PRESENTATION

ON
Investment Management

Submitted to:
submitted by:
Dr. Sudhanshu Pandiya
Group 5

GROUP- 5
AYUSHI GUPTA
DEEPAK YADAV
NAVNEET VISHWAKARMA
SHRISTI YADAV
ROHIT KUSHWAHA

Investment Management
Models of investment management
Duration and yield to maturity(YTM)
Measurement of central tendancy
Measurement of dispersion

MODELS OF INVESTMENT MANAGEMENT

Discounted cash flow model

Dividend discount model
Free cash flow model
Single period model
Multiple growth rate model
Zero growth model
Constant growth model
Two stage growth model
H MODEL.

1. DISCOUNTED CASH FLOW MODELS

The classic method of calculating the estimated value of any

Security is the discounted cash flow (DCF) model , which
Involve a present value analysis.
This technique estimates the value of a security by discounting
its expected future cash floes back to the present and adding
them together.
Formula

2. DIVIDEND DISCOUNT MODEL

This model finds the present value of future dividend of a
Company to derive the present market value of equity .
THE DDM EQUATION

The dividend discount model states that the estimated value

(per share) of a stock today is the discounted value of all
future dividends.

3. FREE CASH FLOW MODEL

The free cash flow model broadly involve determining the
value Of the firm as a whole( this value is called the
enterprise value)
By discounting the free cash flow to investors and then
subtracting the value of preference and debt to obtain the
value of equity.

4. SINGLE PERIOD MODEL

Single period model is one of the discounted cash flow model is
An income valuation approach that aims to find the fair value of
A stock /firm using single projected cash flow value and then
Discounting it with an appropriate discount rate.

5. MULTIPLE- GROWTH RATE MODEL

Multiple growth is defined as a situation in which a company s
Expected future growth in dividends needs to be described using
Two or more growth rates (one of which could be zero).

6. ZERO GROWTH MODEL

In zero growth model the dividend per share remains constant
Forever , implying that the growth rate is nil.
If we assume that the dividend per share remains constant
year
After year at a value of D, Eq. becomes:
Po=D/(1+r)+D/(1+r)2++D/(1+r)++D/(1+r)
equation on simplification ,becomes:
Po=D/r

7.CONSTANT GROWTH MODEL

(Gordon model)
The constant growth model the dividend per share grows at a
Constant rate per year forever.
This model works on the underlying assumption that the
Company will continue to pay the dividend amount as a fixed
Multiple of growth in the future , as it is paying now. It is an
Appropriate model to value companies who increase dividend
By fixed rate every year.
Formula for calculating share price using constant growth model
Arestock value (P)=D1/(r-g)

8.TWO-STAGE MODEL
The simplest extension of the constant growth model assumes
That the extraordinary growth (good or bad) will continue
for a Finite number of years and thereafter the normal
growth rate Will prevail indefinitely.

9. H MODEL
The H model of equity valuation assumes that the abnormal
Current dividend growth rate ,g a, will decline linearly over a
Period of 2H years and remain thereafter at a constant level
Of g n(the normal growth rate ).
The valuation equation for the H model is:
Po=Do[(1+gn)+H( ga-gn)]/r-Gn

Fig. 6.15

The h theory of investment

Growth rate

ga
Dividend growth rate pattern
For H model
gn

2H

time

DURATION
AND YTM

Duration
Three factors affect the price volatility of a
bond. These are:
Term to maturity
Size of coupon
General level of interest rates

Duration captures all three factors in one

number.
Duration was introduced by Frederick
Macaulay in 1938
Slide 315

Two Definitions of Duration

1. Duration is the approximate percentage
change in the price of a bond, given a 1%
change in market yields
2. Duration is that point in time when the
capital gain or loss due to a change in the
YTM is exactly offset by the change in the
reinvestment rate on the coupons.

Formula for Duration

n

DUR

Ct

t 1 i
t 1
n

Ct

1 i
t 1

Where:
Dur = Macaulays Duration
t = the number of time periods
C = the cash flow at time period t
i = the bonds initial yield to maturity
Slide 317

Duration
Duration is a linear relationship that is attempting to
measure something that is not linear
This leads to errors in measurement
As the size of the interest rate shock grows, so does
the size of the error
Duration will always overstate the capital loss and
understate the capital gain
Can correct the duration error using convexity

Duration
Duration of a coupon bond is always less than
maturity
Duration of a zero coupon bond is equal to
duration
Duration will rise as maturity increases
Duration rises as the coupon decreases
Duration rises as the YTM decreases

Current Yield
Current yield
The current yield measures the annual return accruing to
a bondholder who purchases the bond from the
secondary market and sell it before maturity.
The current market price of a bond in the secondary
market may be differ from its face value.
The current yield would be higher than the coupon rate
when the bond is selling at a discount, current yield
would be lower than the coupon rate for a bond selling at
premium.

