Group:NEERAJ KUMAR SAURABH JAIN PRESTEGE VARGHESE JOHN RAJ KISHORE RAHUL PARIHAR

(A)Portfolio related risk measures. The return of security or investment is generally measured as holding period Return which is defined as:Cash inflow during the period + [ending value begging value] ----------------------------------------------------------------------------Beginning value Ex- If a capital investment requires an initial outlay of Rs 100,000, generates a cash flow of Rs 5000, and has end-of-the-period value of Rs 110,000, the holding period return Holding period return = 5000 (110,000 100,000) --------------------------------100,000

= 15%

Key measures used in portfolio analysis a) b) c) d) Variance Co-variance Co-relation Beta

[B] Mean Variance Portfolio construction

The Two-asset portfolio Expected return and standard deviation of return for a two-asset portfolio are

E(Rp) = Wa*E(Ra) + Wb*E(Rb)

The n- asset portfolio When more than two assets are combined in a portfolio, the expected portfolio returns and the standard deviation of portfolio return areE(Rp) =

[C] Feasible reason and Efficient Frontier

[D] Risk Return Preference [E] Optimal Portfolio [F] Optimal portfolio with lending and borrowing at a Riskless Rate [G] Portfolio Theory and Capital Budgeting.

[H] Capital asset pricing model Assumptionsa) Individuals are risk averse b) Individual seek to maximize the expected utilities of their portfolios over a single period planning horizon. c) Individuals have homogeneous expectations. d) Individuals can borrow and lend freely at the risk less rate of return. e) Market is perfect, there is no taxes , no transaction cost, ssecurities are completely divisible. f) Quantities of risky securities in the market is given. Capital Market Line Security Market Line Relation Between SML & CML

Developing the inputs required for applying the CAPM.

a) Risk-Free Rate b) Market Risk Premium - Historical Risk Premium - Forward Looking Risk Premium. c) Beta Estimation Issues Adjusting Historical Beta

CAPITAL ASSET PRICING MODEL AND CAPITAL BUDGETING A) Equity Beta And Asset Beta. Processure for calculating a projects required rate of return.

 Every project being considered is independent. A project is being considered for implementation now or

never. The economic life of a project is fixed. The investment & financing aspect of a project are independent. The cash flows of a project may be estimated on the basis of current prices.

 There are mutually exclusive projects.

Project can be deferred by one or more years.

The economic life of a project is not predetermined &

fixed. The investment & financing side of a project are related. Inflation is explicitly considered in evaluating the project. + Evaluation of overseas investment proposals. Investment in capabilities.

 Choice between mutually exclusive projects of unequal

life. Optimal timing decision. Determination of economic life. Interrelationship between investment and financial aspects. Inflation & capital budgeting. International capital budgeting. Investment in capabilities.

 Machine A Standard Model Costs Rs. 75,000 Lasts 5 Years Operating Cost Rs.
12,000

Machine B Economy Model Costs Rs. 50,000 Lasts 3 Years Operating Cost Rs.
15,000

PV Cost= 75,000+
12,000+12,000+12,000+12,000+12,000
(1.12) (1.12)^2 (1.12)^3 (1.12)^4 (1.12)^5

PV Cost = 50,000+
15,000+15,000+15,000
(1.12) (1.12)^2 (1.12)^3

Present Value Cost (PV Cost) = 1,18,260 Discount Rate = 12%

= 85,030

 Machine A
UAE = PV Cost

Machine B UAE = PV Cost

PVIF A r,n = 118,260 = 32,804 3.605

PVIF A r,n = 86,030 = 35,816 2.402

Unique Annual Equivalent (UAE) or Equivalent Annual Cost (EAC)

 Examine alternative dates (t) when the investment can

be made. Estimate the net future value as of each alternative date and convert the same to its current value. Choosing the timing that has the highest current value.

