A Slight Word.

Overchanging (destination negative)

It word come after when I did something, something real or unreal even it make an effort to whole or apart of life or not. It word would’nt get too far to my life, it’s so many thing that I overchanged. I think when someone said “this things was fix and cannot be changed untill the end of our life” , he was the most brave guy at their times not mine, How could he said those thing was fix even for a logic thing such as science or math that all could be changed if someone try to make senses the different of past event and present event. But its not me off course, I thinking too much and can’t make senses the different like scientist did. I wish someone out there could make senses of all different thing, and change something or whole or just adding or improving something what they all think or what they all the scientist did, all the textbook, formula and other. We need to refresh our whole system the world need to be chaged but stay in a elegant track and put some respect to the former scientist.imagine when your system been changed it must be something you could learn to make yourself understsanding a new thing. That was a little things you can ovechanged for, when you think you did it “NO” its all not over it just give you a moment to think what you could be or what you could do next part. So if you think you have everythig for your thats all just a moment for you to think what you have to do or what you could after the moment, “If you can’t have the one you love, love the one you have” If its word fit to your feeling so you have changed something for your life , whole or a part thats no matter . keep on changing because the world never stop changing every inch it spin. Stop mourning over start something, examples of changing something is breathly deep with smile when you wake up untill you get habitually over and over.. keep on doing .. keep on trying.

AR2011

Risk and Return

Risk-return spectrum

From Wikipedia

The risk-return spectrum is the relationship between the amount of return gained on an investment and the amount of risk undertaken in that investment.^{[citation needed]} The more return sought, the more risk that must be undertaken.

The progression

There are various classes of possible investments, each with their own positions on the overall risk-return spectrum. The general progression is: short-term debt; long-term debt; property; high-yield debt; equity. There is considerable overlap of the ranges for each investment class.

All this can be visualised by plotting expected return on the vertical axis against risk (represented by standard deviation upon that expected return) on the horizontal axis. This line starts at the risk-free rate and rises as risk rises. The line will tend to be straight, and will be straight at equilibrium - see discussion below on domination.

For any particular investment type, the line drawn from the risk-free rate on the vertical axis to the risk-return point for that investment has a slope called the Sharpe ratio.

Short-term loans to good government bodies

a lowest end is short-dated loans to government and government-guaranteed entities (usually semi-independent government departments). The lowest of all is the risk-free rate of return. The risk-free rate has zero risk (most modern major governments will inflate and monetise their debts rather than default upon them), but the return is positive because there is still both the time-preference andinflation premium components of minimum expected rates of return that must be met or exceeded if the funding is to be forthcoming from providers. The risk-free rate is commonly approximated by the return paid upon 30-day T-Bills or their equivalent, but in reality that rate has more to do with the monetary policy of that country's central bank than the market supply conditions for credit.

Mid- and long-term loans to good government bodies

The next types of investment is longer-term loans to government, such as 3-year bonds. The range width is larger, and follows the influence of increasing risk premium required as the maturity of that debt grows longer. Nevertheless, because it is debt of good government the highest end of the range is still comparatively low compared to the ranges of other investment types discussed below.

Also, if the government in question is not at the highest jurisdiction (i.e., is a state or municipal government), or the smaller that government is, the more along the risk-return spectrum that government's securities will be.

Short term loans to blue-chip corporations

Following the lowest risk investments are short-dated bills of exchange from major blue-chip corporations with the highest credit ratings. The further away from perfect is the credit rating, the more along the risk-return spectrum is that particular return.

[edit]Mid- and long-term loans to blue-chip corporations

Overlapping the range for short-term debt is the longer term debt from those same well-rated corporations. These are higher up the range because the maturity has increased. The overlap occurs of the mid-term debt of the best rated corporations with the short-term debt of the nearly-but-not perfectly-rated corporations.

In this arena, the debts are called investment grade by the rating agencies. The lower the credit rating, the higher the yield and thus the expected return.

Rental property

A commercial property that the investor rents out is comparable in risk or return to a low-investment-grade. Industrial property has higher risk and returns, followed by residential (with the possible exception of the investor's own home).

High-yield debt

After the returns upon all classes of investment-grade debt come the returns on speculative grade high-yield debt (also known derisively as junk bonds). These may come from mid and low rated corporations, and less politically stable governments.

Equity

Equity returns are the profits earned by businesses after interest and tax. Even the equity returns on the highest rated corporations are notably risky. Small-cap stocks are generally riskier than large-cap; companies that primarily service governments, or provide basic consumer goods such as food or utilities, tend to be less volatile than those in other industries. Note that since stocks tend to rise when corporate bonds fall and vice-versa, a portfolio containing a small percentage of stocks can be less risky than one containing only debts.

