The document discusses various concepts related to measuring risk and return for investment decisions. It covers key terms, risk diversification through investing in multiple countries and industries, measuring volatility in earnings, valuing companies using discounted cash flow methods, hedging risk exposures, combining hedge funds with traditional equities, the benefits of risk management, portfolio analysis of risk and return, and concludes with thanking the reader.

1. Risk and Return MeasurementForInvestment Decisions

2. 7/15/2009 Applied Finance 2 INTRODUCTION

3. 7/15/2009 Applied Finance 3 Key Terms

4. Larry’s Riskless Stock Strategy Utility Stocks Middle East Crisis “No Downside – No Upside” Zero Risk?? Questioning oneself… 7/15/2009 4 Applied Finance

5. CORE OF THE STORY 7/15/2009 5 Applied Finance

6. STORY CONTINUED 7/15/2009 6 Applied Finance

7. RISK DIVERSIFICATION Diversified Stock -> Lesser Risk Global Diversification - Investing in Multiple Countries 7/15/2009 7 Applied Finance

8. Measurement of Volatility in Earnings 7/15/2009 8 Applied Finance

9. 7/15/2009 Applied Finance 9 Stable Businesses with No Competition

10. Discounted Cash Flow Valuation Assume that you are analyzing a company with the following cash flows for the next five years. Assume also that the cost of equity is 13.625% and the firm can borrow long term at 10%. (The tax rate for the firm is 50%). The current market value of equity is $1,073 and the value of debt outstanding is $800. 7/15/2009 10 Applied Finance

11. Discounted Cash Flow Valuation Method 1: Discount CF to Equity at Cost of Equity to get value of equity Method 2: Discount CF to Firm at Cost of Capital to get value of firm Errors?? 7/15/2009 11 Applied Finance

12. Risk Hedging The manager can leave the firm exposed to risks and assume that its stockholders in the firm will be able to diversify away the risk… magnitude of the risk and the impact that it can have on the overall firm’s earnings and value extent to which different investments the firm mat have in different parts of the world may result in diversification of some or a great portion of the risk degree to which investors in the firm can diversify away the risk on their own by holding portfolios that include stocks that are affected both positively and negatively by exchange rate movements 7/15/2009 12 Applied Finance

13. Combining a Hedge Fund with Equities Suggestion is that all so-called market neutral hedge funds should be required to report in detail on their correlations with major asset classes. That way, investors would have a reliable piece of information to help them decide whether they are truly likely to gain significant benefits from something claiming to be a hedge fund. 7/15/2009 13 Applied Finance

14. The Payoff To Risk Management 7/15/2009 14 Applied Finance

15. Risk and Return Portfolio Analysis 7/15/2009 15 Applied Finance

16. 7/15/2009 16 Applied Finance

17. 7/15/2009 17 Applied Finance

18. 7/15/2009 18 Applied Finance

19. Conclusion 7/15/2009 19 Applied Finance

20. Thank You 7/15/2009 20 Applied Finance By: SiddharthSinha siddharth.sinha@ymail.com

21. References Books: Financial Management; by: Paresh Shah Investment Management; by: V.K. Bhalla Investment Fables; by: AswathDamodaran Practical Financial Modeling; by: Jonathan Swan In the Wonderland of Investment; by: AN Shanbag Valuation; by: McKinesy & Co., Inc;Tom Copland; TimKoller; Jack Murrin The Intelligent Investor; by: Graham Web Links: http://www.wikipedia.com http://www.investopedia.com http://www.wikianswers.com http://www.investorwords.com 7/15/2009 21 Applied Finance Articles: Hedge Funds: Risk and Return;by: Burton G. Malkiel and AtanuSaha; in:Financial Analysts Journal Volume 61 • Number 6 ©2005, CFA Institute