INVESTMENT MANAGEMENT AND CAPITAL MARKET

(THE RETURNS AND RISKS FROM INVESTING)

OLEH:

NUR AINI HIKMAH

21710175

VI A-D (FINANCIAL CONCENTRATION)

MANAGEMENT STUDY PROGRAM

ISLAMIC ECONOMIC AND BUSINESS FACULTY

MUHAMMADIYAH KENDARI UNIVERSITY

2020
 FOREWORD

Assalamu’alaiku warahmatullahi wabarakatuh.

Alhamdulillahirabbil’alamin, a lot of favors that God gave, but very little we remember.

Praise is only worthy of the god of the Lord to exclamation all nature for all his blessings, mercy,

Taufik, and Hidayah, so that the writing can finish the paper titled "Investment Management and

capital market (the returns and risks from investing)".

In his organizing, the author gained a lot of help from various parties, so the author

thanked the same to the concerned party and friends who have provided support to us to compose

this paper.

From there all success began, hopefully all this can give happiness and guidance in a

better step. Although the authors hope the contents of this paper are free of flaws and mistakes,

but there is always less. Therefore, the author expects criticism and advice to help make this

paper even better. The end says the author hopes that this paper is beneficial for all readers.

Wassalamu’alaikum warrahmatullahi Wr. Wb.

Kendari, July 2020

Arranger
 TABLE OF CONTENTS

FOREWORDS ........................................................................................................... i

TABLE OF CONTENT ............................................................................................ ii

CHAPTER 1 PRELIMINARY................................................................................. 1

1.1 Background ................................................................................................ 1

1.2 The Problem............................................................................................... 1

1.3 Purpuse of Writing ..................................................................................... 1

CHAPTER II DISCUSSION ................................................................................... 2

2.1 Asset Valuation .......................................................................................... 2

2.2 Return Component ..................................................................................... 4

2.3 Risk Sources .............................................................................................. 5

2.4 Risk Types ................................................................................................. 7

2.5 Measuring Return....................................................................................... 8

2.6 Adjusting Returns for Inflation ................................................................... 12

2.7 Measuring Risk .......................................................................................... 13

CHAPTER III CLOSING ........................................................................................ 14

3.1 Conclusion ................................................................................................. 14

BLIBLIOGRAPHY.................................................................................................. 15
 CHAPTER I

PRELIMINARY

1.1 Background

Investment development has increased fast, not only the number of investors or funds that

are involved, but also a variety of types of securities instruments that can used as an alternative

investment. These developments followed encourage the availability of capable and capable

human resources manage investments properly.

1.2 The Problem

1.2.1 What is the return and risk of investing?

1.2.2 How to control return and ris investing?

1.3 Purpose of writing

The writing of this paper aims to allow readers to have the goal of what is the return and

risk in investing and also how to control it.

 CHAPTER II

DISCUSSION

2.1 Asset Valuation

2.1.1 Return Function

The main reason people invest is to gain profit, in the context of investment management

The profit level investment is referred to as return. Return is a very reasonable thing if the

investor demands a certain return rate on the funds he has invested. Return that investor expects

from his investment is compensated for the opportunity cost and the risk of decreased purchasing

power due to the influence of inflation.

In the context of investment management, it needs to be distinguished between the

expected return (expected return) and the return (realized return). The expected return is the

anticipated return rate of an investor in the future. The return or actual return is the return level

that the investor has actually obtained. When an investor invests his or her funds, he will require

a certain return level, and if the investment period has passed, the investor will be faced with the

actual return level he or she received. Between the expected return rate and actual return rate

earned by investors from the investments made may differ.

The difference between the expected return and the actually received return (actual

return) is the risk that should always be considered in the investment process. Thus, in investing

in addition to paying attention to the return level, investors should always consider the risk level

of an investment.

2.1.2 Risk Function

It is reasonable if the investor expects a return which is as high as his investment.

However, there are important things that should always be considered, which is the big risk that
must be taken from the investment. Generally, the greater the risk the greater the expected return

rate. Research on the return of shares and bonds in America conducted by Jeremy J. Siegel year

1992, found that in the 1802-1990 period, stock returns far exceed the return of bonds. The

excess return of shares on the return bond is also referred to as premium equity. One of the

factors that led to the phenomenon of premium equity is the fact that the risk of stocks is higher

than the risk of bonds.

The risk can be interpreted as a possible actual return that is different from the expected

return. In general economics and investment Science in particular there is the assumption that

investors are rational beings. Rational investors will certainly not like uncertainty or risk.

Investors who have a reluctant attitude towards such risks are referred to as risk-averse investors.

Such investors will not be willing to risk an investment if the investment does not provide a

decent return expectation as compensation to the risks that investors have to bear.

