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    Unec 1699694085

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    vk9ftw82ts
    Project B, since it has a higher NPV ($60,000) compared to Project A ($40,000). The project with the higher positive NPV is generally the better investment option based on the net present value calculation.

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    Unec 1699694085

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    vk9ftw82ts
    6 views29 pages
    Project B, since it has a higher NPV ($60,000) compared to Project A ($40,000). The project with the higher positive NPV is generally the better investment option based on the net present value calculation.

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    Project B, since it has a higher NPV ($60,000) compared to Project A ($40,000). The project with the higher positive NPV is generally the better investment option based on the net present value calculation.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    6 views29 pages

    Unec 1699694085

    Uploaded by

    vk9ftw82ts
    Project B, since it has a higher NPV ($60,000) compared to Project A ($40,000). The project with the higher positive NPV is generally the better investment option based on the net present value calculation.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
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    Investments

    and Portfolio
    Management

    Azerbaijan State
    University of Economics
    Lecturer: Isgandarbay
    Huseynov
    Market efficiency
    Organization and structure of the market

    1. Factors influencing market efficiency

    2. Market anomalies

    3. Forms of market efficiency


    A market is an
    economic institution
    based on the
    relationship of buying
    and selling goods and
    services.
    Market is a set of processes and
    procedures that ensure the
    exchange of individual goods and
    services between buyers
    (consumers) and sellers
    (suppliers).
    Market efficiency
    refers to how well a
    market works or
    functions.
    Market efficiency
    means that prices of
    goods, services, or
    assets (like stocks) in
    a market are fair and
    reflect all the
    information available.
    If a market is efficient, it
    means that no one can easily
    predict whether the prices
    will go up or down because
    all relevant information is
    already factored into those
    prices. It's like saying that the
    market is working well and
    fairly for everyone involved.
    Market efficiency is
    influenced by various
    factors, and it can
    vary from one market
    to another. Some of
    the key factors that
    influence market
    efficiency include:
    Information Availability: The
    availability and accessibility of
    information play a crucial role
    in market efficiency. In more
    transparent and information-
    rich markets, prices are more
    likely to reflect all available
    data accurately. In contrast,
    markets with limited
    information may be less
    efficient.
    Market Liquidity: Liquidity refers to
    how easily assets can be bought or
    sold without significantly affecting
    their prices. Markets with high
    liquidity tend to be more efficient
    because there are more buyers and
    sellers, making it less likely for one
    party to influence prices.
    Transaction Costs:
    Transaction costs, such as
    brokerage fees and taxes, can
    affect market efficiency.
    Higher transaction costs can
    discourage trading and may
    lead to less efficient markets.
    Investor Behavior: The
    behavior of investors can
    impact market efficiency. If
    investors are rational and make
    decisions based on available
    information, markets are more
    likely to be efficient. However,
    behavioral biases and
    emotional responses can
    sometimes lead to price
    distortions.
    Technology and Information
    Dissemination: Advances in
    technology and
    communication have made it
    easier for information to flow
    quickly to market participants.
    This can improve market
    efficiency by reducing
    information asymmetry.
    Market anomalies are like unexpected or strange things that
    sometimes happen in financial markets. These anomalies are
    situations where prices of stocks or other assets don't behave
    the way they're supposed to based on normal rules or
    information.

    In simpler terms, market anomalies are when something odd


    happens in the stock market.
    For example, a stock might
    suddenly go up a lot in price for no
    clear reason, or a strategy that
    usually doesn't work well suddenly
    starts making a lot of money. These
    anomalies are interesting to
    investors and researchers because
    they can sometimes be used to
    make extra money or because they
    show that markets aren't always as
    predictable as we think.
    There are several other financial
    metrics and investment
    multipliers used in the investment
    sphere to evaluate the
    attractiveness of investments and
    make informed decisions.
    NPV - "Net Present Value“

    it's a way to figure out if


    something is a good investment.

    It's like a financial tool that helps


    you decide whether a project or
    an investment will make you
    more money in the long run or if
    it's not such a good idea.
    Positive NPV: If the NPV is positive, it means that the investment or project is expected to
    generate more money in the future than it costs today. In other words, it is a profitable
    opportunity. You should consider proceeding with the investment because it is expected to
    increase your wealth or the value of your business.

    Negative NPV: If the NPV is negative, it means that the investment or project is not
    expected to generate enough money in the future to cover its initial cost. In this case, it is
    generally not a good financial decision to proceed with the investment because it could
    result in a loss of money.

    Zero NPV: If the NPV is zero, it means that the investment is expected to exactly break
    even, generating just enough money to cover its initial cost. While this doesn't result in a
    profit, it also doesn't result in a loss.
    Scenario: Imagine you have an opportunity to invest in a small business
    project. You have to decide whether it's a good investment or not.

    Information:
    1.Initial Investment: You need to invest $10,000 to start the project.
    2.Expected Cash Flows: Over the next three years, you expect the project
    to generate the following cash flows:
    1.Year 1: $4,000
    2.Year 2: $5,000
    3.Year 3: $6,000
    3.Discount Rate: You want to use a discount rate of 10% to account for the
    time value of money.
    Calculating NPV:
    Step 1: Calculate the present value (PV) of each cash flow.
    •Year 1 Cash Flow PV = $4,000 / (1 + 0.10)^1 = $3,636.36
    (rounded to two decimal places)

    •Year 2 Cash Flow PV = $5,000 / (1 + 0.10)^2 = $4,132.23


    (rounded to two decimal places)

    •Year 3 Cash Flow PV = $6,000 / (1 + 0.10)^3 = $4,620.73


    (rounded to two decimal places)
    Calculating NPV:
    NPV = (Year 1 Cash Flow PV + Year 2 Cash Flow PV + Year 3)- Initial Investment PV

    NPV = ($3,636.36+ $4,132.23+ $4,620.73 ) – $10,000 = $1,389.32

    •A positive NPV ($1,389.32 in this case) indicates that the investment is expected to
    generate more cash over its life than the initial investment of $10,000. Therefore, it is still a
    potentially profitable investment.
    •In this scenario, you would likely decide to proceed with the project because it is expected
    to generate a return greater than your initial investment, even after considering the time
    value of money and including the initial investment as a negative cash flow.
    Task 1: Calculate the NPV of a Project
    Example: You are considering investing $50,000 in a project.

    Over the next five years, you expect the project to generate the
    following cash flows:

    $10,000 in Year 1
    $12,000 in Year 2,
    $15,000 in Year 3

    The discount rate is 8%. Calculate the NPV of the project.


    Task 2: Investment Decision Based on NPV
    Example: You have two investment opportunities. Project A
    has an NPV of $40,000, and Project B has an NPV of
    $60,000. If you can only choose one project to invest in,
    which one should you choose based on NPV?

    Solution:
    You should choose Project which has a higher NPV

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