Investment Funda

INVESTMENT Key Points 1 Price Vs Yield If one is known other can be derived, so both are synonymous 2 Investing has two dimensions risk and return Measure of return is yield; so price can be used as measure of return Low Price means high yield and vice versa High price means low yield and vice versa 3 Key investment funda is buy cheap and sell expensive

how to measure cheap, its cheap if market price >= value, so cheapness is relative to value (intrinsic val

Value and price incorporate the idea of risk while yield doest - so if comparing two inve

The key funda can be stated as buy high yield and sell low yield - but here we will have to worry about ri so if both investments are similar in risk then buy with high yield

Price based Comparison Calculate Value of both investments if market price > value , then a investment now calculate which one is cheaper buy the cheaper of two max [ max(o, MP of Inv A - Val of A) , max(0

ss is relative to value (intrinsic value); value is calculated or measured by analyst/investor

est - so if comparing two investment on price cheaper can be bought without worrying abt the risk here we will have to worry about risk

INVESTMENT A VS INVESTMENT B

rice based Comparison ue of both investments e > value , then a investment is cheap e which one is cheaper per of two MP of Inv A - Val of A) , max(0,MP of Inv B - Val of B)]

Yield based Comparison Get the yield of A & B get the risk of A & B( if bonds o if risk of A&B are equal then sel if risk of A&B are not equal then find out what are the expected now if yield of A is higher than e do same calculation to figure ou select cheaper max[ max(0, yield of A- expecte

orrying abt the risk

Return

Risk

ield based Comparison et the yield of A & B et the risk of A & B( if bonds one can use duration to measure risk) risk of A&B are equal then select one with higher yield risk of A&B are not equal then nd out what are the expected returns for the given risks of A& B ( from the graph above) ow if yield of A is higher than expected return of A then it is a cheaper bond o same calculation to figure out the cheapness of B elect cheaper max[ max(0, yield of A- expected return of A), max (0, yield of B - expected return of B) ]