CONTINUE.
The current yield relates the annual interest receivable on a bond to its
current market price.it can be expressed as;

current yield =In/Po x 100

where,
In= annual interest
Po=current market price

Yield to maturity
It may be defined as the compounded rate of return an
investors is expected to receive from a bond purchased at the
current market price and held to maturity.
It is really the internal rate of return earned from holding a
bond till maturity.
YTM is the discount rate that makes the present value of cash
inflows from the bond equal to the cash outflow for
purchasing the bond.
This is the most widely used measure of return on bonds.

Yield to maturity
formula
n

Ct
TV
MP

t
n
(
1

ytm
)
(
1

ytm
)
t 1
Where,
MP is the current market price of the bond
Ct is the cash inflow from the bond throughout the
holding period
TV is the terminal cash inflow received at the end of the
holding period

Measures of Central Tendency

Definition
Simpson and Kafka observe as A measure
of central tendency is a typical value around
which other figures congregate.

Waugh has expressed An average stand for

the whole group of which it forms a part yet
represents the whole.

Indices of Central Tendency

Sample mean
Common average

Sample median
of the values are above, below

Mode
Most common

26

Arithmetic Mean
Arithmetic mean is a mathematical average and it is the most
popular measures of central tendency. It is frequently referred to
as mean it is obtained by dividing sum of the values of all
observations in a series (X) by the number of items (N)
constituting the series. Thus, mean of a set of numbers X1, X2,
X3,..Xn denoted by xx and is defined as

Arithmetic Mean Calculated Methods

Direct Method :

Short cut method :

Step deviation Method :

Geometric Mean

Harmonic Mean

Summary of Means
Avoid means if possible
Loses information
Arithmetic
When sum of raw values has physical meaning
Use for summarizing times (not rates)
Harmonic
Use for summarizing rates (not times)
Geometric mean
Not useful when time is best measure of perf

Median
Median is a central value of the distribution, or the value
which divides the distribution in equal parts, each parts
containing equal number of items.
To find the median, the data points must first be sorted into
either ascending or descending numerical order.
Cannor has defined as The median is that value of the
variable which divides the group into two equal parts, one
part comprising of all values greater, and the other, all
values less than median.

CALCULATION 0F MEDIAN
Discrete series :

Continuous series:

Mode
The mode is simply the value of the relevant variable
that occurs most often in the sample.
Mode is the most frequent value or score in the
distribution.
It is defined as that value of the item in a series.
It is denoted by the capital letter Z.

Definition
Croxton and cowden defined it as The mode of a
distribution is the value at the point armed with the
item tend to most heavily concentrated, it may be
regarded as the most typical of a series of value.
Mode is that value which occurs most often, it has
the maximum frequency of occurrence mode is not
affected by extreme values.

Calculation of Mode

Mode vs. Median vs. Mean

When there is only one mode and distribution
is fairly symmetrical the three measures (as
well as others to be discussed) will have
similar values
However, when the underlying distribution is
not symmetrical, the three measures of
central tendency can be quite different.

Measures of Dispersion

Definition
A measure of dispersion provides a
summary statistic that indicates the
magnitude of such dispersion and, like a
measure of central tendency.
Measures of dispersion are descriptive
statistics that describe how similar a set of
scores are to each other

METHODS OF MEASURING
DISPERSION
Range
Quartile Deviation
Mean Deviation
Standard Deviation

40

RANGE
It is defined as the difference between the
smallest and the largest observations in a
given set of data.
Formula is R = L S
Ex. Find out the range of the given
distribution: 1, 3, 5, 9, 11
The range is 11 1 = 10.

QUARTILE DEVIATION
It is the second measure of dispersion, no doubt
improved version over the range. It is based on the
quartiles so while calculating this may require
upper quartile (Q3) and lower quartile (Q1) and
then is divided by 2. Hence it is half of the
deference between two quartiles it is also a semi
inter quartile range.
The formula of Quartile Deviation is
(Q D) = Q3 - Q1
2

MEAN DEVIATION
Mean Deviation is also known as average
deviation. In this case deviation taken from
any average especially Mean, Median or
Mode. While taking deviation we have to
ignore negative items and consider all of
them as positive. The formula is given
below

MEAN DEVIATION
The formula of MD is given below
MD = d
N (deviation taken from mean)
MD = m
N (deviation taken from median)
MD = z
N (deviation taken from mode)

The standard deviation

Measures the variation of observations from the
mean
The most common measure of dispersion
Takes into account every observation
Measures the average deviation of observations
from mean
Works with squares of residuals not absolute
valueseasier to use in further calculations

Standard deviation of a
population
Every observation in the population is used.
Standard deviation

x x

The square of the population standard

deviation is called the variance.

Variance

Thank you