In this course, we will discuss fundamental principles of trading off risk and return, portfolio optimization, and security pricing. We will study and use risk-return models such as the Capital Asset Pricing Model (CAPM) and multi-factor models to evaluate the performance of various securities and portfolios. Specifically, we will learn how to interpret and estimate regressions that provide us with both a benchmark to use for a security given its risk (determined by its beta), as well as a risk-adjusted measure of the security’s performance (measured by its alpha). Building upon this framework, market efficiency and its implications for patterns in stock returns and the asset-management industry will be discussed. Finally, the course will conclude by connecting investment finance with corporate finance by examining firm valuation techniques such as the use of market multiples and discounted cash flow analysis. The course emphasizes real-world examples and applications in Excel throughout. This course is the first of two on Investments that I am offering online (“Investments II: Lessons and Applications for Investors” is the second course). The over-arching goals of this course are to build an understanding of the fundamentals of investment finance and provide an ability to implement key asset-pricing models and firm-valuation techniques in real-world situations. Specifically, upon successful completion of this course, you will be able to: • Explain the tradeoffs between risk and return • Form a portfolio of securities and calculate the expected return and standard deviation of that portfolio • Understand the real-world implications of the Separation Theorem of investments • Use the Capital Asset Pricing Model (CAPM) and 3-Factor Model to evaluate the performance of an asset (like stocks) through regression analysis • Estimate and interpret the ALPHA (α) and BETA (β) of a security, two statistics commonly reported on financial websites • Describe what is meant by market efficiency and what it implies for patterns in stock returns and for the asset-management industry • Understand market multiples and income approaches to valuing a firm and its stock, as well as the sensitivity of each approach to assumptions made • Conduct specific examples of a market multiples valuation and a discounted cash flow valuation This course was previously entitled “Financial Evaluation and Strategy: Investments” and was part of a previous specialization entitled "Improving Business and Finances Operations", which is now closed to new learner enrollment. “Financial Evaluation and Strategy: Investments” received an average rating of 4.8 out of 5 based on 199 reviews over the period August 2015 through August 2016. You can view a detailed summary of the ratings and reviews for this course in the Course Overview section. This course is part of the iMBA offered by the University of Illinois, a flexible, fully-accredited online MBA at an incredibly competitive price. For more information, please see the Resource page in this course and onlinemba.illinois.edu.
Why Discount?
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來自 University of Illinois at Urbana-Champaign 的課程
Investments I: Fundamentals of Performance Evaluation
401 個評分
從本節課中
Module 1: Investments Toolkit and Portfolio Formation
In Module 1, we will build the fundamentals of portfolio formation. After providing a brief refresher of basic investment concepts (our toolkit), a summary of historical patterns of stock returns and government securities in the U.S. is provided. We then consider general examples of portfolio choice to highlight the tradeoffs between “risk” and return. We end the module with a discussion of dominated assets and efficient portfolio formation, emphasizing real-world examples and practice in Excel solving for the optimal portfolio given certain constraints (such as the amount of volatility we will accept in our portfolio).
與講師見面
Scott WeisbennerWilliam G. Karnes Professor of Finance
Department of Finance, College of Business
[ Music ]
>> Alright, why don't we get these lesson objectives started,
and first on the countdown here is why discount?
So when we talk about discounting,
we're basically saying cash flows tomorrow are worth less
than today.
Okay? So that probably isn't controversial,
but the key question is, how much less are they worth?
Okay? So two issues come into play.
One is the time value of money, and when we're thinking of,
you know, time value of money, just think of inflation, okay?
So, you know, we're in environment 2015
where inflation's, you know, pretty close to 0 in a lot
of countries, but historically, that's not, not the norm.
And then second, the riskiness of the cash flows,
and that's really what investment finance is all about,
determining, you know, what assets,
what stocks are more risky than others, okay?
And we'll develop the notions of what do we mean
by risk throughout the course, okay?
So, wow, Le Penseur, sculpture by Rodin,
what's he, what's he doing here?
