japan.
A Panda bond is a Chinese renminbi-denominated bond from a nonChinese issuer, sold in
the China.
(*The renminbi is the official currency of the People's Republic of China, and translates to
“people's money.” Its international symbol is CNY (or CNH in Hong Kong; but abbreviated
RMB, with the symbol ¥). Both names are perfectly good, but in slightly different ways.
"Renminbi" was introduced by the Communist People's Republic of China at the time of its
foundation in 1949. It means "the people's currency". "Yuan" is the name of a unit of the
renminbi currency.)
'Bulldog Bond' A type of bond purchased by buyers interested in earning a revenue stream
from the British pound or sterling. A bulldog bond is traded in the United Kingdom.
'Kangaroo Bond' A type of foreign bond that is issued in the Australian market by non-
Australian firms and is denominated in Australian currency. The bond is subject to Australian
laws and regulations. Also known as a "matilda bond.“
A Formosa bond is a bond issued in Taiwan but denominated in a currency other than the
New Taiwan Dollar. They are issued by the Taiwan branches of publicly traded overseas
financial institutions and to be traded must have a credit rating of BBB or higher.
Dim sum* bonds are bonds issued outside of China but denominated in Chinese renminbi,
rather than the local currency. They are named after dim sum, a popular style of cuisine/food
in Hong Kong. The first dim sum bond was issued by the China Development Bank in July
2007. *named on Chinese food i.e. Dumplings
Masala bonds are bonds issued outside India but denominated in Indian Rupees, rather than
the local currency. The first Masala bond was issued by the World Bank backed International
Finance Corporation in November 2014 when it raised 1,000 crore bond to fund
infrastructure projects in India.
“Euroyen Bond” A Eurobond that is denominated in Japanese yen and issued by a non-
Japanese company outside of Japan. Euroyen bonds can be found in bond markets around the
world, not just in European markets.
Eurodollar bond is a U.S.-dollar denominated bond issued by an overseas company and held
in a foreign institution outside both the U.S. and the issuer's home nation. Eurodollar bonds
are an important source of capital for multinational companies and foreign governments. A
eurodollar bond is a type of Eurobond.
A eurobond is an international bond that is denominated in a currency not native to the
country where it is issued. Also called external bond; "external bonds which, strictly, are
neither eurobonds nor foreign bonds would also include: foreign currency denominated
domestic bonds…"
A “Yankee bond” is a bond issued by a foreign entity, such as a bank or company, but is
issued and traded in the United States and denominated in U.S. dollars.
“Reverse Yankee Bond” In 2015, there is a new type bond that has emerge in the worldwide
market called, Reverse Yankee Bond. In general, the Reverse Yankee Bond is a type of bond
that has been issued by the US Company, mostly in higher grade outside the US, and its
currency been denominated other than the US dollars.
Fixed-Income Investments
• Basic concepts of fixed-income investments • Contractual payment schedule • Recourse/
choice or option varies by instrument • Bonds •Investors are lenders •Expect interest payment
and return of principal • Preferred stocks •Dividends require board of directors approval
Fixed-Income Investments
• Savings Accounts • Fixed earnings • Convenient • Liquid and low risk • Low rates •
Certificates of Deposit (CDs) • Usually less than 1 year in maturity • Usually insured by
CDIC (Canadian Deposit Insurance Corporation) • Guaranteed Investment Certificates
(GICs) • Usually issued with terms greater than 1 year • Usually insured by CDI
Fixed-Income Investments
• Fixed income obligations that trade in secondary market • Corporate bonds – issued by
corporations to fund long-term commitments • Bankers Acceptances – issued by banks to
fund short term (less than 1 year) obligations • Government bonds & T-bills • Provincial
government bonds • Agency bonds are issued by Crown corporations • Example: Canada
Mortgage and Housing Corporation (CMHC)
CORPORATE BOND
• Issued by a corporation • Fixed income • Credit quality measured by ratings • Maturity •
Features: • Indenture – legal agreement stating obligations of issue • Call provision – specify
when bonds can be called away from investors before maturity • Sinking fund – provision for
payments to pay down bond debt
Preferred Stock (Equity)
• Hybrid security • Fixed dividends • Dividend obligations are not legally binding, but must
be voted on by the board of directors to be paid • Most preferred stock is cumulative
International Bond Investing
• Eurobonds • An international bond denominated in a currency other than the country where
it is issued •Example: Eurodollar bond is issued in USD but sold outside of the U.S. to non-
U.S. investors
• Maple bonds • A Canadian dollar denominated bond sold in Canada by a foreign
corporation or government • Interest payments are made in CAD$ •Example: Maple bond
issued by British Airways in Canada to Canadian investors
• Yankee bonds • Sold in the United States and denominated is US$, but issued by foreign
corporations or governments • Eliminates exchange risk to U.S. investor
• International domestic bonds • Sold by issuer within its own country in that country’s
currency • Example: bond sold by Nippon Steel, denominated in yen. A Canadian investor
could purchase this bond by exchanging Canadian dollars for yen and then purchase the
bond. However, the Canadian investor would be exposed to foreign exchange rate risk.
