...Asset Value and Volatility Estimation for Corporate Credit Rating 1009611462 LUFEI Xiaoxin 1009611301 HE Yao Abstract The market-based credit models make use of market information such as equity values to estimate a firm’s credit risk. The Merton model and the Black-Cox model are two popular models that link asset value with equity value, based on the option pricing theories. Under these models, the distance to default can be derived and thus the default probability can be mapped to as long as a large database of companies is provided. The difficulty, however, is that some parameters, including asset values and asset volatilities, which are required in calculating the distance to default, are unobservable in market. Therefore, statistical methods need to be developed in order to estimate the unobservable parameters. In this project, our focus is on using KMV method, which has been widely used in the industry, to estimate corporates’ asset values and asset volatilities. We implemented two models and did numeric study by simulation, which shows that the KMV method gives generally accurate estimates under both models. We also analyzed the model risk under different circumstances. The barrier sensitivity analysis gives the result of how sensitive the Black-Cox model is in choosing different barriers, in the relation with asset volatility and debt level. Furthermore, the models are applied to real companies with different leverage ratios, which shows that structural models are...
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...RISK & ASSETS OF THE FORMER IMPLANTATION OF SEPHORA IN CHINA With an annual turnover of around 2.5 billion euros, Sephora is a worldwide brand. Present in China since 2005, the company now has 135 stores in 47 cities. The brand has experienced a rapid development and do not stop there. The brand aims to open more new stores, particularly in the towns of 2nd and 3rd level. Indeed, cosmetic products in China are rapidly expanding. What were the risk and assets of an implantation in China? I - RISK 1. Cultural rigidities Traditionally, cosmetics, especially skincare and fragrances are reserved for women. Taking about caring of your body is not a major concern for men, especially in rural areas. However it develops in the cities new male customers, more westernized, consisting essentially of managers with a high enough income. Female customers appreciate in great majority the skin lightening products. Unlike the European, they prefer light perfumes and discreet scent, and they prefer the scent of flowers. In addition, the Chinese hardly use deodorant. Most Chinese do not know cosmetic products or only a small part, which requires a high level of involvement on the part of vendors and a strong marketing strategy to attract potential consumers. 2. Copying Counterfeiting is a problem in Asian countries and in particular China, where the industry has taken on an unprecedented scale over the last ten years. It represented in 2006 about 8 % of China's GDP ($115,76...
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...First name Last name Name of Course Name of Professor 12 November 2012 Brief Analysis of Asset-based Financing and Consequent Audit Risk The article by Robert A. Modansky and Jerome P. Massiminom mainly discusses the features and rationale of three asset-based financing methods-revolving lines of credit, purchasing order financing and factoring and further introduces how to account for them according to U.S. GAAP. Companies that are highly-leveraged or do not have the credit rating or track record to qualify for bank financing now find asset-based lending a pleasant choice instead of the financing option of last resort. The main difference between the asset-based lending and traditional types of banking is that asset-based financing is secured by an asset like trade account receivable, inventory or property and equipment not credit rather than credit ratings (Robert A. Modansky, Jerome P. Massiminom).The benefit of placing the borrower’s assets as collateral is that the borrower will receive a higher amount of maximum credit with a lower interest rate. Revolving lines of credit requires the borrower to grant a security interest in its receivables and inventory to lenders as collateral to secure the loan, which creates a borrowing base for the loan. It’s worth noting that not all receivables and inventory are eligible to constitute the borrowing base. For instance, receivables that are more than 90 days old and related party receivables would be ineligible (Robert A...
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...Zeus Asset Management Inc Executive Summary Zeus Asset Management Inc is an asset management firm with more than $1.7 billion in asset under management. Zeus is well known for relationship-oriented that served both individual and institutional investors with the investment philosophy of believing that they could get a superior return over the long run using a conservative, risk-averse and quality-oriented approach. Zeus have been measuring it’s return in an absolute basis however Abbott demanded for it to be in risk adjusted basis to be better determine if Zeus outperform the relevant indices. The main problem with the current measure is that it did not take risk into consideration. The main aim in this case study is to determine if the current performance evaluation is sufficient or a better risk adjusted measure could be form. Other than that, we would also take into consideration of the difference between Zeus with its main competitors and how different type of investors would have different investment strategy due to their different risk preference. Problem with current measure As the current fund performance measurement consist mainly of holding period and benchmark return, these return have weaknesses that does not allow it to be a sufficient measurement. As a HPR generally calculated based on determining what the total return is earned from holding the investment for a specific period of time. The advantage of it is that it is easy to calculate and understand by...
