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Objectives of Investment

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9 views4 pages

Objectives of Investment

Uploaded by

arpanptl0099
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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1.

Objectives of investment:
• Safety
• Growth
• Income
• Tax exemption
• Liquidity

2. What do you mean by Efficient Market Hypothesis, Also Explain the forms of Market
efficiency.

The Efficient Market Hypothesis (EMH) is a financial theory that suggests that financial
markets are "efficient," meaning that asset prices fully reflect all available information at
any point in time. In an efficient market, it is impossible to consistently achieve higher-
than-average returns through stock picking or market timing because any new
information is quickly incorporated into prices.

Forms of Market Efficiency


EMH is divided into three forms based on the type of information that is incorporated
into stock prices:
1) Weak Form Efficiency:
a) This form suggests that current stock prices reflect all past market data, such
as historical prices, trading volumes, and patterns.

2) Semi-Strong Form Efficiency:


a) This form asserts that stock prices reflect all publicly available information,
including financial statements, news reports, and economic indicators.

3) Strong Form Efficiency:


a) In this most extreme form, all information—public and private (insider
information)—is reflected in stock prices.
1. Expected Return:
The expected return is calculated as:
E(R)=∑Probability× Return
Step 1: Calculate possible returns:
Return=Ending Price−Beginning Price/Beginning Price
• If the price is Rs. 55:
R1=55−43/43 =12/43=0.2791 or 27.91%
If the price is Rs. 60:
R2=60−43/43=17/43=0.3953 or 39.53%
Step 2: Calculate expected return:
Given that each outcome has a 50% probability:
E(R)=(0.5×0.2791)+(0.5×0.3953)
E(R)=0.1396+0.1977=0.3373 or 33.73%
2. Risk (Variance and Standard Deviation):
The risk is measured using the standard deviation of returns. First, we calculate the
variance:
Variance=∑Probability×(Return−E(R))2
Step 1: Calculate deviations from expected return:
• For R1=0.2791
R1−E(R)=0.2791−0.3373=−0.0582
For R2=0.3953
R2−E(R)=0.3953−0.3373=0.0580
Step 2: Calculate squared deviations:
• For R1:
(R1−E(R))2=(−0.0582)2=0.00339
For R2
(R2−E(R))2=(0.0580)2=0.00336
Step 3: Calculate variance:
Variance=(0.5×0.00339)+(0.5×0.00336)=0.001695+0.00168=0.003375
Step 4: Calculate standard deviation (risk):
Standard Deviation=Variance=0.003375=0.0581 or 5.81%

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