Equity Instruments
• Common Stock • Represents ownership of a firm • Investor’s return tied to the
performance of the company and may result in loss or gain
• Common Stock Classifications • Industrial: manufacturers of automobiles, machinery,
chemicals, beverages
• Utilities: electrical power companies, gas suppliers, water industry
• Transportation: airlines, truck lines, railroads
• Financial sector: banks, savings and loans, credit unions
Buying Foreign Equities
American Depository Receipts (ADRs)
• Easiest way to directly acquire foreign shares • Certificates of ownership issued by a U.S.
bank that represents indirect ownership of a certain number of shares of a specific foreign
firm on deposit in a U.S. bank in the firm’s home country
• ADRs trade on American stock exchanges. • ADRs and their dividends are priced in U.S.
dollars. • ADRs represent an easy, liquid way for U.S. investors to own foreign stocks.
Buying Foreign Equities
• Buy and sell in U.S. dollars • Dividends in U.S. dollars • May represent multiple shares •
Listed on U.S. exchanges
• Global Mutual Funds or ETFs • Global funds: Invest in both U.S. and foreign stocks •
International funds: Invest mostly outside the domestic country
• Funds can specialize • Diversification across many countries • Concentrate in a segment of
the world • Concentrate in a specific country • Concentrate in types of markets • Exchange-
traded funds (ETFs) are a recent innovation in the world of index products
Equity Derivatives: Warrants
• Warrants • An options issued by a company giving the holders the right to buy its common
stock • Normally issued with bond
Equity Derivatives: Options
• Equity-derivative securities which have a claim on the common stock of a firm • Rights to
buy or sell common stock or other underlying assets at a stated price for a period of time •
Puts are options to sell • Calls are options to buy
Futures Contracts
• Exchange of a particular asset at a specified delivery date for a stated price paid at the time
of delivery • Deposit (10% margin) is made by buyer at contract to protect the seller.
• Commodities trading is largely in futures contracts: Current price depends on expectations.
Example: Corn, soybeans, oil
Financial Futures
• Recent development of contracts on financial instruments such as T-bills, Treasury bonds,
and Eurobonds • Traded mostly on Chicago Mercantile Exchange (CME) and Chicago Board
of Trade (CBOT) • Allow investors and portfolio managers to protect against volatile interest
rates • Currency futures allow protection against changes in exchange rates • Various stock
futures on market indexes such as the S&P 500 and Value Line Index (Exchanges in The
Value Line Composite Index are: • American Stock Exchange • NASDAQ • New York Stock
Exchange • Toronto Stock Exchange • In Kansas city: The total number of companies in the
Value Line Composite Index hovers near 1681.
Investment Companies
• Mutual Funds • Rather than buy individual securities directly from the issuer they can be
acquired indirectly through shares in an investment company • Investment companies sell
shares in itself and uses proceeds to buy securities • Investors own part of the portfolio of
investments.
• Money-Market Funds • Acquire high-quality, short-term investments • Yields are higher
than normal bank CDs or GICs • Typical minimum investment is $1,000 • No sales
commission charges • Withdrawal is by cheque with no penalty • Investments usually are not
insured • * The Global Industry Classification Standard (GICS) is an industry taxonomy
developed in 1999 by MSCI and Standard & Poor's (S&P) for use by the global financial
community.
• Bond Funds • Invest in long-term government or corporate bonds • Vary in bond quality
from risk-free government bonds to high-yield or junk bonds • Expected returns also differ
reflecting the risk level of bonds in the fund
Investment Companies
• Funds • Invest in a combination of stocks and bonds depending on their stated objective.
• Index Funds • These are mutual funds created to track the performance of a market index
like the S&P/TSX Composite (Toronto stock exchange). • Appeal to passive investors who
want to simply experience returns equal to some market index • Lower costs to investors as
management expense fees are lower than actively managed mutual funds
Real Estate
• Real Estate Investment Trusts (REITs) • Investment fund that invests in variety of real
estate properties, similar to stock or bond mutual fund • Construction and development trusts
provide builders with construction financing • Mortgage trusts provide long-term financing
for properties • Equity trusts own various income-producing properties
• Direct Real Estate Investment • Purchase of a home • Purchase of raw land • Intention of
selling in future for a profit • Ownership provides a negative cash flow due to mortgage
payments, taxes, and property maintenance • Land Development • Divide the land into
individual lots • Build houses or a shopping mall on it • Requires capital, time, and expertise.
