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Why Corporations Need Financial Markets and Institutions

Review:
 Roles
1. 2. 3.

of Financial Manager

Investment Decisions Financing Decisions Dividend Policy

 The
 

Objective of Financial Management

Max. Value Max. Profit Max. Value = Max. Shareholders Wealth = Max. Market Value of Stock

 Agency
1. 2.

Conflict

Manager vs. Shareholders Managers/Shareholders vs Debtholders

Beberapa Pertanyaan Mendasar





Jika Anda sebagai Seorang Investor

Manakah yang lebih menarik bagi Anda, investasi pada deposito, saham, obligasi, reksa dana, forex, opsi, kontrak berjangka atau real estat?  Jika Anda akan berinvestasi pada saham atau obligasi atau pada aset riil, apa yang menjadi pertimbangan Anda?  Jika Anda akan menilai saham suatu perusahaan, apa yang menjadi dasar analisis Anda?

Jika Anda sebagai Seorang Manajer Keuangan


Apa yang harus Anda persiapkan agar investor tertarik berinvestasi pada perusahaan Anda?  Apakah untuk pendanaan perusahaan Anda, manakah yang paling optimal: pendanaan dengan saham, hutang bank atau obligasi?  Apakah pendanaan perusahaan Anda sebaiknya menggunakan pendanaan jangka pendek atau jangka panjang?  Jika transaksi bisnis Anda menggunakan valas, bagaimanakah Anda melakukan manajemen risiko?


PROCESS FINANCIAL INTERMEDIARY


FUNDS FUNDS

2 DEFICIT UNITS
(BORROWERS) FINANCIAL MARKETS

1 SURPLUS UNITS
(INVESTORS)

3
SECURITIES

4
SECURITIES

FINANCIAL MARKET
Sources of Longterms vs Short-term Capital 1. Capital Market (Stock Market and Bond Market) 2. Money Market Financial Intermediaries/Institutions 1. Bank 4. Insurance 2. Venture Capital 5. Pension Funds 3. Mutual Funds 6. Factoring and Leasing Speculation and Hedging 1. Option Market 3. Futures Market 2. Forex Market

Flow of Savings

Money

Primary Markets Secondary Markets

OTC Markets

Financial Markets (Debt Market)


Issue Debt Company Cash Investors

Irwin/McGraw-Hill

Financial Markets (Mutual Fund)


$ Bank of America
Sells shares

$ Windsor Fund
Issues shares

Investors

Open-End Close-End

Irwin/McGraw-Hill

Financial Markets
Banks Insurance Cos. Brokerage Firms

Company
Funds

Obligations

Intermediary
Obligations Funds

Depositors Policyholders Investors


Irwin/McGraw-Hill

Investor

Financial Markets (Bank)


Company
Loan $2.5 mil

Banks

Intermediary
Deposits Cash

Depositors

Investor

Irwin/McGraw-Hill

Financial Markets (Insurance)


Company
Loan $250 mil

Insurance Company

Intermediary
Sell policies Issue Stock Cash

Policyholders

Investor

Irwin/McGraw-Hill

Function of Financial Markets


1. 2. 3. 4. 5.

Transporting cash across time Risk transfer and diversification Liquidity Payment mechanism Provide information
Commodity prices  Interest rates  Company values


TRANSACTION COSTS

RISK AND RETURN


y PENGERTIAN RETURN DAN RISIKO y ESTIMASI RETURN DAN RISIKO ASET TUNGGAL y ANALISIS RISIKO PORTOFOLIO y DIVERSIFIKASI y

ESTIMASI RETURN DAN RISIKO PORTOFOLIO


4-14

PENGERTIAN RETURN
y Return adalah imbalan atas keberanian investor menanggung risiko, serta komitmen waktu dan dana yang telah dikeluarkan oleh investor. y Return juga merupakan salah satu motivator orang melakukan investasi. y Sumber-sumber return terdiri dari dua komponen: 1. Yield 2. Capital gains (loss) y Dengan demikian, return total investasi adalah: Return total = yield + capital gains (loss) (4.1)

Tks untuk Eduardus Tandelilin

4-15

PENGERTIAN RISIKO
y Risiko adalah kemungkinan perbedaan antara return aktual yang diterima dengan return yang diharapkan. y Sumber-sumber risiko suatu investasi terdiri dari:

1. Risiko suku bunga 2. Risiko pasar 3. Risiko inflasi 4. Risiko bisnis 5. Risiko finansial 6. Risiko likuiditas 7. Risiko nilai tukar mata uang 8. Risiko negara (country risk)
Tks untuk Eduardus Tandelilin 4-16

PENGERTIAN RISIKO
y Risiko juga bisa dibedakan menjadi dua jenis:

1. Risiko dalam konteks aset tunggal.


- Risiko yang harus ditanggung jika berinvestasi hanya pada satu aset saja.