 Time

Net Future Value (Rs. Mn)

Time
0

Net Future Value (Rs. Mn)

20 = 20.00

0 1 2 3 4

20 28 33 36 38

(1.12)^0

28
(1.12)^1

= 25.00

33 (1.12)^2

= 26.30

36 (1.12)^3

= 25.62

38 (1.12)^4

= 24.15

INTERRLATIONSHIP BETWEEN INVESTMENT AND FINANCING ASPECTS

The weighted average cost of capital is based on the assumption that every project is financed by the same Propertions of debt and equity as found in the capital sturucture of firm. Finanacing and Investment decision are likely to interrelated. This may be done either by calculating the adjusted NPV or using the adjusted discount rate.

Adjusted Net Present Value

The adjusted NPV of a project is its NPV calculated after making adjustments for the financing impact of the project Adjusted NPV = Base case NPV +NPV of finanacing decisions associated with the project.

SOCIAL COST BENEFIT ANALYSIS

1) Rationale for SCBA 2) UNIDO approach 3) Net benefit in terms of economic (efficiency) prices. 4) Savings impact and its value. 5) Income distribution impact 6) Adjustment for merit and demerit goods. 7) little-Mirrlees approach. 8) Shadow Prices 9) SCBA by financial Institution. 10) Public sector investment decisions in India.

Rationale for SCBA

a) b) c) d) e) f) Market Imperfections Externalities Taxes and subsidies Concern for saving Concern for Re-distribution Merit wants

UNIDO approach
UNIDO approaches was first articulated in the Guidelines for project Evaluation. UNIDO came out with another publication Guide To Practical Appraisal in 1978. It involves 5 stagesa) Calculation of the financial profitability of the project measured at market price. b) Obtaining the net benefit of the project in terms of the economic (Efficiency) prices. c) Adjust for the impact of the project on savings and investment. d) Adjust for the impact of the project on income distribution. e) Adjust for the impact of the project on merit goods and demerit goods whose social value differ from their economic value.

Net benefit in terms of economic (efficiency) prices.

a) Shadow pricing : Basic issue -choice of numeraire - concept of tradability - sources of shadow pricing

-Taxes (1)When a project result in diversion of non traded inputs which are fixed in supply from other producers or addition to non traded goods, taxes should be included. (2)When a project augments a domestic production by other producer, taxes should be excluded. (3) For fully traded goods, taxes should be ignored

-consumer willingness to pay.

Savings impact and its value

a) Impact on saving b) Value of saving Income Distribution impact - Marginal utility of income = % decrease in income/ % increase in income. -Weight attached to income = Adjustment for merit and de-merit goods Merit goods Whose social value is greater than economic value De-merit goods Whose economic value is greater than social value.

LITTLE-MIRRLEES APROACH
Calculating accounting prices particularly for a foreign exchange savings and unskilled labor. Considering the factor of equity. Use of DCF analysis UNIDO 1) Measures cost and benefit in terms of Domestic rupee. 2) Measure cost and benefit in terms of Consumption. 3) Stage by stage analysis of efficiency , savings , and redistribution. L-M approach Measures cost and benefit in terms of International prices Measure cost and benefit in terms of uncommitted social income. It However tends to view these consi-derations together.

SHADOW PRICES [I]Shadow price of traded goods It is simply the border price, If goods are exported then its shadow price will be FOB. If goods are imported then its shadow price will be CIF. If foreign demand isnt perfectly elastic then the marginal export revenue will be substituted to FOB price. If foreign supply isnt perfectly elastic then the marginal import revenue will be substituted to CIS price

[II]Accounting price of non traded goods - 2/3 marginal social cost + marginal social benefit. Use of conversion factor - Monetary cost of non-traded item is broken down into Tradable, Labor, Residual components. Shadow wage rate SWR = c-1/s(c-m) or SWR = m+(c-c)+[1-1/s](c-m) Accounting rate of return:

SCBA by financial Institution. a)Economic rate of return.

b) Effective Rate of Protection

c) Domestic resource cost PUBLIC SECTOR INVESTMENT DECISIONS IN INDIA Initiatives to Improve the quality of Investments Decision Project Appraisal Division Public Investment Board. Lacunae