Low Liquidity Investments
• Some investments don’t trade on securities markets • Lack of liquidity keeps many
investors away • Auction sales create wide fluctuations in prices • Without notional markets,
dealers incur high transaction costs. • The notional value is the total amount of a security's
underlying asset at its spot price. • Some may consider them more as hobbies than
investments
• Antiques •Dealers buy at estate sales, refurbish/repair, and sell at a profit •Serious
collectors may enjoy good returns •Individuals buying a few pieces to decorate a home may
have difficulty overcoming transaction costs to ever enjoy a profit them more as hobbies than
investments
• Art •Investment requires substantial knowledge of art and the art world •Acquisition of
work from a well-known artist requires large capital commitments and patience •High
transaction costs •Uncertainty and illiquidity
• Coins and Stamps • Enjoyed by many as hobby and as an investment • Market is more
fragmented/parted than stock market, but more liquid than art and antiques markets • Price
lists are published weekly and monthly • Grading specifications aid sales • Widespread
between bid and ask prices
• Diamonds • Can be illiquid • Grading determines value, but is subjective • Investment-
grade gems require substantial investments • No positive cash flow until sold • Costs of
insurance, storage, and appraisal/value
Historical Risk Returns on Investments
• Reilly and Wright (2004) examined the performance of various investment alternatives
from the Canada, the U.S, Europe, Japan, and the emerging markets for the period 1993-2009
(CAD)
• The expected relationship between annual rates of return and total risk (standard deviation)
of these securities was confirmed.
Toronto Stock Exchange - TSX' The Toronto Stock Exchange (TSX) is the largest stock
exchange in Canada. It was established in 1852 and formally incorporated in 1878. The
exchange is headquartered on Bay Street in Toronto; it is owned and operated by the TMX
Group.
‘TMX Group’ An exchange group that owns and operates several businesses involved in
trading in Canada. The TMX Group, through its subsidiaries, operates derivative, energy,
cash and equity trading facilities. The group also provides other financial services such as
data products and clearing facilities.
The TMX Group is a large Toronto-based financial services company which operates
Canadian exchanges, who deal in a wide range of asset classes. The group operates
exchanges for derivatives, equity, and fixed income trades through trading, clearing,
depository, and settlement services.
Why Do Individuals Invest ? By saving money (instead of spending it), individuals tradeoff
present consumption for a future larger consumption.
Which would you rather have: $1 today or $2 tomorrow
How Do We Measure The Rate Of Return On An Investment ?
The pure rate of interest is the exchange rate between future consumption and present
consumption.
People’s willingness to pay the difference for borrowing today and their desire to receive a
surplus on their savings give rise to an interest rate referred to as the pure time value of
money.
 The interest rate is established in the capital market by a comparison of supply of excess
income available (savings) to be invested and the demand for excess consumption
(borrowing) at a given time. If you can exchange $100 of certain income today for $104 of
certain income one year from today, then the pure rate of exchange on a risk free investment
(that is, the time value of money) is said to be 4% [(104/100)-1].  The investor who gives
up $100 today expects to consume $104 of goods and services in the future.
 If investors expect a change in prices, they will require a higher rate of return to
compensate for it. If inflation rises by 2% , the investor will increase the required interest rate
by 2%. That in this case would be 6% nominal risk free interest rate required instead of 4%.
 Suppose, if the future payments from the investment are not certain, the investor will
demand an interest rate that exceed the nominal risk free interest rate. The uncertainty of the
payment from an investment is the investment risk. The additional return added to the
nominal risk free interest rate is called a risk premium.
Therefore, If the future payment will be diminished in value because of inflation, then the
investor will demand an interest rate higher than the pure time value of money to also cover
the expected inflation expense.
If the future payment from the investment is not certain, the investor will demand an interest
rate that exceeds the pure time value of money plus the inflation rate to provide a risk
premium to cover the investment risk.
Defining an Investment
A current commitment of $ for a period of time to derive future payments that will
compensate for: (1) the time the funds are committed (2) the expected rate of inflation
(3) uncertainty of future payments. These are the required rate of return.
How Do Investors Measure Risk and Return for Alternative Investments?
Historical rates of return Average rates over time Average rate of a portfolio Variance
and standard deviation Expected rates of return Measures of uncertainty
Computing mean historical returns
 We have considered the HPY for a single investment for a single year. We want to
consider mean rates of return for a single investment and a portfolio of investment. 
Investor wants summary figure that indicates the rate of return you should expect to receive if
you owned this investmentoveran extended period of time.  Investor can drive such a
summary figure by computing the mean annual rate of return for this investmentoversome
period of time.