2. Risiko dalam konteks portofolio aset.


a. Risiko sistematis (risiko pasar/risiko umum).
- Terkait dengan perubahan yang terjadi di pasar dan mempengaruhi return seluruh saham yang ada di pasar.

b. Risiko tidak sistematis (risiko spesifik).


- Terkait dengan perubahan kondisi mikro perusahaan, dan bisa diminimalkan dengan melakukan diversifikasi.
Tks untuk Eduardus Tandelilin 4-17

ESTIMASI RETURN SEKURITAS


y Untuk menghitung return yang diharapkan

dari suatu aset tunggal kita perlu mengetahui distribusi probabilitas return aset bersangkutan, yang terdiri dari: 1. Tingkat return yang mungkin terjadi 2. Probabilitas terjadinya tingkat return tersebut

Tks untuk Eduardus Tandelilin

4-18

ESTIMASI RETURN SEKURITAS


y Dengan demikian, return yang diharapkan

dari suatu aset tunggal bisa dihitung dengan rumus:


n

E (R) !

R
i !1

pri

(4.2)

dimana: E(R) = Return yang diharapkan dari suatu sekuritas Ri = Return ke-i yang mungkin terjadi pri = probabilitas kejadian return ke-i n = banyaknya return yang mungkin terjadi
4-19

Tks untuk Eduardus Tandelilin

ESTIMASI RETURN SEKURITAS


y Di samping cara perhitungan return di atas, kita juga bisa menghitung return dengan dua cara: 1. Arithmetic mean 2. Geometric mean
y Rumus untuk menghitung arithmetic mean: X (4.3) X ! n y Rumus untuk menghitung geometric mean:
G = [(1 + R1) (1 + R2) (1 + Rn)]1/n 1
Tks untuk Eduardus Tandelilin

(4.4)
4-20

ESTIMASI RETURN SEKURITAS: ASET ABC


Kondisi Ekonomi Ekonomi kuat Ekonomi sedang Resesi Probabilitas 0,30 0,40 0,30 Return 0,20 0,15 0,10

y Berdasarkan tabel distribusi probabilitas di atas, maka tingkat return yang diharapkan dari aset ABC tersebut bisa dihitung dengan menerapkan rumus 4.2:

E(R)

= [(0,30) (0,20)] + [(0,40) (0,15)] + [(0,30) (0,10)] = 0,15 atau 15%


4-21

Tks untuk Eduardus Tandelilin

ARITHMETIC MEAN: CONTOH


Tahun 1995 1996 1997 1998 1999 Return (%) 15,25 20,35 -17,50 -10,75 15,40 Return Relatif (1 + return) 1,1525 1,2035 0,8250 0,8925 1,1540

y Berdasarkan data dalam tabel di atas, arithmetic mean bisa dihitung dengan menggunakan rumus 4.3 di atas: [15,25  20,35  (-17,50)  (-10,75)  15,40] X ! 5 [ 22,75] X ! ! 4,55 % Tks untuk Eduardus Tandelilin 5 4-22

GEOMETRIC MEAN: CONTOH


y Berdasarkan data dalam tabel di atas, geometric mean bisa dihitung dengan rumus 4.4:

G= [(1 + 0,1525) (1 + 0,2035) (1 0,1750) (1- 0,1075) (1 + 0,1540)]1/5 1 = [(1,1525) (1,2035) (0,8250) (0,8925) (1,1540)]1/5 1 = (1,1786) 1/5 1 = 1,0334 1 = 0,334 = 3,34%

Tks untuk Eduardus Tandelilin

4-23

MENGHITUNG RISIKO ASET TUNGGAL


y Risiko aset tunggal bisa dilihat dari besarnya

penyebaran distribusi probabilitas return. Ada dua ukuran risiko aset tunggal, yaitu: 1. Varians 2. Deviasi standar
y Di samping ukuran penyebaran tersebut, kita juga

perlu menghitung risiko relatif aset tunggal, yang bisa diukur dengan koefisien variasi.
y Risiko relatif ini menunjukkan risiko per unit

return yang diharapkan.


