INVESTMENT

Key Points
1 Price Vs Yield
If one is known other can be derived, so both are synonymous
2 Investing has two dimensions risk and return
Measure of return is yield; so price can be used as measure of return
Low Price means high yield and vice versa
High price means low yield and vice versa
3 Key investment funda is buy cheap and sell expensive
how to measure cheap, its cheap if market price >= value, so cheapness is relative to value (intrinsic val
Value and price incorporate the idea of risk while yield doest - so if comparing two inve
The key funda can be stated as buy high yield and sell low yield - but here we will have to worry about ri
so if both investments are similar in risk then buy with high yield

Price based Comparison

Calculate Value of both investments
if market price > value , then a investment
now calculate which one is cheaper
buy the cheaper of two
max [ max(o, MP of Inv A - Val of A) , max(0
ss is relative to value (intrinsic value); value is calculated or measured by analyst/investor
est - so if comparing two investment on price cheaper can be bought without worrying abt the risk
here we will have to worry about risk

INVESTMENT A VS
INVESTMENT B

rice based Comparison Yield based Comparison

ue of both investments Get the yield of A & B
e > value , then a investment is cheap get the risk of A & B( if bonds o
e which one is cheaper if risk of A&B are equal then sel
per of two if risk of A&B are not equal then
MP of Inv A - Val of A) , max(0,MP of Inv B - Val of B)] find out what are the expected
now if yield of A is higher than e
do same calculation to figure ou
select cheaper
max[ max(0, yield of A- expecte
 orrying abt the risk

Return

Risk

ield based Comparison

et the yield of A & B
et the risk of A & B( if bonds one can use duration to measure risk)
risk of A&B are equal then select one with higher yield
risk of A&B are not equal then
nd out what are the expected returns for the given risks of A& B ( from the graph above)
ow if yield of A is higher than expected return of A then it is a cheaper bond
o same calculation to figure out the cheapness of B
elect cheaper
max[ max(0, yield of A- expected return of A), max (0, yield of B - expected return of B) ]