Options and futures

Option and futures contracts often provide leverage on underlying stocks, bonds or commodities; this increases the returns but also the risks. Note that in some cases, derivatives can be used tohedge, decreasing the overall risk of the portfolio due to negative correlation with other investments.

Why the progression?

The existence of risk causes the need to incur a number of expenses. For example, the more risky the investment the more time and effort is usually required to obtain information about it and monitor its progress. For another, the importance of a loss of X amount of value is greater than the importance of a gain of X amount of value, so a riskier investment will attract a higher risk premium even if the forecast return is the same as upon a less risky investment. Risk is therefore something that must be compensated for, and the more risk the more compensation required.

If an investment had a high return with low risk, eventually everyone would want to invest there. That action would drive down the actual rate of return achieved, until it reached the rate of return the market deems commensurate with the level of risk. Similarly, if an investment had a low return with high risk, all the present investors would want to leave that investment, which would then increase the actual return until again it reached the rate of return the market deems commensurate with the level of risk. That part of total returns which sets this appropriate level is called the risk premium.

Leverage extends the spectrum

The use of leverage can extend the progression out even further. Examples of this include borrowing funds to invest in equities, or use of derivatives.

If leverage is used then there are two lines instead of one. This is because although one can invest at the risk-free rate, one can only borrow at an interest rate according to one's own credit-rating. This is visualised by the new line starting at the point of the riskiest unleveraged investment (equities) and rising at a lower slope than the original line. If this new line were traced back to the vertical axis of zero risk, it will cross it at the borrowing rate.

Domination

All investment types compete against each other, even though they are on different positions on the risk-return spectrum. Any of the mid-range investments can have their performances simulated by a portfolio consisting of a risk-free component and the highest-risk component. This principle, called the separation property, is a crucial feature of Modern Portfolio Theory. The line is then called thecapital market line.

If at any time there is an investment that has a higher Sharpe Ratio than another then that return is said to dominate. When there are two or more investments above the spectrum line, then the one with the highest Sharpe Ratio is the most dominant one, even if the risk and return on that particular investment is lower than another. If every mid-range return falls below the spectrum line, this means that the highest-risk investment has the highest Sharpe Ratio and so dominates over all others.

If at any time there is an investment that dominates then funds will tend to be withdrawn from all others and be redirected to that dominating investment. This action will lower the return on that investment and raise it on others. The withdrawal and redirection of capital ceases when all returns are at the levels appropriate for the degrees of risk and commensurate with the opportunity costarising from competition with the other investment types on the spectrum, which means they all tend to end up having the same Sharpe Ratio.

Investment

Investment

From Wikipedia, the free encyclopedia

Investment is putting money into something with the expectation of profit. More specifically, investment is the commitment of money or capital to the purchase of financial instruments or other assets so as to gain profitable returns in the form of interest, income (dividends), or appreciation (capital gains) of the value of the instrument. It is related to saving or deferring consumption. Investment is involved in many areas of the economy, such as business management and finance no matter for households, firms, or governments. An investment involves the choice by an individual or an organization, such as a pension fund, after some analysis or thought, to place or lend money in a vehicle, instrument or asset, such as property, commodity, stock, bond, financial derivatives (e.g.futures or options), or the foreign asset denominated in foreign currency, that has certain level of risk and provides the possibility of generating returns over a period of time^.

Investment comes with the risk of the loss of the principal sum. The investment that has not been thoroughly analyzed can be highly risky with respect to the investment owner because the possibility of losing money is not within the owner's control. The difference between speculation and investment can be subtle. It depends on the investment owner's mind whether the purpose is for lending the resource to someone else for economic purpose or not^.

In the case of investment, rather than store the good produced or its money equivalent, the investor chooses to use that good either to create a durable consumer or producer good, or to lend the original saved good to another in exchange for either interest or a share of the profits. In the first case, the individual creates durable consumer goods, hoping the services from the good will make his life better. In the second, the individual becomes an entrepreneur using the resource to produce goods and services for others in the hope of a profitable sale. The third case describes a lender, and the fourth describes an investor in a share of the business. In each case, the consumer obtains a durable asset or investment, and accounts for that asset by recording an equivalent liability. As time passes, and both prices and interest rates change, the value of the asset and liability also change.

An asset is usually purchased, or equivalently a deposit is made in a bank, in hopes of getting a future return or interest from it. The word originates in the Latin "vestis", meaning garment, and refers to the act of putting things (money or other claims to resources) into others' pockets. The basic meaning of the term being an asset held to have some recurring or capital gains. It is an asset that is expected to give returns without any work on the asset per se. The term "investment" is used differently in economics and in finance. Economists refer to a real investment (such as a machine or a house), while financial economists refer to a financial asset, such as money that is put into a bank or the market, which may then be used to buy a real asset.