Tks untuk Eduardus Tandelilin 4-24

MENGHITUNG RISIKO ASET TUNGGAL


y Rumus untuk menghitung varians, standar deviasi, dan

koefisien variasi adalah: Varians return = W2 = 7 [Ri E(R)]2 pri Standar deviasi = W = (W2)1/2

(4.5) (4.6) (4.7)

standar deviasi return Wi Koefisien variasi ! ! return yang diharapkan E(Ri ) dimana: W2 = varians return W = standar deviasi E(Ri) = Return ke-i yang mungkin terjadi pri = probabilitas kejadian return ke-I (R) = Return yang diharapkan dari suatu sekuritas

Tks untuk Eduardus Tandelilin

4-25

PERHITUNGAN VARIANS & STANDAR DEVIASI: CONTOH


Tabel 4.3. Penghitungan varians dan standar deviasi saham DEF
(1)
Return (R)

(2)
Probabilitas (pr)

(3)
(1) X (2) R

(4)
E(R)

(5)
[(R-E(R)]2

(6) [(Ri E(R)]2 pri 0,00002 0,000 0,00000 0,00004 0,000


Varians = 0,00202

0,07 0,01 0,08 0,10 0, 15

0,2 0,2 0,3 0,1 0,2 1,0

0,014 0,002 0,024 0,010 0,030


E(R) = 0,080

-0,010 -0,0 0 0,000 0,020 0,0 0

0,0001 0,004 0,0000 0,0004 0,004

CV = 0,0449/0,080 = 0,56125 Standar deviasi = W = (W2)1/2 = (0,00202)1/2 = 0,0449 = 4,49% Eduardus Tandelilin 2001
4-26

GAMBAR 1.1. HUBUNGAN RISIKO DAN RETURN


Return
High Return Return increase in proportion Risk increase in proportion to the Y axis High potential for fluctuation High risk investments tend to have a great potential for fluctuation High Risk

Risk

Profit + Losses

Low potential for fluctuation Low Risk Low risk investments tend to have a low potential for fluctuation

Sumber: http://www.softcapital.co.jp/eigo/return1.html
Eduardus Tandelilin 2001 1-27

GAMBAR 1.2. HUBUNGAN RISIKO DAN RETURN PADA BERBAGAI ASET


Return yang diharapkan
Tingkat bunga bebas risiko Obligasi pemerintah Obligasi perusahaan Saham Opsi put & call Kontrak futures Ekuitas Internasional

RF

Risiko Risiko rendah moderat

Risiko sedang

Risiko diatas rata-rata

Risiko tinggi

Risiko

Sumber: Farrel, James L., 1997, Portfolio Management: Theory and Application, McGraw- Hill, Singapore, hal. 11. Eduardus Tandelilin 2001
1-28

PORTFOLIO MANAGEMENT
DON T PUT YOUR ALL EGGS INTO ONE BASKET
(TRADE OFF BETWEEN RISK AND RETURN)

EFFICIENT PORTFOLIO OPTIMAL PORTFOLIO

CHAPTER 8 Risk and Rates of Return

Stand-alone risk  Portfolio risk  Risk & return: CAPM / SML




Investment returns
The rate of return on an investment can be calculated as follows:
Return =

________________________
Amount invested

(Amount received Amount invested)

For example, if $1,000 is invested and $1,100 is returned after one year, the rate of return for this investment is: ($1,100 - $1,000) / $1,000 = 10%.

What is investment risk?




Two types of investment risk


Stand-alone risk Portfolio risk

 

Investment risk is related to the probability of earning a low or negative actual return. The greater the chance of lower than expected or negative returns, the riskier the investment.