Computing mean historical returns  Investor can calculate the mean rate of return for the
portfolio (for example all stocks or all bonds or a combination of investment e.g. stocks,
bonds and real state) of investment for an individual year or for a numberof years. ➢Single
investment: Given a set of annual rate of return (HPYs) for an individual investment, there
are twosummary measuresof return performance. ➢(1) Arithmetic mean return ➢(2)
Geometric mean return
Expected Rates of Return
Risk is uncertainty of return Point estimates are most likely expected return Range of
possible returns Probabilities of various possible returns
Risk Premium and Fundamental Risk
Business risk Financial risk Liquidity risk Exchange rate risk Country risk
Business Risk Uncertainty of income flows caused by the nature of a firm’s business affect
income flows to an investor. Investors demand a risk premium based on the uncertainty
caused by the basic business of the firm.
Financial Risk Uncertainty is introduced by the method by which the firm finances its
investments. Borrowing requires fixed payments which must be paid ahead of payments to
stockholders. The use of debt increases uncertainty of stockholder income and causes an
increase in the stock’s risk premium.
Liquidity Risk Uncertainty is introduced by the secondary market for an investment.
How long will it take to convert an investment into cash? How certain is the price that
will be received? Investors increase their required rate of return to compensate for liquidity
risk.
Exchange Rate Risk Uncertainty of return is introduced by acquiring securities
denominated in a currency different from your own. Changes in exchange rates affect the
investors return when converting an investment back into the “home” currency.
Country Risk Political risk is the uncertainty of returns caused by the possibility of a
major change in the political or economic environment in a country. Individuals who invest
in countries that have unstable political-economic systems must include a country risk-
premium when determining their required rate of return
Total Risk
Risk Premium is a function of Business Risk, Financial Risk Liquidity Risk Exchange
Rate Risk Country Risk
Measures of Risk Variance of rates of return Standard deviation of rates of return
Coefficient of variation of rates of return (standard deviation/means) Covariation of
returns with the market portfolio (beta)
Sources of Risk Business Risk Financial Risk Liquidity Risk Exchange Rate Risk
Country Risk
Market Portfolio Risk
The market risk premium for the market portfolio (contains all the risky assets in the market)
can be computed: RPm = E(Rm)- E(RFR) where: RPm = risk premium on the market
portfolio E(Rm) = expected return on the market portfolio E(RFR) = expected return on a
risk-free asset or risk free return.
Index
• According to Investorwords, an index is "a statistical indicator providing a representation of
the value of the securities which constitute it.".
• https://bizfluent.com/facts-6046751-market-index-point.html
Market Index
• A market index is therefore an index that represents the values of a particular market. In
other words, it "measures price changes of an overall market, such as a stock market or bond
market," (Investorwords).
The Market Index Point
• A point in a market index is a concept used to measure the value of the securities listed in
the index. However, the point will have a different meaning depending on whether it is a
stock market index or a bond market index.
Points
• Points reveal the direction in which a single stock or the market as a whole is currently
moving. Points often rise and fall many times over the course of a trading day, and when the
day is over they indicate whether stock prices are up, down or stable in relation to their
position at the start of the day. Understanding what a point means on the stock exchange is
important not only for the information it imparts daily but also for what points indicate over
time.
Point: Stock Market Index
• When referring to stocks and stock market indexes, a "point" is equivalent to $1.
Single Point
• Consider a point from the perspective of a single share of common stock, a single point and
an individual investor. Here, a single point is the equivalent of $1. If a stock currently trading
at $60 per share rises to $65 per share or falls to $55 per share, the rise or fall equates to five
points. This information helps you monitor the performance of stocks you already own and is
useful for evaluating a stock you may be thinking about purchasing.
Point: Bond Market Index
• When referring to bonds and bond market indexes, a "point" is equivalent to $10 because
every bond price is actually equal to a percentage of $1,000.
Price-Weighted Averaging
• Stock market indexes such as the Dow Jones Industrial Average expand on a simple
definition of a point. • Although a point still equates to a dollar, the Dow assigns a "weight" –
or level of importance – to each of the 30 stocks it includes and calculates an average rise or
fall according to the weight it assigns to each. Because of this, the one to two point move of a
heavily weighted component stock can change the average by any number of points. • Price-
weighted averaging takes place multiple time over the course of a trading day and allows you
to analyze basic market trends and the performance of the stock market as a whole, and it
helps you make predictions about where the market is heading.
Calculating the Dow
• Calculating the Dow starts by adding up the current trading prices of 30 of the biggest
industrial-sector U.S. companies. • As of publication date, this list includes companies in a
variety of industries, such as Boeing, General Electric, McDonald’s and Wal-Mart. After
calculating the sum, the Dow divides it by a "Dow divisor" that changes over time – for
example, in 2008 the divisor was 0.125552709, and as of May 2013 it stands at 0.130216081
-- to take events such as stock splits or mergers into consideration, maintain consistency and
allow past-to-present price comparisons.
