Subject

CHAPTER
Name
Sem
Roll no.

: SAPM
:1
: Rucha
:3
:15

Chapter Outline
Meaning of finance and money
Meaning of Consumption, Saving & Investment
Investment v/s Speculation v/s gambling
Avenues of invest
Need for investment
Triangle of investment
Risk and return

meaning

type of risk

S.D., Co-variation & co-relation

CAPM & SML

Meaning of portfolio and diversification

Meaning of finance and money

Finance

"Finance is the management of money and other valuables.

Finance is the to obtain of funds and effective utilization of funds.

Money

Money means what money dose

Money is a medium of exchange

Meaning of Consumption, Saving &

Investment
Income
saving
Consumption
investment

If we postponed
the
consumption

Put the in
working with
aim of return

Investment v/s Speculation v/s gambling

Basis

Investment

Speculation

Gambling

Time Horizon

Long term

Short term
holding assets from
one day up to one
year

shorter than
speculation and
investment

Risk

Limited (calculated)

High (calculated)

High (noncalculated)

process

continuous process

In between

immediate event

Stability of income

Very Stable

Uncertain and
risky

luck

Avenues of
investment

Different ways that one can invest there money

Investment alternative

Need for investment

To keep the value of your money from inflation.

To get a good return from your ideal money.

To satisfy your future financial goals.

Provide enough money for meeting uncertain future needs

Triangle of investment
The first step to investing is to
determine which of the following
results are most important to
you:
Safety - How much risk are you
willing to take??
Income - Do you need money
from your investment now? Or
want to reinvest it?
Growth - How much to do want
your investment to grow to??

Risk and return

Retune will be count on:

1) income/ dividend

2) profit/ growth

R=

Dt + (P1 P0 )
P0

Risk:-

Getting 0 or lower return then we expect.

Systematic
Financial
risk
risk
risk
Typeunsystematic
of risk
Market risk
Interest
Purchasing
Business
risk
power risk

CALCUTION OF S.D.
Satiate of
economy

Probabilit
y

Expected
retune

A-

(A-)2

(A-)2
*P

0.30

16

4.8

4.5

20.25

6.075

0.50

11

5.5

-0.5

0.25

0.125

0.20

1.2

-5.5

30.25

6.05

total

11.5

S.D =

12.52
= 3.5

12.25

Co-variation & co-relation

Covariance shows how two stocks might

move together in the future.

It measures whether the two move in the

same direction (a positive covariance) or
in opposite directions (a negative
covariance).

to determine the strength of the

relationship, we need to look at
thecorrelation.

measurement value between -1 and 1

correlation is

1= they move perfectly together

-1= they move perfectly in opposite

directions.

0= they move in random directions from

each other.

Deviatio
n
(A-)

Deviatio
n
(O-)

Probabili
ty

Covariation

-8

-14

0.10

11.2

-3

-6

0.30

5.4

0.50

12

0.10

8.4
29

Co-relation = co-vriance (A,O)

SDA*SDO
=

29
4*7.27

= 0.99

CAPM

CAPM was developed in 1960s by William

Sharpe's.

A model that describes the relationship between

risk and expected return and that is used in
the pricing of risky securities.

CAPM, therefore, evolved as a way to measure

this systematic risk
R = Rf + (Rm Rf)b

Where,
R = required rate of return of security
Rf = risk free rate
Rm = expected market return
B = beta of the security
Rm Rf = equity market premium

Suppose the risk free rate of the security is 6%. The market rate is 12% and the beta is
1.25, Then the required rate of return for the security would be

R = 6 + (12 6) * 1.25
R = 6 + 7.5
R = 13.5%

SECURITY MARKET
LINE

The SML essentially graphs

the results from the capital
asset pricing model (CAPM)
formula.

If the security's risk versus

expected return is plotted
above the SML, it is
undervalued because the
investor can expect a greater
return for the inherent risk.

A security plotted below the

SML is overvalued because
the investor would be
accepting less return for
the amount of risk assumed.

PORTFOLIO
Portfolio: A group of activity
A good portfolio consists of financial assets that are not
strongly positively correlated
It help to diversify the risk
A good portfolio consists of financial assets that are not
strongly positively correlated
collection of assetssuch as stock, bonds, and mutual funds
held by an investor

DIVERSIFICATION
A diversified portfolio should consist of
securities that are not perfectly positively
correlated.
Diversification is basically used as a tool to
spread the risk across the number of assets or
investments.

Portfolio return = W1*R1+W2*R2+

+Wn*Rn
Portfolio risk
+Wn*SDn

= W1*SD1+W2*SD2+

status

Return

Probabili
ty

Expecte
d
return

Deviatio (deviation
n
)2

P*(deviation
)2

5(100)+5(150) =
1250

0.3

375

85

7225

2167.5

5(110)+5(10) =
1200

0.4

480

35

1225

490

5(120)+5(90) =
1050

0.2

210

-115

13225

2645

5(140)+5(60)
=
S.D. = 805
100

0.1
=89.58

100

-165

27225

2722.5

total

1165

805

Bibliography

http://www.investopedia.com/articles/financial-theory/11/calculating-cov
ariance.asp

Note book

https://en.wikipedia.org/wiki