Probability distributions
 

A listing of all possible outcomes, and the probability of each occurrence. Can be shown graphically.
Firm X

Firm Y -70 0 15 100

Rate of Return (%)

Expected Rate of Return

Selected Realized Returns, 1926 2004


Small-company stocks Large-company stocks L-T corporate bonds L-T government bonds U.S. Treasury bills Average Standard Return Deviation 17.5% 33.1% 12.4 20.3 6.2 8.6 5.8 9.3 3.8 3.1

Source: Based on Stocks, Bonds, Bills, and Inflation: (Valuation Edition) 2005 Yearbook (Chicago: Ibbotson Associates, 2005), p28.

Investment alternatives
Economy Prob. 0.1 0.2 0.4 0.2 0.1 T-Bill 5.5% 5.5% 5.5% 5.5% 5.5% HT -27.0% -7.0% 15.0% 30.0% 45.0% Coll 27.0% 13.0% 0.0% -11.0% -21.0% USR 6.0% -14.0% 3.0% 41.0% 26.0% MP -17.0% -3.0% 10.0% 25.0% 38.0%

Recession Below avg Average Above avg Boom

Why is the T-bill return independent of Tthe economy? Do T-bills promise a Tcompletely risk-free return? riskT-bills will return the promised 5.5%, regardless of the economy. No, T-bills do not provide a completely risk-free return, as they are still exposed to inflation. Although, very little unexpected inflation is likely to occur over such a short period of time. T-bills are also risky in terms of reinvestment rate risk. T-bills are risk-free in the default sense of the word.

How do the returns of HT and Coll. behave in relation to the market?


 HT

Moves with the economy, and has a positive correlation. This is typical.  Coll. Is countercyclical with the economy, and has a negative correlation. This is unusual.

Calculating the expected return


^

r ! xp ct d r t
^

f r tur

r ! ri
i!

! ( ( (

) ( . )  ()( . )( )( . )! .

)( . ) )( . )

Summary of expected returns


HT Market USR T-bill Coll. Expected return 12.4% 10.5% 9.8% 5.5% 1.0%

HT has the highest expected return, and appears to be the best investment alternative, but is it really? Have we failed to account for risk?

Calculating standard deviation


W! t
d rd d vi ti
2

W ! Variance ! W
!
(ri  )2 r
i! i

Standard deviation for each investment


W !

i !1

(ri  r ) 2 Pi
2 2

W T  bills

(5.5 - 5.5) (0.1)  (5.5 - 5.5) (0.2) !  (5.5 - 5.5) 2 (0.4)  (5.5 - 5.5) 2 (0.2)  (5.5 - 5.5) 2 (0.1) W Coll ! 13.2% W USR ! 18.8% W M ! 15.2% ! 20.0%

W T  bills ! 0.0% W HT

Comparing standard deviations


Prob. T - bill USR HT

5.5 9.8

12.4

Rate of Return (%)

Comments on standard deviation as a measure of risk


 Standard

deviation ( i) measures total, or stand-alone, risk.  The larger i is, the lower the probability that actual returns will be closer to expected returns.  Larger i is associated with a wider probability distribution of returns.

Comparing risk and return


Sec rity T-bills HT Coll* USR* Market
* Seem out of place.

Ex ecte ^ ret rn, r 5.5% 12.4% 1.0% 9.8% 10.5%

Risk, 0.0% 20.0% 13.2% 18.8% 15.2%

Coefficient of Variation (CV)


A standardized measure of dispersion about the expected value, that shows the risk per unit of return.

Stan ar eviation W CV ! ! Ex ecte ret rn r

Risk rankings, by coefficient of variation


T-bill HT Coll. USR Market CV 0.0 1.6 13.2 1.9 1.4

Collections has the highest degree of risk per unit of return. HT, despite having the highest standard deviation of returns, has a relatively average CV.

Illustrating the CV as a measure of relative risk


Prob.

0
A

Rate of Return (%)

= B , but A is riskier because of a larger probability of losses. In other words, the same amount of risk (as measured by ) for smaller returns.

Investor attitude towards risk




Risk aversion assumes investors dislike risk and require higher rates of return to encourage them to hold riskier securities. Risk premium the difference between the return on a risky asset and a riskless asset, which serves as compensation for investors to hold riskier securities.

