Basic Measures, Policy Statement, and Securities Markets
Corporate Investment Analysis
1
Basic Measures, Policy Statement, and Securities Markets
Alvaro Reis Professor Dr. Anthony Criniti. October 16, 2011
Corporate Investment Analysis
Abstract
2
Investment world has become in a very competitive arena where every penny if battled. Financial analyst need different tools to scrutinize the market and identify the most succulent securities available for their clients, to accomplish this objective they utilize different mathematical and statistical calculations like arithmetic mean, geometric mean and standard deviation, this paper shows how to perform these calculations and how they could be used to identify a good investment. Additionally, provides an overview in formulating and justifying investment policies identifying objectives and constraint considerations. Finally, market transactions area analyzed to explain how limit transactions work in different scenarios as well as how high or low transaction volume will impact on the efficiency of markets.
Corporate Investment Analysis
1. During the past five years, you owned two stocks that had the following annual rates of return: Year Stock T Stock B 1 0.19 0.08 2 0.08 0.03 3 -0.12 -0.09 4 -0.03 0.02 5 0.15 0.04
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a. Compute the arithmetic mean annual rate of return for each stock. Which stock is most desirable by this measure? Arithmetic Mean: a mathematical representation of the typical value of a series of numbers, computed as the sum of all the numbers in the series divided by the count of all numbers in the series. Stock T: 0.19 + 0.08 + (-0.12) + (-0.03) + 0.15 = 0.054 = 5.40 % Stock B: 0.08 + 0.03 + (-0.09) + 0.02 + 0.04 = 0.16 = 1.60 % Based on the fact that Arithmetic Mean for stock T is greater than for stock B, stock T is more desirable. b. Compute the standard deviation of the annual rate of return for each stock. (Use Chapter 1 Appendix if necessary.) By this measure, which is the preferable stock? Stock T Years Rᵢ 1 0.19 2 0.08 3
1
Basic Measures, Policy Statement, and Securities Markets
Alvaro Reis Professor Dr. Anthony Criniti. October 16, 2011
Corporate Investment Analysis
Abstract
2
Investment world has become in a very competitive arena where every penny if battled. Financial analyst need different tools to scrutinize the market and identify the most succulent securities available for their clients, to accomplish this objective they utilize different mathematical and statistical calculations like arithmetic mean, geometric mean and standard deviation, this paper shows how to perform these calculations and how they could be used to identify a good investment. Additionally, provides an overview in formulating and justifying investment policies identifying objectives and constraint considerations. Finally, market transactions area analyzed to explain how limit transactions work in different scenarios as well as how high or low transaction volume will impact on the efficiency of markets.
Corporate Investment Analysis
1. During the past five years, you owned two stocks that had the following annual rates of return: Year Stock T Stock B 1 0.19 0.08 2 0.08 0.03 3 -0.12 -0.09 4 -0.03 0.02 5 0.15 0.04
3
a. Compute the arithmetic mean annual rate of return for each stock. Which stock is most desirable by this measure? Arithmetic Mean: a mathematical representation of the typical value of a series of numbers, computed as the sum of all the numbers in the series divided by the count of all numbers in the series. Stock T: 0.19 + 0.08 + (-0.12) + (-0.03) + 0.15 = 0.054 = 5.40 % Stock B: 0.08 + 0.03 + (-0.09) + 0.02 + 0.04 = 0.16 = 1.60 % Based on the fact that Arithmetic Mean for stock T is greater than for stock B, stock T is more desirable. b. Compute the standard deviation of the annual rate of return for each stock. (Use Chapter 1 Appendix if necessary.) By this measure, which is the preferable stock? Stock T Years Rᵢ 1 0.19 2 0.08 3
References: Berk, J., & DeMarzo, P. (2010). Corporate Finance: The Core. New Jersey: Pearson Education, Inc. Investopedia. (2011, October). Retrieved October 2011, from Investopedia: www.investopedia.com Reilly, F., & Brown, K. (2009). Investment Analysis and Portfolio Management. Mason, Ohio: Cengage Learning. Wikipedia. (2011, October). Retrieved October 2011, from Wikipedia: www.wikipedia.org 10