Question

I want case study with question of this topic :

Time value of money

Risk and return

portfolio theory

Answer 1

Introduction

The idea the value of a rupee to be gotten in coming future is not exactly the value of rupee today.

I. Time value of Money is a hypothesis preferred position of having money today then last mentioned.

II. The time value of money is an idea, which states money accessible presently has worth

more than a similar measure of money in future because of its gaining limit.

Objectives

1. To comprehend the idea of Time value of money

2. How we can compute present value/future value for profiled incomes?

3. How time of money can encourages us to take care of our genuine issues?

There are different explanations for this idea

1. Investment: Money can be put away for creating more money, so money got today has more noteworthy value.

2. Interest Earning: Value of rupee as of now is more than its future value, as it is normal that it very well may be A rupee today is worth more today than in future in view of its chance expense of lost income.

3. Inflation: It is relied upon to increment in cost of items in coming future because of inflation, which lead to decrease in value of the present money. "Positive pace of Inflation diminish the buying intensity of rupee with entry of time".

4. Risk: When somebody loans money, there is a risk associated with not taking care of the money. In light of that risk interest is charged on the money, which lessens value of money.

Terms joined with Time Value of Money are

1. Present Value is a progression of future installment or future value limited at a pace of interest up to the present date to mirror the time value of money and result is called present value

Future Value is sum that is determined by expanding present value or arrangement of installment at the given rate of interest and result is future value.

3. Rate of Interest is a charge against use to swell/markdown present value/future value to accomplish want result.

4. Time Value of Money Principle: It is utilized to think about two diverse income explanations of two unique organizations or activities for investment. Reason for existing is to state return gave by them on the off chance that we make investment now.

5. Number of Periods: it speak to the time frame to which value or installment arrangement limited/expanded to ascertain fitting return.

Importance of Time Value of Money

It is for the most part utilized idea in Finance world; in light of this, choices are made to amplify return on investments. It encourages investors to contribute their store astutely. Its idea adds to this viewpoint to much degree. Its criticalness are as per the following:

1. Investment Decision will be choice to make investment of assets for long haul reason. TVM help us to recognize long haul income proclamations which will happen at various purpose of time. In this way, if financial specialist have two tasks to put its money in, those two ventures can be contrasted and this procedure regardless of whether their income explanation time period doesn't matches with one another by giving present value of their future income. Its idea is generally utilized in value or obligation protections investment by utilizing valuation models while doing investments.

2. Financing Decision will be choice to make to advance capital structure of the association. Raising asset for value, obligation or from some other source. TVM helps in this choice by contrasting expense with organization through use of compelling rate of interest of each wellspring of account. And afterward present value of expenses of two choices is contrasted against one another with settle on suitable wellspring of financing.

3. Operational Decision: This idea is additionally utilized in assessing bank cycle and indebted individuals' cycle in overseeing money assortment under current resources the executives.   Tvm Formula
FV = PV * [1 + (i/n)] (n * t)
FV = Future value of money
PV = Present value of money
i = Interest rate
t = number of years taken into consideration
n = number of compounding periods of interest per year
Example:
PV = Rs. 10,000 i = 10%
t = 10 years
n = 1 p.a.
FV =?
Scenario 1: n changes from 1 to 4 in case 1 Scenario 2: i changes from 10% to 11% in case 1 Scenario 3: t changes from 1 to 4 in ca. Applications of Time Value of Money in Real Life Problems
Asset Replacement Problem

A Manager needs to find out accumulated entirety of money in future date to supplant it with existing assets.

Model: ABC Ltd has Rs. 100,000 of Debentures (5%). Company want set up a replacement of existing assets after 10 years. This replacement asset earns 8% every year. Required investment will be as per the following:

Outcome: So ABC Ltd ought to invest Rs. 46,319.35 now to get Rs. 100,000 as replacement at 10 years.

i = 8%

t = 10

n =1

FV = 100,000

PV = Rs. 100,000/[1 + (0.080/1)] ^ (1 * 10) PV = Rs. 46,319.35

Investment Problem (Rate of Return)

Manage wants to calculate implicit rate of return over an investment.