Portfolio construction: Risk and return


 

Assume a two-stock portfolio is created with $50,000 invested in both HT and Collections. A portfolios expected return is a weighted average of the returns of the portfolios component assets. Standard deviation is a little more tricky and requires that a new probability distribution for the portfolio returns be devised.

Calculating portfolio expected return


^

r p is
^

i ht d v r
^ i

rp !
i!

ri

rp ! . (

) . ( .

) ! 6.

An alternative method for determining portfolio expected return


Economy Recession Below avg Average Above avg Boom

Prob. 0.1 0.2 0.4 0.2 0.1

HT -7.0% 15.0%

Coll 13.0% 0.0%

Port. 0.0% 3.0% 7.5% 9.5%

-27.0% 27.0%

30.0% -11.0%

45.0% -21.0% 12.0%

r ! 0.10 (0.0%)  0.20 (3.0%)  0.40 (7.5%)  0.20 (9.5%)  0.10 (12.0%) ! 6.7%

Calculating portfolio standard deviation and CV


0.  0. W p !  0.  0.  0. . ! 6. 0 (0.0 - 6. ) 0( 0( 0( 0( .0 - 6. ) . - 6. ) . - 6. ) .0 - 6. )

! .

! 0.

Comments on portfolio risk measures


  

= 3.4% is much lower than the i of either stock ( HT = 20.0%; Coll. = 13.2%). p = 3.4% is lower than the weighted average of HT and Coll.s (16.6%). Therefore, the portfolio provides the average return of component stocks, but lower than the average risk. Why? Negative correlation between stocks.
p

General comments about risk


} 35% for an average stock.  Most stocks are positively (though not perfectly) correlated with the market (i.e., between 0 and 1).  Combining stocks in a portfolio generally lowers risk.


Returns distribution for two perfectly negatively correlated stocks ( = -1.0)


Stock W
25 15 0 25 15 0

Stock M
25 15 0

Portfolio WM

-10

-10

-10

Returns distribution for two perfectly positively correlated stocks ( = 1.0)


Stock M
25 15 0 25 15 0

Stock M
25 15 0

Portfolio MM

-10

-10

-10

Creating a portfolio: Beginning with one stock and adding randomly selected stocks to portfolio


 

decreases as stocks added, because they would not be perfectly correlated with the existing portfolio. Expected return of the portfolio would remain relatively constant. Eventually the diversification benefits of adding more stocks dissipates (after about 10 stocks), and for large stock portfolios, p tends to converge to } 20%.
p

Illustrating diversification effects of a stock portfolio


Wp (%) 35 Diversifiable Risk Stand-Alone Risk, Wp 20 Market Risk 0

10

20

30

40

2,000+

# Stocks in Portfolio

Breaking down sources of risk


Stand-alone risk = Market risk + Diversifiable risk


Market risk portion of a securitys stand-alone risk that cannot be eliminated through diversification. Measured by beta. Diversifiable risk portion of a securitys standalone risk that can be eliminated through proper diversification.

Failure to diversify


If an investor chooses to hold a one-stock portfolio (doesnt diversify), would the investor be compensated for the extra risk they bear? NO! Stand-alone risk is not important to a welldiversified investor. Rational, risk-averse investors are concerned with p, which is based upon market risk. There can be only one price (the market return) for a given security. No compensation should be earned for holding unnecessary, diversifiable risk.

Capital Asset Pricing Model (CAPM)




Model linking risk and required returns. CAPM suggests that there is a Security Market Line (SML) that states that a stocks required return equals the risk-free return plus a risk premium that reflects the stocks risk after diversification. ri = rRF + (rM rRF) bi

Primary conclusion: The relevant riskiness of a stock is its contribution to the riskiness of a well-diversified portfolio.

Beta
a stocks market risk, and shows a stocks volatility relative to the market.  Indicates how risky a stock is if the stock is held in a well-diversified portfolio.
 Measures

Comments on beta
   

If beta = 1.0, the security is just as risky as the average stock. If beta > 1.0, the security is riskier than average. If beta < 1.0, the security is less risky than average. Most stocks have betas in the range of 0.5 to 1.5.