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...Tesla Motors, Inc.’s 5 most valuable assets and their inherent risks Tesla’s most valuable assets are the ones in the company’s control and on which the company’s future growth will largely depend. This paper identifies: the CEO, customer loyalty, execution of strategy, workforce, and hardware and software systems security as the most important drivers of growth in the company’s control. 1. CEO Elon Musk: One of Tesla’s most valuable assets is CEO Elon Musk. Musk is a charismatic leader who is admired by the company’s employees. Talented people choose his company because they believe that, by working for a person with his track record, they will be a part of something great.1 Elon Musk made his millions selling PayPal to eBay. He is also the CEO and founder of Space X and serves as the chairman at SolarCity, where he plans to bring solar Photovoltaic (PV)...
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...Name: Peter Michelsen____________________________ CSI 242 01 Chapter 3 Homework 1. What is a type of law that represents all of the laws that apply to a citizen (or subject) of a jurisdiction? Civil Law 2. What is a type of law that addresses violations harmful to society and that is enforced by prosecution by the state? Criminal Law 3. Private Law is a type of law that regulates the relationship between an individual and an organization. 4. Public Law is a type of law that regulates the structure and administration of government agencies. 5. Ethics define socially acceptable behaviors. 6. Laws define rules that mandate or prohibit certain behavior. 7. True or False: ___True_____ The cornerstone of many current federal computer-related criminal laws is the Computer Fraud and Abuse Act of 1986. 8. __B___ is created by combining pieces of nonprivate data—often collected during software updates, and via cookies—that when combined may violate privacy. a. Contextual information b. Aggregate information c. Profile data d. Privacy data 9. The law that regulates the overall role of the government in protecting the privacy of individuals is the Federal Privacy Act of 1974. 10. The law that regulates the role of the health-care industry in protecting the privacy of individuals is the __C___. e. GLB f. FOIA g. HIPAA h. CFAA 11. True or False: __False_____ The law...
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...__________ risk of the portfolio decreases until 10 to 20 securities are included. The portion of the risk eliminated is __________ risk, while that remaining is __________ risk * o diversifiable; nondiversifiable; total o relevant; irrelevant; total o total; diversifiable; nondiversifiable o total; nondiversifiable; diversifiable The higher an asset's beta, * o the more responsive it is to changing market returns o the higher the expected return will be in a down market o the lower the expected return will be in an up market o the less responsive it is to changing market returns __________ probability distribution shows all possible outcomes and associated probabilities for a given event * o A continuous o An expected value o A discrete o A bar chart A beta coefficient of 0 represents an asset that * o is less responsive than the market portfolio o has the same response as the market portfolio o is more responsive than the market portfolio o is unaffected by market movement The financial manager's goal for the firm is to create a portfolio that maximizes return in order to maximize the value of the firm * o False o True The security market line (SML) reflects the required return in the marketplace for each level of nondiversifiable risk (beta) * 212 Gitman • Principles of Finance, Eleventh Edition o False o True The portion of an asset's risk that is attributable to firm-specific, random causes is called * o systematic risk o unsystematic...
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...return for a given amount of portfolio risk, or equivalently minimize risk for a given level of expected return, by carefully choosing the proportions of various assets. Although MPT is widely used in practice in the financial industry and several of its creators won a Nobel memorial prize for the theory,[1] in recent years the basic assumptions of MPT have been widely challenged by fields such as behavioral economics. MPT is a mathematical formulation of the concept of diversification in investing, with the aim of selecting a collection of investment assets that has collectively lower risk than any individual asset. That this is possible can be seen intuitively because different types of assets often change in value in opposite ways.[2] For example, to the extent prices in the stock market move differently from prices in the bond market, a collection of both types of assets can in theory face lower overall risk than either individually. But diversification lowers risk even if assets' returns are not negatively correlated—indeed, even if they are positively correlated.[3] More technically, MPT models an asset's return as a normally distributed function (or more generally as an elliptically distributed random variable), defines risk as the standard deviation of return, and models a portfolio as a weighted combination of assets, so that the return of a portfolio is the weighted combination of the assets' returns. By combining different assets whose returns are not perfectly positively...