Investor's attitude towards risk will depend heavily on the investor's preference for risk.

More daring investors will choose a higher investment risk, which is followed by the expectation

of a high return rate as well. Similarly, investors who do not want to bear too high risk, certainly

will not be able to expect a return level is too high.

2.1.3 Realized Return and risk measurement

2.1.3.1 Realized Return

Return actual calculated based on historical data (ex post data). The historical return is

useful as the basis for determining the expected return and future risks.

2.1.3.2 Expected Return

 Expected return will be gained by the investor in the future. Unlike the already occurring

return Lisation (ex post data), the expected return is the result of the estimate so that its nature

has not yet occurred (ex ante data).

2.2 Return component

2.2.1 Periodic cash flow such as interest or dividends (income return)

Yield, The basic component many investors think of when discussing investing returns is

the periodic cash flows (or income) on the investment, either interest (from bonds) or dividends

(from stocks). The distinguishing feature of these payments is that the issuer makes the payments

in cash to the holder of the asset. Yield measures a security’s cash fows relative to some price,

such as the purchase price or the current market price.

2.2.2 Price Appresiation or Depretiation (Capital Gain Or Loss)

Capital gain (loss), the second component is the appreciation (or depreciation) in the

price of the asset, commonly called the capital gain (loss). We will refer to it simply as the price

change. In the case of an asset purchased (long position), it is the difference between the

purchase price and the price at which the asset can be, or is, sold; for an asset sold first and then

bought back (short position), it is the difference between the sale price and the subsequent price

at which the short position is closed out. In either case, a gain or a loss can occur. Return of total

investment can be calculated as:

𝐑𝐞𝐭𝐮𝐫𝐧 𝐓𝐨𝐭𝐚𝐥 = 𝐘𝐢𝐞𝐥𝐝 + 𝐜𝐚𝐩𝐢𝐭𝐚𝐥 𝐠𝐚𝐢𝐧 (𝐥𝐨𝐬𝐬)

2.3 Risk Sources

2.3.1 Interest Rate Risk

Int erest rat e risk is a risk arising from t he relat ive value of flowering asset s,

such as loans or bonds, will deteriorat e due to increased int erest rates. This risk

can be int erpreted as a risk caused by t he change in t he i nt erest rate in t he market

so t hat it will affect t he invest ment income in general, if t he int erest rate

increases, t he price of t he flowering bond will st ill fall, as well as vice versa.

Int erest rate risk is generally measured wit h t he bond t ime period, t he most old

technique now used to manage int erest rate risk .

2.3.2 Market Risk

Market risk is t he risk of fluct uat ions or ups and downs of t he net asset

value (NAB) caused by changes in financial market sent iment (such as stocks

and bonds) which are oft en referred to as syst emat ic r isk, meaning t his r isk is

inevit able and will always be exper ienced by investors it can even make

invest ors find capit al loss. This change could be due to some t hings such as

economic recessio n, issues, r iot s, speculat io n as well as polit ical changes.

2.3.3 Inflation Risk

The risk of inflat ion, also called t he risk of purchasing power, is t he

opportunit y t hat cash flows from invest ment s will not be worth as much in t he

fut ure due to changes in purchasing power due to inflat ion. This risk has t he

potent ial to harm people's p urchasing power to invest ment due to t he average

increase of t he consumpt ion price. Inflat ion risk is a risk taken by investors when
holding cash or invest ing in asset s t hat are not relat ed to inflat ion. The risk is t hat

t he value of cash will be reduced b y inflat ion.

2.3.4 Liquidity Risk

Liquidit y r isk is a risk ar ising from t he difficult y o f providing cash wit hin

a cert ain per iod of t ime. For example: I f a part y is unable t o pay it s obligat ions

due in cash. Alt hough t he part y has asset s of considerable value to pay off it s

obligat ions, but when t he asset can not be convert ed immediat ely int o cash, t hen

t he asset is said to be illiquid. This can happen if t he unpaid part y cannot sell it s

propert y because t he absence o f t he ot her part y in t he market is int erest ed in

buying it .

This is different from t he drast ic decline of asset prices, because in t he case

of price declines, t he market argues t hat such asset s are of no value. The absence

of int erested part ies to buy asset s is likely only due to the difficult y of bri nging

toget her t he two part ies. Therefore, t he risk of liquidit y is usually more likely to

occur in a newly grown or small volume market. The risk of t his t ype is relat ed to

t he accelerat ion of t he securit ies issued by t he company t hat can be traded in t he

secondary market .

2.3.5 Exchange Rate Risk

Foreign exchange Risk (FX) is a risk caused by changes in foreign exchange

rates on t he market that is not suit able again wit h t he expected especially when

converted wit h t he domest ic currency. This t ype of risk relat es to a fluct uat ion in

rupiah exchange rat e against the currency of anot her country. In general, t his t ype

of risk is also referred to as currency risk or wit h exchange rat e risk .