In economics or macroeconomics

In economic theory or in macroeconomics, investment is the amount purchased per unit time of goods which are not consumed but are to be used for future production. Examples include railroad orfactory construction. Investment in human capital includes costs of additional schooling or on-the-job training. Inventory investment refers to the accumulation of goods inventories; it can be positive or negative, and it can be intended or unintended. In measures of national income and output, gross investment (represented by the variable I) is also a component of Gross domestic product (GDP), given in the formula GDP = C + I + G + NX, where C is consumption, G is government spending, and NX is net exports. Thus investment is everything that remains of total expenditure after consumption, government spending, and net exports are subtracted (i.e. I = GDP - C - G - NX).

Non-residential fixed investment (such as new factories) and residential investment (new houses) combine with inventory investment to make up I. Net investment deducts depreciation from gross investment. Net fixed investment is the value of the net increase in the capital stock per year.

Fixed investment, as expenditure over a period of time ("per year"), is not capital. The time dimension of investment makes it a flow. By contrast, capital is a stock— that is, accumulated net investment to a point in time (such as December 31).

Investment is often modeled as a function of Income and Interest rates, given by the relation I = f(Y, r). An increase in income encourages higher investment, whereas a higher interest rate may discourage investment as it becomes more costly to borrow money. Even if a firm chooses to use its own funds in an investment, the interest rate represents an opportunity cost of investing those funds rather than lending out that amount of money for interest.

Investment related to business of a firm - business management

The investment decision (also known as capital budgeting) is one of the fundamental decisions of business management: Managers determine the investment value of the assets that a business enterprise has within its control or possession. These assets may be physical (such as buildings or machinery), intangible (such as patents, software, goodwill), or financial (see below). Assets are used to produce streams of revenue that often are associated with particular costs or outflows. All together, the manager must determine whether the net present value of the investment to the enterprise is positive using the marginal cost of capital that is associated with the particular area of business.

In terms of financial assets, these are often marketable securities such as a company stock (an equity investment) or bonds (a debt investment). At times, the goal of the investment is to produce future cash flows, while at others it may be for the purpose of gaining access to more assets by establishing control or influence over the operation of a second company (the investee).

Business firms or organisations raise funds from investors in the form of equites,debts(collectively known as the capital structure)and further reinvest it into various investment schemes by carefully analysing the returns in order to meet out their obligations relating to purchase of assets which provides them long term benefits.

In finance

In finance, investment is the commitment of funds by buying securities or other monetary or paper (financial) assets in the money markets or capital markets, or in fairly liquid real assets, such as goldor collectibles. Valuation is the method for assessing whether a potential investment is worth its price. Returns on investments will follow the risk-return spectrum.

Types of financial investments include shares, other equity investment, and bonds (including bonds denominated in foreign currencies). These financial assets are then expected to provide income or positive future cash flows, and may increase or decrease in value yielding the investor capital gains or losses.

Trades in contingent claims or derivative securities do not necessarily have future positive expected cash flows, and so are not considered assets, or strictly speaking, securities or investments. Nevertheless, since their cash flows are closely related to (or derived from) those of specific securities, they are often studied as or treated as investments.

Investments are often made indirectly through intermediaries, such as banks, mutual funds, pension funds, insurance companies, collective investment schemes, and investment clubs. Though their legal and procedural details differ, an intermediary generally makes an investment using money from many individuals, each of whom receives a claim on the intermediary.

Within personal finance, money used to purchase shares, put in a collective investment scheme or used to buy any asset where there is an element of capital risk is deemed an investment. Savingwithin personal finance refers to money put aside, normally on a regular basis. This distinction is important, as investment risk can cause a capital loss when an investment is sold, unlike saving(s)where the more limited risk is cash devaluing due to inflation.

In many instances the terms saving and investment are used interchangeably, which confuses this distinction. For example many deposit accounts are labeled as investment accounts by banks for marketing purposes. Whether an asset is a saving(s) or an investment depends on where the money is invested: if it is cash then it is savings, if its value can fluctuate then it is investment.

Real estate as the instrument of investment

In real estate, investment money is used to purchase property for the purpose of holding, reselling or leasing for income and there is an element of capital risk.

Residential real estate

Investment in residential real estate is the most common form of real estate investment measured by number of participants because it includes property purchased as a primary residence. In many cases the buyer does not have the full purchase price for a property and must engage a lender such as a bank, finance company or private lender. Different countries have their individual normal lending levels, but usually they will fall into the range of 70-90% of the purchase price. Against other types of real estate, residential real estate is the least risky.

Commercial real estate

Commercial real estate consists of multifamily apartments, office buildings, retail space, hotels and motels, warehouses, and other commercial properties. Due to the higher risk of commercial real estate, loan-to-value ratios allowed by banks and other lenders are lower and often fall in the range of 50-70%.

Source from Wikipedia, Investment.