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...Asset Pricing Models Sony Thomas Capital Market Theory: An Overview • Capital market theory extends portfolio theory and develops a model for pricing all risky assets • Capital asset pricing model (CAPM) will allow you to determine the required rate of return for any risky asset Assumptions of Capital Market Theory 1. All investors are Markowitz efficient investors who want to target points on the efficient frontier. Assumptions of Capital Market Theory 2. Investors can borrow or lend any amount of money at the risk-free rate of return (RFR). Assumptions of Capital Market Theory 3. All investors have homogeneous expectations; that is, they estimate identical probability distributions for future rates of return. Assumptions of Capital Market Theory 4. All investors have the same one-period time horizon such as one-month, six months, or one year. Assumptions of Capital Market Theory 5. All investments are infinitely divisible, which means that it is possible to buy or sell fractional shares of any asset or portfolio. Assumptions of Capital Market Theory 6. There are no taxes or transaction costs involved in buying or selling assets. Assumptions of Capital Market Theory 7. There is no inflation or any change in interest rates, or inflation is fully anticipated. Assumptions of Capital Market Theory 8. Capital markets are in equilibrium. Risk-Free Asset • • • • An asset with zero standard deviation Zero correlation with all other...
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...Part I Portfolio Theory 1. Introduction Before discussing the portfolio, it is important to make sure the following concepts are understood: E¢cient Portfolios: That is when investors seek to maximize the expected return from their investment given some level of risk they are willing to accept. Risk Aversion: Individuals according to those theories are assumed to be risk averse: is one who, when faced with two investments with the same expected return but two di¤erent risks, will prefer the one with the lower risk. Risky assets: Those are the ones which the return that will be realized in the future is uncertain. Corporate bonds are riskier than public bonds, because of the possibility of default, in‡ation and so on. Assets in which the return that will be realized in the future is known with certainty today are referred to as risk-free assets or riskless assets. 1.1. Returns And Variances In order to understand the relationship between risk and return, we must be able to measure both risk and return for an investment. 1.1.1. Dollar returns The return on an investment has two components: the income component; and the capital gain (or capital loss) component. For a common stock, your return comes in two components: dividends ( periodic income) and capital gains. Suppose you buy 100 shares of ABC common stock for $25 per share. Over one year, the ABC company pays a cash dividend of $2 per share and the value of the stock rises to $30. At the end of the year you have received...
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...Return, Risk, and the Security Market Line COMM 298 Outline 1 Portfolios 2 Portfolio Expected Return 3 Portfolio Variance 4 Systematic Risk, Specific Risk, and Diversification 5 Market Portfolio and Measure of Systematic Risk 6 CAPM: From Risk to Return COMM 298 Return, Risk, and the Security Market Line 1 / 54 Outline 1 Portfolios 2 Portfolio Expected Return 3 Portfolio Variance 4 Systematic Risk, Specific Risk, and Diversification 5 Market Portfolio and Measure of Systematic Risk 6 CAPM: From Risk to Return COMM 298 Return, Risk, and the Security Market Line 1 / 54 Portfolios Investors are risk averse. COMM 298 Return, Risk, and the Security Market Line 2 / 54 Portfolios Investors are risk averse. To reduce risk, it is good idea “not to put all your eggs in one basket”. COMM 298 Return, Risk, and the Security Market Line 2 / 54 Portfolios Investors are risk averse. To reduce risk, it is good idea “not to put all your eggs in one basket”. This is achieved by building a portfolio, which is a collection of assets. COMM 298 Return, Risk, and the Security Market Line 2 / 54 Portfolios Investors are risk averse. To reduce risk, it is good idea “not to put all your eggs in one basket”. This is achieved by building a portfolio, which is a collection of assets. The process is called diversification. COMM 298 Return, Risk, and the...
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...Regular Features Hotels Hotel investment risk: What are the chances? Received (in revised form): 7 November 2006 Elie Younes was, at the time of writing, a Director with HVS International’s London office, heading the Middle East and Africa region together with Bernard Forster. He joined HVS International in 2001 having had four years’ operational and managerial experience in the hospitality industry in the Middle East. He holds a BA in Hospitality Management from Notre Dame University in Lebanon, an MBA from IMHI (Essec Business School, France and Cornell University, USA) and is currently preparing his MSc in Real Estate Investment at Cass Business School in London. He has now joined Starwood Hotels and Resorts’ Acquisition & Development team. Russell Kett is Managing Director of the London office of HVS International. He has some 30 years’ specialist hotel consultancy, investment and real estate experience and generally focuses on the provision of valuation, feasibility, shared ownership, property, brokerage, investment, asset management, strategy and related consultancy services, advising hotel companies, financial institutions, developers and investors on all aspects of their hospitality industry-related interests, throughout Europe, the Middle East, Africa and Asia. He is a frequent speaker on the international hotel industry and on topics relating especially to the valuation of and investment in hotels, marketing, resorts and shared ownership, as well as on the hospitality...