Can the beta of a security be negative?


if the correlation between Stock i and the market is negative (i.e., i,m < 0).  If the correlation is negative, the regression line would slope downward, and the beta would be negative.  However, a negative beta is highly unlikely.
 Yes,

Calculating betas


Well-diversified investors are primarily concerned with how a stock is expected to move relative to the market in the future. Without a crystal ball to predict the future, analysts are forced to rely on historical data. A typical approach to estimate beta is to run a regression of the securitys past returns against the past returns of the market. The slope of the regression line is defined as the beta coefficient for the security.

Illustrating the calculation of beta


_
ri
20 15 10 5

.
5 10

Year 1 2 3

rM 15% -5 12

ri 18% -10 16

-5

0 -5 -10

15

20

_
rM

Regression line:

^ = -2.59 + 1.44 r^ r
i

Beta coefficients for HT, Coll, and T-Bills T40

_ ri

HT: b = 1.30

20 T-bills: b = 0

-20

20

40 Coll: b = -0.87

_ kM

-20

Comparing expected returns and beta coefficients


Security HT Market USR T-Bills Coll. Expected Return 12.4% 10.5 9.8 5.5 1.0 Beta 1.32 1.00 0.88 0.00 -0.87

Riskier securities have higher returns, so the rank order is OK.

The Security Market Line (SML): Calculating required rates of return


SML: ri = rRF + (rM rRF) bi ri = rRF + (RPM) bi
 Assume

the yield curve is flat and that rRF = 5.5% and RPM = 5.0%.

What is the market risk premium?




Additional return over the risk-free rate needed to compensate investors for assuming an average amount of risk. Its size depends on the perceived risk of the stock market and investors degree of risk aversion. Varies from year to year, but most estimates suggest that it ranges between 4% and 8% per year.

Calculating required rates of return


 rHT  rM  rUSR  rT-bill  rColl

= 5.5% + (5.0%)(1.32) = 5.5% + 6.6% = 12.10% = 5.5% + (5.0%)(1.00) = 10.50% = 5.5% + (5.0%)(0.88) = 9.90% = 5.5% + (5.0%)(0.00) = 5.50% = 5.5% + (5.0%)(-0.87) = 1.15%

Expected vs. Required returns


r HT Market USR T - bills Coll. r Un erval e (r " r) Fairly val e (r ! r) Overval e (r r) 12.4% 12.1% 10.5 9.8 5.5 1.0 10.5 9.9 5.5 1.2

Fairly val e (r ! r) Overval e (r r)

Illustrating the Security Market Line


SML: ri = 5.5% + (5.0%) bi
ri (%) HT rM = 10.5 rRF = 5.5
-1

SML

.
Coll.

. T-bills

. ..
USR
1 2

Risk, bi

An example: EquallyEqually-weighted two-stock portfolio two Create

a portfolio with 50% invested in HT and 50% invested in Collections.  The beta of a portfolio is the weighted average of each of the stocks betas. bP = wHT bHT + wColl bColl bP = 0.5 (1.32) + 0.5 (-0.87) bP = 0.225

Calculating portfolio required returns




The required return of a portfolio is the weighted average of each of the stocks required returns. rP = wHT rHT + wColl rColl rP = 0.5 (12.10%) + 0.5 (1.15%) rP = 6.63% Or, using the portfolios beta, CAPM can be used to solve for expected return. rP = rRF + (RPM) bP rP = 5.5% + (5.0%) (0.225) rP = 6.63%

Factors that change the SML




What if investors raise inflation expectations by 3%, what would happen to the SML?
( I = 3%

ri (%) 13.5 10.5 8.5 5.5


0 0.5 1.0

SML2 SML1

Risk, bi
1.5

Factors that change the SML




What if investors risk aversion increased, causing the market risk premium to increase by 3%, what would happen to the SML?
( RPM = 3%

ri (%) 13.5 10.5 5.5

SML2 SML1

Risk, bi
0 0.5 1.0 1.5

Verifying the CAPM empirically


 The

CAPM has not been verified completely.  Statistical tests have problems that make verification almost impossible.  Some argue that there are additional risk factors, other than the market risk premium, that must be considered.

More thoughts on the CAPM




Investors seem to be concerned with both market risk and total risk. Therefore, the SML may not produce a correct estimate of ri. ri = rRF + (rM rRF) bi + ??? CAPM/SML concepts are based upon expectations, but betas are calculated using historical data. A companys historical data may not reflect investors expectations about future riskiness.