Performance Analysis
• Near constant calculations over the course of a trading day show how the market is
currently performing. If the Dow falls 200 points from its last calculation and closes the day
at this point, the performance of individual stocks may be satisfactory, but the market as a
whole is currently performing poorly. If over time the Dow continues to fall, poor overall
stock performance may indicate the market is trending toward a “bearish” market, one
characterized by overall falling stock prices and increased risk for investors.
Stock Index Points
• If the Dow Jones index increases from 13,000 to 13,001, it gained one point. Discussions
about stock index points use whole numbers to describe increases and dips, and ignore the
fractional values after the decimal point.
• 13001.002145
Stock Share Points
• For individual stocks, points indicate whole dollar price changes. If someone states that
IBM is up 5 points, it means the IBM share price is $5 higher. • With stocks, a point is a
dollar on a $20 stock, and a point is a dollar on a $500 stock. • To understand what a point
means relative to a given stock or index, you need to know the current value of the stock or
the index you're following.
Percent Math
• The designated number of points divided into the value of the underlying stock or index
price produces a percentage change. If IBM is up 5 points from $100 per share, that means
that it's up $5, and the stock gained 5 percent. • If the S&P 500 is up 5 points from 1,420, the
stock index gained 0.35 percent. Percentages of change are always calculated from the
starting value. • Using the percent change makes comparisons understandable. For example,
if the Dow is up 130 points from a starting value of 13,180 for the day, and the S&P 500 has
gained just 14 points from a starting point of 1,420, both stock indexes are up about 1
percent.
Time Frames
• The use of "points" to describe stock index or share price gains is usually confined to short-
term results, such as for the day or week. • For longer time frames such as year-to-date or 12-
month returns, the financial news reports will often provide those results in percentage terms.
In the investing world, day-to-day results are counted in points and annual results get
converted to percentage gains and losses.
Basis Point
• A basis point is one-hundredth of a percentage point. • That is, 100 basis points = 1 percent,
theoretically of any measured quantity. • It is most often used in financial calculations and
especially in describing a change in interest rates, or a small difference between two rates of
return (the spread). • Basis points help provide precision when using measurements expressed
as percentages.
Basis Points vs. Percentage Points
• Percentage points, which break a whole in one hundred parts, can always be expressed in
basis points.
• For example, 0.5 percent equals 50 basis points, 1.5 percent equals 150 basis points.
Characteristics of point: Clarity
• The main advantage of using basis points is that they are very clear in their meaning. • If
you said, for example, that a 4 percent interest rate "was down by 0.25 percent," that could
either mean it dropped to 3.75 percent (4 - 0.25 = 3.75) or that it dropped to 3 percent,
because 0.25 percent of 4 is 1, and 4 - 1 = 3. This statement wouldn't be clear for everyone.
But, by using basis points, there is no such confusion. A drop of 25 basis points from a 4
percent interest rate can mean only one thing: the rate is now 3.75 percent.
Size
• It might not seem that something as small as a basis point, or 1 percent of 1 percent, is
really necessary. But when dealing with large sums of money, a single basis point can be
quite sizable. • For example, each basis point on a $10 billion loan would be worth $1
million. • Thus, when dealing with large amounts of debt, interest rates are often negotiated
to the tenth or even hundredth of a basis point (1 percent of 1 percent of 1 percent) because
the overall sums are so mind-bogglingly large.
Spreads
• Basis points are a convenient way to express "spread" so that it is easy to understand at a
glance. • Spread is used in a number of ways in the financial world; often referring to the
difference between the buying and selling price of something, or the difference in return that
two different investments produce. • In either case, if the spread is expressed in basis points,
it offers a quick and absolutely clear snapshot of the difference.
Pegged to Interest Rates
• Loans whose interest rates are not fixed--those with floating interest rates--are often
determined by adding X basis points to a certain financial benchmark.
• One of the most common benchmarks for lending is the London Interbank Offered Rate
(LIBOR), which changes regularly. • A borrower who takes a loan at 50 basis points +
LIBOR is paying interest at the LIBOR rate, whatever it happens to be, plus an additional 50
basis points. Because basis points offer clarity and precision in calculating interest rates, the
borrower will know the exact interest rate at any given time, even though the rate isn't fixed.
Turnover in Trading
• In business, the term “turnover” can have multiple meanings. However, it has a particular
meaning in trading. • In general, the term refers to the amount of stock traded by individual
traders, stock exchanges or countries. • It can also refer to the activity level of trading in a
specific portfolio.