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...error-free. 1 Central concepts for this week • Risk-return trade-off • Covariance (between individual assets) • Efficient Frontier • Market portfolio (choice of the rational investor) ↓ • Capital Market Line • Security Market Line • Cost of capital - Firm: the returns that are necessary to attract capital - Investor: returns that the capital markets offers for comparable investments Readings this week: Brealey, Myers & Allen (BMA), Corporate Finance 8th edition, chapters 7, 8, 9. 10 1. Portfolio theory • Criteria for choice of optimal portfolio by risk-averse rational agents • Mean/variance analysis • Market portfolio Note: static world with only one point in time. Definitions: - Financial asset = stream of income, typically uncertain, with a given risk/return profile - Portfolio = mix of financial assets 11 1.1 Expected returns for portfolio (2 assets) Let E(Z) be the expectation (expected value) of a random variable Z = probability-weighted midpoint of the distribution of Z. E(RP) = x1E(r1) + (1-x1)E(r2) (1) E(RP) = Expected portfolio return xi = Share of investment in asset i, (i = 1, 2) E(ri) = Expected return asset i, (i=1, 2) Expected portfolio returns is the weighted average of expected returns of individual assets. In general E(ri) is not observable but must be estimated by the use of historical data or “best guesses”. 12 1.2 Portfolio risk (2 assets) Recall that: Var(Z1 + Z2) = Var(Z1) + Var(Z2)...
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...Chapter 6: Efficient Diversification General thought: Risk comes from different places. Some risk comes from common sources, like the economy. Other risk comes from sources unique to each asset. This means that some kinds of risk can be diversified. Return and Risk for a Portfolio 0 First, need to know how much you’ve invested in each asset (w) as a percentage of your total funds invested. Expected return on a portfolio In other words, portfolio expected return is always a weighted average of the expected returns of the assets within the portfolio. However, this is not true of portfolio standard deviation! * Portfolio standard deviation depends on covariance / correlation between each pair of assets within the portfolio…how much the movements between each pair of assets offset each other. * In general, portfolio standard deviation will be less than the weighted average of the standard deviations of the individual assets within the portfolio. 1 Covariance =: Tells you how much any pair (two) stocks (i and j) move around together: | Prob. | 1 | 2 | Great | .3 | .2 | .1 | OK | .5 | .1 | .2 | Bad | .2 | - .05 | .4 | = -.0033 + 0 + -.0057 = -.009 Correlation between Two Assets The correlation coefficient “standardizes” covariance – puts it into a form that tells you how much two assets actually move together. Correlation coefficients are scaled between –1 and +1: = = -.995 Finally, we can...
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...What is refinancing risk? How is refinancing risk part of interest rate risk? If an FI funds long-term fixed‐rate assets with short‐term liabilities, what will be the impact on earnings of an increase in the rate of interest? A decrease in the rate of interest? Refinancing risk is the uncertainty of the cost of a new source of funds that are being used to finance a long‐term fixed‐rate asset. This risk occurs when an FI is holding assets with maturities greater than the maturities of its liabilities. For example, if a bank has a 10‐year fixed‐rate loan funded by a two‐year time deposit, the bank faces a risk of borrowing new deposits, or refinancing, at a higher rate in two years. Thus, interest rate increases would reduce net interest income. The bank would benefit if the rates fall as the cost of renewing the deposits would decrease, while the earning rate on the assets would not change. In this case, net interest income would increase. What is reinvestment risk? How is reinvestment risk part of interest rate risk? If an FI funds short‐term assets with long‐term liabilities, what will be the impact on earnings of a decrease in the rate of interest? An increase in the rate of interest? Reinvestment risk is the uncertainty of the earning rate on the redeployment of assets that have matured. This risk occurs when an FI holds assets with maturities that are less than the maturities of its liabilities. For example, if a bank has a two‐year loan funded by a 10‐year fixed‐rate...
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