Well whenever you see this slide, it means that a question,
and an in-lecture question is about to appear,
and when you see the question, I want you to do what's said
in the title here, like pause, think about the question,
and then answer it, okay?
And then once you've given it the old college try, come back
and you can see my response to the question.
So let's see the first question I have prepared here.
So let's start out, you know, pretty straightforward.
You have $200 dollars, you're going to invest this
for two years and you're getting an interest rate
at 10 percent per year, it's paid out at the end of the year.
So $200 dollars savings, 10 percent interest paid
out at the end of the year, you're holding it for two years,
what's going to be your balance at the end?
What's going to be the future value?
[ Silence ]
Okay, hopefully you've had time to get it done, why don't we go
over to the tablet and let's talk about this problem a bit.
$200 dollars, 10 percent interest rate,
held for two years, what's going to be our balance at the end of,
at the end of two years?
So first let's just have, introduce some, you know,
kind of terms here, FV equals future value,
PV equals present value, and the general formula
to convert present value to future value and future value
to present value is shown here.
So if you have, let's, you know, kind of highlight this.
You have your present value here, you basically,
you have your present value, you just, you know, gross that up
by whatever the return is to get to your future value.
So in our context, our interest rate was 10 percent,
we are grossing that up by two years, okay?
To get to our future value.
Now, later in the course, in Module 4, we'll be talking
about valuing firms, so in that case you're doing the opposite.
You're making estimates about future values of cash flows,
then you need to discount them back to get a value today,
but the question we asked here was a first one, alright?
So let's look at, you know, what, what answer do we get,
what answer do we get for that?
So the future value
of the correct response is $242 dollars,
and it's interesting how that $242 dollars is broken down.
So, three parts of it.
$200 of the $240 dollars is just simply the principle.
Okay? The simple interest, the 10 percent of $200,
$20 dollars per year for two years, is $40 dollars.
So that's a simple interest part given here,
2 times 10 percent times 200, okay?
Then finally, the compound interest part.
So this is the interest on interest.
So for the 10 percent earned in year one, we get interest rate,
or a return of 10 percent on that, that's 2 dollars
of the $242, $242 dollars.
So you might wonder, like, hey, why do I have this question of,
you know, kind of $200 dollars, two years, 10 percent,
well this is actually a question I'm very familiar with.
A good friend, a colleague of mine here at the University
of Illinois, Jeff Brown, and I did this as a survey question,
where we asked, you know,
respondents from the state university retirement system
in Illinois, we asked them precisely this question.
Okay? And we made a rookie mistake
in doing this survey here as we provided a textbox for people
to provide their responses.
So it turned out 55 percent of the, of the,
of the folks got the $242 dollar answer correct,
but a lot of people wrote in the textbox, I hate math,
I'm doing a survey, why is this turning into a math exam?
So it really kind of highlighted, to me, that,
you know, as a finance professor, you may take it
for granted that everyone's like, you know, kind of a,
a math whiz, but that's kind of really not the case, just like,
hey, I'm not an exercise whiz as you can kind of, you know,
kind of clearly, clearly see.
And, in fact, if you look at, you know, kind of polling data,
40 percent of adults hate math, okay?
They, in fact, that was a, you know,
kind of most-hated subject, twice as much
as the next most unpopular subject.
Obviously going into finance myself, you know,
math is probably my favorite subject,
but that's not the norm, okay?
Now when you see headlines like this, that really, you know,
kind of illustrates the point, we hate math,
say 4 in 10 Americans, a majority, okay?
Well, you know, technically a majority should probably be 6
out of 10, not 4 out of 10, so this just, you know,
kind of proves, proves the point of Americans not liking math
and some of them, at least who are writing the headlines,
not being very good, very good at it.
Okay?
But this is actually something that can come back to haunt you,
like not being good with nutrition
and exercise can come back to haunt you later on in health.
Not being good at math can help you through, can hurt you
with your financial decisions.
Because what's one of the most important factors in finance?