2.3.6 Country Risk

This risk is referred to as polit ical risk. It is based on stat e polit ics

condit ions. From t his risk t here is also a connect ion wit h t he change in t he

provisions of legislat ion t hat makes revenues decline. It is not even possible if t he

invest ment t hat has been plant ed event ually disappears or losers. Therefore, if

t here is an investor who will invest in capit al abroad, it is bett er to see t he

country's polit ical condit ions. If t he polit ical condit ion is good, it will also

posit ively impact t he invest ment .

2.3.7 Business Risk

This risk is t he risk t hat occurs in t he income of a financial asset t hat

requires t he company to perform re-invest act ivit y. So, when doing re-invest , t he

company must really understand what it re -invest as well as how to manage or

manage t he risks of t his invest ment .

2.4 Risk Types

2.4.1 Systematic Risk (general)

Systematic risk or market risk, i.e. risks associated with changes occurring in the market

as a whole. Some authors refer to general risk, as a risk that cannot be diversified

2.4.2 Nonsystematic Risk (Spesific)

No systematic risk or specific risk (company risk), is a risk unrelated to the overall

market change. The company's risk is more related to the change of microcondition of securities

issuing company. Company risk can be minimized by diversifying assets in a portfolio. Return of

total investment can be calculated as:

 𝐓𝐨𝐭𝐚𝐥 𝐑𝐢𝐬𝐤 = 𝐆𝐞𝐧𝐞𝐥𝐚𝐫 𝐑𝐢𝐬𝐤 + 𝐒𝐩𝐞𝐬𝐢𝐟𝐢𝐜 𝐑𝐢𝐬𝐤

2.5 Measuring Return

Measuring return is useful for comparing performance over t ime or across

different securit ies, We now know that a correct returns measure must incorporate the two

components of return, yield and price change, keeping in mind that either component could be

zero.

2.5.1 The Total Return (TR)

The total return (TR) for a given holding period is a decimal or percentage number

relating all the cash flows received by an investor during any designated time period to the

purchase price of the asset calculated as

𝐂𝐅ₜ + 𝐏𝐄
𝐓𝐑 =
𝐏𝐁

Where

CFₜ = cash flows during the measurement period t

Pᴇ = price at the end of period t or sale price

PB = purchase price of the asset or price at the beginning of the period

PC = change in price during the period, or PE minus PB

The periodic cash flows from a bond consists of the interest payments received, and for a

stock, the dividends received. For some assets, such as a warrant or a stock that pays no
dividends, there is only a price change. Pengembalian total dapat berupa positif atau negative,

relative pengembalian menyelesaikan masalah karena positif.

2.5.2 Return Relative

It is often necessary to measure returns on a slightly different basis than total returns.

This is particularly true when calculating either a cumulative wealth index or a geometric mean,

both of which are explained below, because negative returns cannot be used in the calculation.

𝐂𝐅ₜ + 𝐏𝐄
𝐑𝐑 = = 𝟏 + 𝐓𝐑
𝐏𝐁

2.5.3 Cumulative Wealth Index

Return measures such as TRs measure the rate of change in an asset’s price or return, and

percentage rates of return have multiple uses. Nevertheless, we all understand dollar amounts,

Therefore, it is often desirable to measure how one’s wealth in dollars changes over time. In

other words, we measure the cumulative effect of returns compounding over time

The Cumulative wealth index, CWIₙ , is computed as

WI₀(1+TR₁)(1+TR₂)…(1+TRₙ)

Where

CWI₀ = the cumulative wealth index as of the end of period n

WI₀ = the beginning index value; typically $1 is used but any amount can be used

TR₁ = the periodic TRs in decimal form

2.5.4 Measuring International Return

When investors buy and sell assets in other countries, they must consider exchange rate

risk or currency risk. This risk can convert a gain from the asset itself into a loss on the

investment or a loss from the asset itself into a gain on the investment. We need to remember

that international stocks are priced in local currencies for example, a French stock is priced in

Euros, and a Japanese stock is priced in yen. For a U.S. investor who buys a foreign security, the

ultimate return to him or her in spendable dollars depends on the rate of exchange between the

foreign currency and the dollar, and this rate typically changes daily. Currency risk (exchange

rate risk) is the risk that any change in the value of the investor’s home currency relative to the

foreign currency involved will be unfavorable; however, like risk in general, currency risk can

work in the investor’s favor, enhancing the return that would otherwise be received.

