MIDTERM

ARTICLE 10: PORTFOLIO THEORY AND ITS RELEVANCE TO REAL INVESTMENT DECISIONS

The act of evaluating risk, expressed as variance, against projected return is referred to as mean-variance analysis (MVA). When it comes to making financial decisions, mean-variance analysis is used. According to current portfolio theory, an investor would choose multiple assets to invest in, each with a distinct level of volatility and expected return. When using this method, the goal is to differentiate assets so that the danger of catastrophic loss is reduced in the case of quickly changing market conditions.

If you want the best-expected return possible on a given level of risk (or, conversely, the least amount of risk possible for a given expected return), you should invest in an efficient portfolio, often known as an optimal portfolio. It is possible to have multiple financial products in one portfolio. The set of optimal portfolios that provide the highest. The expected return for a defined level of risk or the lowest expected return for a given level of expected return is referred to as the efficient frontier. Stock and bond portfolios that fall below the efficient frontier are considered sub-optimal because they do not provide enough return for the risk they bear.

Mean-Variance Analysis James Chen (2021) https://www.investopedia.com/terms/m/meanvariance-analysis.asp

Akhilesh Ganti and James Chen (2021)

https://www.investopedia.com/terms/i/inefficient-portfolio.asp

ARTICLE 11: CAPITAL ASSET PRICING MODEL

The Capital Asset Pricing Model (CAPM) is used to determine the value of capital assets. Expected return on an investment based on the time value of money and the asset's systematic risk. CAPM calculates the price of a high-risk stock by establishing a link between the stock risk and the projected return. CAPM is widely used in finance to price risky securities and calculate an expected return on those assets while taking risk and cost of capital into account. Unsystematic risk, on the other hand, is referred to as risk specific to as a pecific investment. The unsystematic risk would include a significant disruption in the company supply chain, an unfavorable court judgment harming the company, and so forth. Such risks can still be mitigated by adding more investments to a portfolio.

Arbitrage Pricing Theory is a theory of asset pricing that asserts that a price can be decided arbitrarily in some situations. Affirms that the linear relationship between an asset projected returns and the macroeconomic factors determining the asset risk can be utilized to forecast the asset returns in some situations. Stephen Ross, an American economist, came up with the idea in 1976, and it has been around ever since. The APT provides analysts and investors with a multi-factor pricing model for securities that are based on the link between the projected return on a financial asset and the risk associated with holding that asset. It is founded on a pricing model that takes several different kinds of risk and uncertainty into account, which is known as the arbitrage pricing theory. Models of APT, in contrast to the Capital Asset Pricing Model (CAPM), consider many macroeconomic variables that, according to theory, influence the risk and return on a specific asset, rather than just the overall market risk.

https://studyfinance.com/capital-asset-pricing-model/

https://corporatefinanceinstitute.com/resources/knowledge/finance/arbitrage-pricing-theory-apt/

ARTICLE 12: SOURCES OF LONG-TERM FINANCE

Companies can raise capital in a variety of ways, including through the sale of stocks and bonds. The types of shares that corporations provide to the general public are also up to them to decide. That determination is based on the type of relationship they desire with shareholders, the cost of issuing the stock, and the urgency of the situation requiring the financing. When it comes to raising capital, some companies choose to issue preferred stock in addition to their common stock in order to maximize their return on investment. The reasons for adopting this strategy, on the other hand, differ from company to company.

Alternatively referred to as a convertible loan note (CLN), a convertible loan note is a type of short-term debt that may subsequently be converted into equity shares. The use of a convertible loan note to invest in a startup usually allows the investor to obtain discounted stock in exchange for their investment, dependent on the company's future valuation. A convertible note is a type of loan instrument frequently utilized by angel or seed investors looking to fund a business that has not yet been evaluated in the traditional sense. Upon receiving further information that allows them to establish an acceptable valuation for the company, convertible note investors can convert their notes into shares of stock.

Emily Norris (2020) https://www.investopedia.com/ask/answers/042015/why-would-company-issue-preference-shares-instead-common-shares.asp

James Chen (2021) https://www.investopedia.com/terms/s/senior-convertible-note.asp