Model: Company offering to pay Rs. 201,475 at the end of 10 years with deposit of Rs. 15,000 p.a. What amount implicate rate of return ABC ltd is offering to its customers? Outcome: Company is offering 5.3% of annual return

Valuation Problem

TVM help us to tackle issue of valuation for investment in equity, bonds, debentures, fixed deposits, recurring deposits etc.

Conclusion and Recommendation

According to my analysis, TVM is an extremely vibrant concept in finance world. It encourages us to calculate approximate future value of current investment or present value of future returns. It encourages us to in making decision where to invest and which not to consider. As talked about for this situation study there are different genuine issues which can be comprehended through this technique.

So my recommendation is to consistently consider this technique before making any investment in any financial instrument like equity, debts, bonds, insurance and different other instruments. B) PRisk return analysis- Demi Thomas, the financial manager for Urti Corporation, wishes to evaluate three prospective investments: X, Y, and Z. Currently, the firm earns 12% on its investments, which have a risk index of 6%. The expected return and expected risk of the investments are as follows:

Investment Expected return Expected risk index
X 14% 7%
Y 12% 8%
Z 10% 9%.

a. If demi were risk-indifferent, which investments would she select? Explain why.

A risk indifferent person would select the investment with the highest return
X gives the highest return; hence she will choose X

b. If she were risk-averse, which investments will she select? Why?

A risk averse person selects the investments which give the highest return for a given level of risk or the lowest risk for a given level of return
Thus she would not choose X as the returns are the highest (14%) with the lowest risk of 7%

c. If she were risk-seeking, which investments would she select? Why?

A risk seeking person would go for highest risk: Z (risk of 9%)

d. Given the traditional risk preference behavior exhibited by financial managers, which investment would be preferred? Why?

Traditionally managers are risk averse- hence X would be preferred. C) MPT relates to a portfolio's expected return. MPT shows that the general expected return of a portfolio is the weighted normal of the expected returns of the individu.al assets themselves. For instance, accept that an investor has a two-asset portfolio worth $1 million. Asset X has an expected return of 5%, and Asset Y has an expected return of 10%. The portfolio has $800,000 in Asset X and $200,000 in Asset Y. In light of these figures, the expected return of the portfolio will be: Portfolio expected return = (($800,000/$1 million) x 5%) + (($200,000/$1 million) x 10%) = 4% + 2% = 6% If the investor wants to ratchet up the expected return of the portfolio to 7.5%, the investor should simply shift the appropriate amount of capital from Asset X to Asset Y. For this situation, the appropriate weights are half in every asset:

Expected return of 7.5% = (half x 5%) + (half x 10%) = 2.5% + 5% = 7.5%

This equivalent thought applies to risk. One risk statistic that originates from MPT, known as beta, quantifies a portfolio's sensitivity to the market's systematic risk, which is the portfolio's vulnerability to wide market events. A beta of one means that the portfolio is presented to a similar amount of systematic risk as the market. Higher betas mean more risk, and lower betas mean less risk. Accept that an investor has a $1 million portfolio invested in the following four assets:

Asset A: Beta of 1, $250,000 invested

Asset B: Beta of 1.6, $250,000 invested

Asset C: Beta of 0.75, $250,000 invested

Asset D: Beta of 0.5, $250,000 invested

The portfolio beta is:

Beta = (25% x 1) + (25% x 1.6) + (25% x 0.75) + (25% x 0.5) = 0.96

The 0.96 beta means the portfolio is taking on about as much systematic risk as the market in general. Expect that an investor wants to take on more risk, hoping to accomplish more return, and chooses a beta of 1.2 is perfect. MPT infers that by adjusting the weights of these assets in the portfolio, the ideal beta can be accomplished. This can be done in many manners, but here is a model that demonstrates the ideal result:

Shift 5% away from Asset An and 10% away from Asset C and Asset D. Invest this capital in Asset B:

New beta = (20% x 1) + (half x 1.6) + (15% x 0.75) + (15% x 0.5) = 1.19

The ideal beta is almost perfectly accomplished with a couple of changes in portfolio weightings. This is key insight from MPT