Return International cover any changes to the realized exchange rate, if the foreign

currency is depreciation, the return is lower in domestic currency, the total refund in domestic

currency

𝐄𝐧𝐝 𝐕𝐚𝐥. 𝐨𝐟 𝐟𝐨𝐫 𝐜𝐮𝐫𝐫

[𝐑𝐑 × ] –𝟏
𝐁𝐞𝐠𝐢𝐧 𝐕𝐚𝐥. 𝐨𝐟 𝐟𝐨𝐫 𝐜𝐮𝐫𝐫.

2.5.5 Summary Statistics For Returns

The total return, return relative, and cumulative wealth index are useful measures of

return for a specified period of time. Also needed for investment analysis are statistics to describe

a series of returns.

2.5.5.1 Arithmetic Mean

Arithmetic mean does not measure the compound growth rate over time, does not capture

the realized change in wealth over multiple periods, does capture typical return in a single
period. The best known statistic to most people is the arithmetic mean. Therefore, when someone

refers to the mean return they usually are referring to the arithmetic mean unless otherwise

specified. The arithmetic mean, customarily designated by the symbol X-bar, of a set of values is

calculated as

Ʃ𝐱
𝐱̅ =
𝐧

or the sum of each of the values being considered divided by the total number of values n.

2.5.5.2 Geomatric mean

The arithmetic mean return is an appropriate measure of the central tendency of a

distribution consisting of returns calculated for a particular time period, such as 10 years.

However, when an ending value is the result of compounding over time, the geometric mean, is

needed to describe accurately the “true” average rate of return over multiple periods. The

geometric mean is defined as the nth root of the product resulting from multiplying a series of

return relative together.

𝐆 = [(𝟏 + 𝐓𝐑₁)(𝟏 + 𝐓𝐑₂) … (𝟏 + 𝐓𝐑ₙ)𝟏/𝐧 ] − 𝟏

The geometric mean return measures the compound rate of growth over time. It is

important to note that the geometric mean assumes that all cash flows are reinvested in the asset

and that those reinvested funds earn the subsequent rates of return available on that asset for

some specified period. It reflects the steady growth rate of invested funds over some past period;

that is, the uniform rate at which money actually grew over time per period, taking into account

all gains and losses.

Difference between geometric mean and arithmetic mean depends on the variability of

returns

̅)𝟐 − 𝐬²
(𝟏 + 𝐆)𝟐 ≈ (𝟏 + 𝐗
2.6 Adjusting Returns for Inflation

The percentage rates of return we see daily on the news, being paid by financial

institutions, or quoted to us by lenders, are nominal rates of return. We need to consider the

purchasing power of the dollars involved in investing. To capture this dimension, we analyze real

returns,orinflation-adjusted returns. When nominal returns are adjusted for inflation, the result is

in constant purchasing-power terms. Returns measures are not adjusted for inflation, purchasing

power of investmen may change over time, Consumer Price Index (CPI) is possible measure of

inflation

(𝟏 + 𝐓𝐑)
𝐓𝐑 𝐈𝐀 = −𝟏
(𝟏 + 𝐈𝐅)

Where

TR IA = the inflation adjusted total treturn

IF = the rate of inflation

2.7 Measuring Risk

Risk is the chance that the actual outcome is different than the expected outcome, The

investment risk is measured from the standard deviation from the expected return, the standard

deviation is the square root of the variance, which shows how large the random variable is spread

among the average; The greater the spread, the greater the variance or deviation of the standard

investment.

𝟏/𝟐
Ʃ(𝐗 − ̅̅̅̅̅
𝐗)²
𝐬=( )
𝐧−𝟏
2.7.1 Risk Premiums

Premium is additional return earned or expected for additional risk, equity premium is the

difference between stock and risk free returns, ERP:

𝟏 + 𝐓𝐑 𝐂𝐒
[ ]−𝟏
𝟏 + 𝐑𝐅

bond horizon premium is the difference between long and short term government

securities, BHP:

𝟏 + 𝐓𝐑 𝐆𝐁
[ ]−𝟏
𝟏 + 𝐓𝐑 𝐓𝐁
 CHAPTER III

CLOSING

3.1 Conclusion

The main reason people invest is to gain profit, in the context of investment management

The profit level investment is referred to as return. Return is a very reasonable thing if the

investor demands a certain return rate on the funds he has invested. The risk can be interpreted as

a possible actual return that is different from the expected return. In general economics and

investment Science in particular there is the assumption that investors are rational beings.
 BLIBLIOGRAPHY

Jones, Charles P. 1943. Invesrments Analysis and Management twelfth edition.Library of

Congress Cataloging in Publication Data.

Helmi, Andri. Return Yang Diharapkan Dan Risiko Portofolio. Downloaded on 6 Juli 2020

Tandelilin, Eduardus. Modul 1 Dasar-dasar Manajemen Investasi. Downloaded on 6 July 2020.