It's the power of compound interest.
So let's go through a little example here
to highlight how important compound interest is
in terms of, you know, accumulation of wealth.
So let's say you have $1,000 dollars to invest,
so let's make this kind of like a practical problem here,
like you want to set aside an extra $1,000 bucks.
And you're going to do this for one year, two years, five, ten,
twenty, thirty years, and again,
let's keep this 10 percent rate of return per year.
So over these various horizons,
let's consider what will your final wealth be,
how much of that wealth is original principle?
Obviously it's $1,000 dollars.
How much of that wealth is the simple interest?
And how much of that wealth is the interest on interest?
The compounding interest effect?
Okay? So let's look at the composition of wealth here
across these various time horizons and the breakdown
of compound interest, and as you go here from left to,
left to right, you can really see how this compounding effect
takes hold.
You may have heard the saying, you want your money to work
for you, well that's exactly what's happening when you look
at the 30-year investment horizon.
So if you're only putting the money aside for two years,
this 10 percent return, your dollar grows
to a dollar twenty-one, of that dollar twenty-one,
only one cent is compound interest, or I'm sorry,
this is in thousands of dollars, so of the $1,210 dollars,
you know, only, you know,
$10 dollars of that is compound, is compound interest.
How about if we go out to 30 years?
Okay? Well there, $17,450 dollars is your accumulation,
of that $17,000, over $13,000
of that is the interest on interest.
So this is getting your money to work for you, this can work
for a positive or a negative.
This can work for a positive if you're saving for retirement
and you start at age 35, look what happens when you're 65,
this works as a negative if you're borrowing money,
you have a credit card balance and you just pay the minimum,
this compound interest here is basically, you know,
kind of the interests that you're paying to,
paying to the credit company.
Ah, Le Penseur again.
So you know what this means.
Time for a question.
Okay, and in fact, this time, I actually have a series
of two questions back to back.
So they're related.
So let's start with the first one here.
Question one, $50,000 dollars.
So imagine you have some settlement where you're going
to be paid $50,000 dollars three years from now,
and you're up late at night and you see this commercial
about a firm that will pay you money today
for future settlements, and you want to know,
are they giving you a good deal or not?
Okay? Suppose interest rate is 2 percent, okay,
so 2 percent interest rate, what does that mean the present value
of that $50,000 dollars three years is,
three years from now is, when interest rates are 2 percent?
That's the first of the series of two questions.
Okay, great!
You got question one done, now let's kind of finish
up the second question, what if interest rates change?
They go up?
Instead of them being at 2 percent,
now they're at 5 percent.
Okay? So what's the new present value
of this $50,000 dollars that's paid out three years from now
when interest rates are 5 percent?
[Pause]
Alright, so we have $50,000 dollars three years from now.
And then interest rate, or, you know,
later on we'll call this the discount rate, 2 percent,
so 2 percent to the third,
because we're getting this payment three years
from now, $47,116 dollars.
Okay? So, you know, the interest rates are very low,
so money in the future is, you know,
kind of worth pretty similar to what money, money today is,
you know, or, in the, at least in this, this question.
So now let's go to answer two here.
So this kind of puts a new wrinkle on it.
What if interest rates go up?
Like at least in 2015, it's a low inflationary environment,
there's a concern, will the Federal Reserve raise interest
rates, what's going to happen to the value of this future income
if interest rates go
up 3 percentage points, from 2, 2 to 5?
So let's, you know, solve, solve that here.
Basically in this case, if the interest rate goes up,
the value is going to go down.
Okay, and then just, you know, kind of solving through here,
$50,000 divided by 1.05, this money is coming three years
from now and we get the interest payments at the end
of the year, that's $43,192.
So, you know, about $4,000 dollars less...than
when interest rates were 2 percent.
So, obviously, you could make a natural analogy to the value
of stocks if the future cash flows are worth less, the value,
you know, if the future cash flows are worth less,
the stock price is less.
So as interest rates are going up,
future cash flows are less valuable,
current values are going down.