Turnover: Defined
• Turnover, in the stock market, refers to the total value of stocks traded during a specific
period of time. • The time period may be annually, quarterly, monthly or daily. • If, for
example, the trading turnover for a month were $3 billion, it would simply mean that the total
value of stocks traded during the month was equal to $3 billion.
Turnover: Uses
• Turnover can measure the trading volume for individual traders, stock markets or entire
countries. • For example, a stockbroker will use turnover to measure the size of his trades,
while stock markets and countries will use their respective turnovers to gauge the size of the
overall market for stocks.
Turnover: Importance
• The turnover of a particular stock market is a good indicator of the overall health of the
market. • When the turnover is high, it indicates that investors have confidence in the market
and that they are actively investing in the market. This is what is referred to as a bull market.
• When the turnover is low, it indicates that investors are wary and either holding their
investments or selling them at a low price. This is what is referred to as a bear market.
Portfolio Turnover
• Portfolio turnover is a measure of the activity of a specific portfolio of stocks. • It is
calculated by dividing the total volume of stocks bought and sold by the total value of the
overall portfolio. • A high portfolio turnover indicates that the stocks in the portfolio have
changed frequently, and this may indicate that the market is highly volatile and subject to
frequent changes.
Calculating Market to Book Ratio
• Market to book ratio is also known as the price to book ratio. • This formula is a way of
estimating if the market price of the stock is overpriced or underpriced. • The market to book
ratio compares the market value of the stock to the book value of the stock. • An underpriced
stock could mean the stock is selling for less than it should right now, or that there is
something wrong with the company. • For calculation determine the following: • Company's
market value per share. This is the current selling price of the company's stock on the open
market. For example, stock for Firm A is selling at $50 a share. • Company's book value per
share. The book value per share is the value of the company's stock on the company's
stockholders' equity section. For example, Firm A's book value per share is $40. • Divide the
market value per share by the book value per share to calculate market to book ratio. In our
example, $50 divided by $40 equals 1.25.
The Difference Between Net Worth and Market Value
• Net worth and market value both relate to the value of a business, or the value of an
investor's share of ownership in a business.
• The primary difference is that net worth is an accounting value, whereas market value is the
actual amount someone is willing to pay for the business.
Net Worth Basics
• To calculate a company's net worth, you subtract its liabilities from its assets. • If total
assets equal $750,000 and total liabilities equal $500,000, net worth is $250,000. • Another
perspective is that net worth is what remains after all liabilities are paid for after asset
liquidation. • Net worth is also known as owners' equity, or the book value of owner capital
invested in the company. • For an individual investor, net worth is the value of his current
ownership stake.
Market Value
• A company's market value is the highest projected amount a buyer is willing to pay for the
company at the present time.
• market value is likely $500,000, for instance, if that is the highest amount a ready, willing
and able buyer offers over an extended period of time.
The Law of One Price & Purchasing Power Parity
• The law of one price is an economic theory that explains why the prices of commodities,
assets and securities remain the same across markets, regardless of the exchange rate. • In
efficient markets, the law of one price should dominate. Ultimately, when the law of one
price plays out correctly, the result is purchasing power parity. Purchasing power parity is
just a fancy way of saying that buyers have equal power to each other because the price
remains the same across markets.
The Law of One Price
Basically, an asset, security or commodity will have one price across markets, even when
taking into consideration the exchange rates. This is because if an asset is cheaper in one
market, investors will swoop in and buy that asset. Then, those investors will flip the asset,
selling it to the more expensive market and ultimately netting a profit. This is called market
arbitrage. However, this type of buying power simply can’t last forever. As more investors
try to take advantage of the lower priced market, the supply and demand will shift until prices
level out across markets. • Of course, transportation costs, taxes and tariffs affect prices in
different markets. This may result in a variance in the actual price consumers pay. For
example, gas and groceries are more expensive on islands, because they must be transported
to the island. Still, the base price of these items before shipping should be nearly identical
under the law of one price.
Example of the Law of One Price
• Say Market A is selling widgets for $100, while Market B is selling them for just $10. • It
stands to reason that investors would buy up Market B’s widgets and sell them for a profit to
buyers in Market A, who are willing to pay a higher price. • Obviously, this can’t go on
forever. As more investors sell into Market A, competition will ensue, and prices will be
driven down. Eventually, the law of one price dictates that these prices will balance out
across markets. • Ultimately, this keeps markets more fair, balanced and efficient.
Purchasing Power Parity Theory
• Purchasing power parity theory is simply the end result of the law of one price. When the
law of one price works the way it should, buyers will have the same purchasing power across
markets, regardless of the currency or exchange rate. • In practice, consumers across markets
do not exactly have absolute purchasing power parity. There are many reasons for this, but
they mostly boil down to access. Not every consumer has access to cheap goods, or to
international goods. Some buyers are limited in their access to goods and services, and this
makes purchasing power parity very difficult to achieve in the real world.
