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Principles of Finance Videos 166 videos

Principles of Finance: Unit 1, Company Formation, Structure, Inception
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Principles of Finance: Unit 2, Investment Ratios 7 Views


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Description:

The Rule of 72. The Sharp Ratio. Alpha. Are these investment ratios, or band names we've been tossing around? Only one way to find out.

Language:
English Language

Transcript

00:00

Principles of finance ah la shmoop investment ratios well thus

00:05

far in this section we've been covering company operating metrics

00:09

But as the crack savvy financial manager that you are

00:13

you don't just swim the hundred meter freestyle You do

00:16

the four hundred I am all strokes all folks Well

00:21

the key factors you need to understand regarding investment metrics

00:25

revolve around to basic questions What was the total return

00:28

or all in performance of the investment And how much

00:32

risk did you take to get there All right well

00:34

let's start with some of the curve balls you'll get

00:36

in point one above an investment manager tells you she

00:40

was off eighty two percent this year Yet on your

00:43

statement it shows that your capital only grew fifty two

00:46

percent Did she lie Well no And yes odds are

00:50

good that this investment was in a hedge fund which

00:53

charged you two per cent annual fee and then took

00:56

twenty percent of profits up to a certain level and

00:58

then fifty percent of profits above another level Yes obscene

01:01

x rated profits to the hedge fund And how do

01:04

you really grow that much in a year being truly

01:07

Hedged anyway Well you probably weren't You were naked long

01:11

and well that's a different story later A lot of

01:13

hedge funds say their hedge than they really armed Anyway

01:15

the gross return and the net returned to investors are

01:18

totally different animals and you need to know the difference

01:21

Journalists write about how the market was flat for a

01:24

decade that it was a lost decade from nineteen seventy

01:27

two to nineteen eighty two because while journalists get paid

01:30

on clicks and non actual quality research and because well

01:34

they didn't take this course Obviously these journalists decry how

01:37

investors were invested in the stock market and got zilch

01:40

not a nothing for their investments because of course the

01:43

s and p five hundred was basically flat from nineteen

01:46

seventy to about one hundred until nineteen Eighty to about

01:49

a hundred Okay so you know the scene in the

01:51

graduate where the ski easy father whispers to dustin hoffman

01:56

plastics Yeah alright what were whispering different it's Well dividend

02:01

rates during that time period went from three ish percent

02:04

to about eighty percent toward the end and if an

02:06

investor had simply reinvested the dividend taub i'm or of

02:11

there s and p five hundred index fund Well they

02:13

actually would have made a modest but knights return during

02:16

that era of about five or six percent per year

02:19

Compounded it's Nothing to write home about but hardly a

02:22

lost decade and way better than what bonds did during

02:24

that time And oh by the way this was pretty

02:27

much the worst decade in our modern history to pluck

02:30

from the rule of seventy two is great little handy

02:32

dandy financial tool In this situation the rule of seventy

02:35

two is based on a log arrhythmic view of doubling

02:38

meaning that it answers at a given interest rate How

02:41

long does it take for an investment too Double So

02:45

let's say you're getting a twelve percent return on an

02:47

investment year after year Well at that rate it'll take

02:50

six years to double So what we did here Twelve

02:53

in tow Seventy two gets you six There you go

02:56

If we compounded at four percent in seventy to divide

02:58

by four there we go Yeah it take eighteen years

03:00

to double at ten percent Well seven point two years

03:03

at the very high end of rates While the model

03:05

falls apart yet fifty two percent The numbers don't quite

03:08

work but the rule wasn't really designed for the corner

03:10

cases No this one Well it'll come in handy in

03:13

this course and in life Another big one is the

03:16

sharpe ratio Bill sharp is a god You know like

03:20

eric clapton Bill invented this concept of a sharp ratio

03:24

which links risk and reward to investors You don't have

03:27

to know The calculations are actually being maid You just

03:31

have to understand the concept for this course Well the

03:34

basic idea is that if you returned to your investors

03:37

fifteen times their money over ten years that might be

03:41

awesome from a sharp ratio perspective But it might not

03:44

be either Sharpe ratio's measure how much risk you took

03:47

in delivering a given set of investment returns So this

03:51

return in particular might be awesome You had an unlevel

03:53

ridge diversified portfolio of investments that lonely simply did well

03:57

over time That is You had hi alva or high

04:00

knowledge in allocating your investment portfolio Not awesome You had

04:05

eighty two venture capital investments eighty one of which went

04:09

fully bankrupt And then you had google lottery tickets That's

04:13

All that was you've got lucky to win one lottery

04:16

ticket out of eighty two and lottery tickets are great

04:18

but you can't exactly count on them They're not really

04:21

investing all right so that's the basic deal here Total

04:24

return What was your total return with dividends that of

04:27

fees that of costs eventually net of taxes will cover

04:30

all that stuff And second thing you've got to think

04:32

about is how much risk did you take to get

04:34

there was a lottery tickets or were you just smart

04:37

Oh

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