Intro to Financial Management - PowerPoint PPT Presentation

1 / 22
About This Presentation

Intro to Financial Management


Intro to Financial Management ... and dividends Modern Portfolio Theory ... suggest investment direction Fundamental analysis Tries to ... – PowerPoint PPT presentation

Number of Views:60
Avg rating:3.0/5.0
Slides: 23
Provided by: Klinger5


Transcript and Presenter's Notes

Title: Intro to Financial Management

Intro to Financial Management
  • Personal Finances

  • Homework
  • Dividend payment theories
  • Residual dividend theory
  • Clientele theory
  • Information effect
  • Agency costs
  • Expectations theory
  • Earnings predictability concerns
  • Policies
  • Constant dividend payout
  • Stable dollar
  • Small regular plus end-of-year
  • One-time
  • Stock splits and dividends

Modern Portfolio Theory
  • Diversification can
  • Reduce risk
  • Increase returns
  • Objective is to
  • Maximize return for a given level of risk
  • or
  • Minimize risk for a given level of return

Not All Risk is the Same
  • Firm Risk Systemic risk
    Idiosyncratic Risk

Financial Markets
Global Conditions
Risk Unique to the Firm
Source of Correlation
Idiosyncratic risk can be diversified away!
Diversification Simple Example
When IBM went down, ATT went up. When ATT went
down, IBM went up.
If stocks are perfectly positively correlated,
diversification has no effect on risk If stocks
are perfectly negatively correlated, portfolio is
perfectly diversified. What do you want as an
Risk and Diversification
With large portfolio, 30 200 stocks,
idiosyncratic moves cancel out!
The Efficient Frontier
Modern Portfolio Theory
  • Optimal portfolio is a combination of the market
    portfolio and the risk-free asset
  • So what is the market portfolio?
  • SP 500?
  • Wilshire 5000?
  • Total world index?
  • What about bonds?

Diversification with Stocks and Bonds
Note adding some stock to a 100 Treasury
portfolio increases the return and decreases the
Market Portfolio
  • What about other asset classes?
  • TIPS
  • Commodities
  • How is one to decide on a market portfolio?
  • Simple approach 60/40 stocks/bond
  • Include other asset classes
  • Six Ways from Sunday portfolio http//www.dallasne
  • All-Weather Portfolio
  • Asset allocation is your most significant
    investment decision

What to Invest In?
  • Index funds
  • Track an index
  • Low cost
  • Types
  • Total market
  • SP 500
  • Total bond
  • REITs
  • TIPS
  • Precious metals
  • International
  • Managed funds
  • Fund has a stated objective
  • Fund manager invests to maximize returns subject
    to objective

Can You Beat the Market?
  • Efficient market hypothesis
  • Investment exercise
  • Thought experiment
  • What if advisors are actually bad and only get it
    right 40 of the time?
  • You cant consistently beat the market
  • But many will try
  • Are you tempted by Apple, Facebook, gold?

Market Analysis
  • Technical analysis
  • Looks at historical returns
  • Looks for patterns
  • Patterns suggest investment direction
  • Fundamental analysis
  • Tries to understand the whys
  • Looks for underlying causes
  • Inflation
  • GDP growth
  • Relationships (e.g. oil to plastics and farm
  • Exchange rates

Post Modern Portfolio Theory
  • Two Ways to Make Money
  • Beta
  • Your market portfolio
  • Has systemic risk from asset class
  • Easy, inexpensive to create
  • Alpha
  • Your bet against the market, you know better than
    everyone else
  • Zero-sum game
  • There are winners and losers
  • Has idiosyncratic risk, comes from skill of
    investment advisor
  • Hard, expensive to create

Post Modern Portfolio TheoryPractical Application
  • First, set aside emergency money
  • Determine how many months of income 3 6
  • Leave in a money market fund
  • Pick how much you want to bet your alpha
  • Specify as a percent
  • Place your bet
  • Be prepared to lose it
  • Invest the remaining percent in your market
    portfolio beta

Market Timing
  • Can you time the market?
  • Who do you listen to?
  • Do you know better than the pros?
  • Do the pros know?
  • Two schools of thought
  • Dollar cost averaging
  • Go to your strategy

Retirement Planning
  • Why should you care now?

You Can Never Catch Up
Person A Saves 2000 per year from age 22 to age
35 and then stops Person B Starts saving 2000
per year beginning at age 35 and never stops
Both earn 8 on their
investments. At age 75 Person
A has 1M in savings Person B
has 561K in savings
How Much Do You Need?
  • Calculate your income requirement
  • Use todays dollars (remember time value of
  • Current income
  • - Pension
  • - Social Security (maybe)
  • Income need
  • Rough estimate of the portfolio you must have
    income need x 25
  • Conversely, can live off of 4 of your portfolio
  • E.g. If have 1M, then can live off 40k per year

How Much Do You Need?
  • Previous calculation was in todays dollars
  • You may need 4 times that amount in the future
  • Inflation has averaged 4 since 1929
  • At that rate, prices will go up 4x in 36 years
  • Start saving now
  • Minimally 10
  • Shoot for gt 20

Are You On Track?
  • Under Accumulator of Wealth (UAW)
  • net worth lt age (.10 pretax income)
  • Average Accumulator of Wealth (AAW)
  • net worth age (.10 pretax income)
  • Prodigious Accumulator of Wealth (PAW)
  • net worth gt age (.10 pretax income)
  • If age 30 with pretax income of 60,000, then you
    need net worth 30 (.10 60000) 180,000
  • If age 40 with pretax income of 100,000, then
    you need net worth 40 (.10 100000)
  • A guideline, not a law of physics
  • Not good for young ages

Retirement Vehicles
  • 401(k)s
  • IRA
  • Roth IRA
Write a Comment
User Comments (0)