Meaning of Point on the Stock Exchange
• Points reveal the direction in which a single stock or the market as a whole is currently
moving. Points often rise and fall many times over the course of a trading day, and when the
day is over they indicate whether stock prices are up, down or stable in relation to their
position at the start of the day.
Price-Weighted Averaging
• Stock market indexes such as the Dow Jones Industrial Average expand on a simple
definition of a point. Although a point still equates to a dollar, the Dow assigns a "weight" –
or level of importance – to each of the 30 stocks it includes and calculates an average rise or
fall according to the weight it assigns to each. Because of this, the one to two point move of a
heavily weighted component stock can change the average by any number of points.
Priceweighted averaging takes place multiple time over the course of a trading day and
allows you to analyze basic market trends and the performance of the stock market as a
whole, and it helps you make predictions about where the market is heading.
Calculating the Dow
• Calculating the Dow starts by adding up the current trading prices of 30 of the biggest
industrial-sector U.S. companies. As of publication date, this list includes companies in a
variety of industries, such as Boeing, General Electric, McDonald’s and Wal-Mart. After
calculating the sum, the Dow divides it by a "Dow divisor" that changes over time – for
example, in 2008 the divisor was 0.125552709, and as of May 2013 it stands at 0.130216081
-- to take events such as stock splits or mergers into consideration, maintain consistency and
allow past-to-present price comparisons.
Performance Analysis
• Near constant calculations over the course of a trading day show how the market is
currently performing. If the Dow falls 200 points from its last calculation and closes the day
at this point, the performance of individual stocks may be satisfactory, but the market as a
whole is currently performing poorly. If over time the Dow continues to fall, poor overall
stock performance may indicate the market is trending toward a “bearish” market, one
characterized by overall falling stock prices and increased risk for investors.
How to Calculate Daily Price Variation in Stocks
• Investors use many different tools and computations to guide their decisions about when to
buy or sell stock. Many of these tools are very complex, though investment websites and
software make them simple enough for even beginner investors to use. However, other
calculations that reveal information about a stock are quite simple to calculate, including
daily price variation.
Definition
• The daily price variation of a stock is the difference between its highest and lowest values
on a given trading day. Daily price variation may also refer to the difference between one
day's opening price and the next day's opening price. Daily price variation is a measure of
volatility, or how much a stock's value changes. Although it is a daily measurement, average
daily variations can be calculated by adding up individual daily price variations and dividing
the total by the number of days to spot a more long-term trend.
Process
• To calculate the amount of a daily price variation, you'll need to know the high and low
prices for a given stock on a given day. Most newspaper and online stock quotes give this
basic information, labeled "high" and "low." Subtract the smaller number from the larger
number to determine the daily price variation. Since it is only a measure of variation, or
difference, it does not matter whether the stock gained or lost value.
Translating to a Percentage
• You can turn a daily price variation from a dollar amount into a percentage. This is
especially helpful if you want to compare the daily price variations in multiple stocks. To
calculate daily price variation as a percentage, divide the variation amount by the closing
price of the stock. For example, if a stock opened at $75 per share, fell to $70 and remained
there until the end of the day, you would divide $5 (the daily price variation) by $70 (the
closing, or current, price) for a result of .071, representing a 7.1% daily price variation.
Uses
• Investors use daily price variation data in a number of ways. The data serve foremost as an
indicator of volatility. A stock with a very large daily price variation is very volatile and may
be expected to change its value quickly over time. When daily price variations are small, it
indicates more consensus within the market about the value of the stock. Stable daily price
variations over time show that a stock is unlikely to shoot up or plummet in value on any
given day.
Dow Jones Industrial Index
• The Down Jones Industrial Index is a list, or index, of companies considered to be good
indicators of the stock market's overall strength. Simply put, these companies are a barometer
of the market: when they do well, the economy is doing well, and vice versa. So the Dow
takes the average value of these companies every day to see if it has increased or decreased.4
• The DJIA is named after Charles Dow, who created it in 1896, along with his business
partner, Edward Jones.5
• Because the index is dealing with companies that are worth billions of dollars, a simple
method of displaying their changes in value had to be formulated. The clever and resourceful
Charles Dow broke everything into points rather than dollars. The points still represent
dollars, but the ratio is not 1:1. This way, instead of saying, "Today, the Dow stocks
collectively gained $693.573961, give or take a few thousandths," people can say, "The Dow
was up 100 points."2 Obviously, this is a vast improvement.
• The Dow Jones Industrial Index is a benchmark index of 30 blue-chip companies listed on
U.S. stock exchanges.1 • When the Dow gains or loses a point, it reflects changes in the
underlying prices of its component stocks.2 • The index is price-weighted, meaning that the
index moves in-line with the price changes of its components on a point basis, adjusted by a
divisor.3 • To figure out how a change in any particular stock affects the index, divide the
stock's price change by the current divisor.
• The index grew to 30 components in 1928 and has changed components a total of 51
times.6 7 The first change came just three months after the index was launched.8 In its first
few years until roughly the Great Depression, there were many changes to its components. In
1932, eight stocks within the Dow were replaced. However, during this change, the Coca-
Cola Company and Procter & Gamble Co. were added to the index, two stocks that are still
part of the Dow in 2019.9 10 • The most recent large scale change to the Dow took place in
1997 when four of the index's components were replaced. Two years later, in 1999, four more
components of the Dow were changed. The most recent change took place on June 26, 2018,
when Walgreens Boots Alliance, Inc. replaced General Electric Company.11 10 •
How Does the Dow Divisor Work?
• To better understand how the Dow changes the value, let’s start at its beginnings. When
Dow Jones & Co. first introduced the index in the 1890s, it was a “simple average” of the
prices of all constituents. For example, let's say there were 12 stocks in the Dow index; in that
instance, the Dow's value would have been calculated by simply taking the sum of closing
prices of all 12 stocks and dividing it by 12 (the numberof companies or “constituents of the
Dow index”). Hence, the Dow started as a simple price average index.12 • To calculate the
DJIA, the current prices of the 30 stocks that make up the index are added and then divided
by the Dow divisor, which is constantly modified.13 To demonstrate how this use of the
divisor works, we will create an index, the Investopedia Mock Average (IMA). The IMA is
composed of 10 stocks, which total $1,000 when their stock prices are added together. The
IMA quoted in the media is therefore 100 ($1,000 ÷ 10). Note that the divisor in our example
is 10.
• Now, let's say that one of the stocks in the IMA average trades at $100 but undergoes a 2-
for-1 split, reducing its stock price to $50. If our divisor remains unchanged, the calculation
for the average would give us 95 ($950 ÷ 10). This would not be accurate because the stock
split merely changed the price, not the value of the company. To compensate for the effects
of the split, we have to adjust the divisor downward to 9.5. This way, the index remains at
100 ($950 ÷ 9.5) and more accurately reflects the value of the stock in the average. If you are
interested in finding the current Dow divisor, you can find it on the website of the Dow Jones
Indexes and the Chicago Board of Trade. • The value of the Dow Divisor has changed
significantly over the years. For example, it was at 16.67 back in 1928 but was at
0.132129493 as of March 2011.14 The values of the Dow Divisor as well as divisors for the
other Dow Jones indexes are published daily in The Wall Street Journal.
• For example, if the sum of the prices of the 30 constituents of the DJIA is 1,650, dividing
this figure by the Dow Divisor of 0.132129493 would provide a level of 12,487.75 for the
index. As of September 1, 2017, the Dow Divisor was 0.14523396877348 on September 1,
2017. Using this Divisor, every $1 change in price in a particular stock within the average
equates to a 6.885 (or 1 ÷ 0.14523396877348) point movement.
• Assessing the Dow Jones Methodology • No mathematical model is perfect—each comes
with its merits and demerits. Price weighting with regular divisor adjustments does enable the
Dow to reflect the market sentiments at a broader level, but it does come with a few
criticisms.15 Sudden price increments or reductions in individual stocks can lead to big
jumps or drops in DJIA.
• For a real-life example, an AIG stock price dip from around $22 to $1.5 within a month’s
time led to a fall of almost 3,000 points in the Dow in 2008. Certain corporate actions, like
dividend going ex (i.e., becoming an ex-dividend, wherein the dividend goes to the seller
rather than to the buyer), leads to a sudden drop in DJIA on the ex-date. High correlation
among multiple constituents also led to higher price swings in the index. As illustrated above,
this index calculation may get complicated on adjustments and divisor calculations.
• Despite being one of the most widely recognized and most followed index, critics of price-
weighted DJIA index advocate using float-adjusted market-value-weighted S&P 500 or the
Wilshire 5000 index, although they too come with their own mathematical dependencies.3 16
17 18
• After nearly 140 years as a marker of major market developments, the DJIA is still one of
the most recognized and cited of all market indexes. While it may not represent the new
market opportunities and early-stage fast-growing companies, and may not be indicative of
the overall economic strength of the U.S. economy given many of the companies in the Index
procure a high percentage of revenue outside the U.S., it does provide some valuable
purposes. So, despite all its shortcomings, the Dow is still one of the most watched indicators
for stock market performance and the shape of the U.S. economy.