How Risk Free Is The Risk-Free Rate Of Return?

The risk-free rate of return is one of the most basic components of modern finance and many of its most famous theories. The capital asset pricing model (CAPM), modern portfolio theory (MPT) and the Black-Scholes model all use the risk-free rate as the primary component from which other valuations are derived. The risk-free asset only applies in theory, but its actual safety rarely comes into question until events fall far beyond the normal daily volatile markets.

An article by Michael Schmidt looks at the risk-free security in theory and in reality (as a government security), evaluating how truly risk free it is. The model assumes that investors are risk averse and will expect a certain rate of return for excess risk extending from the intercept, which is the risk-free rate of return. Find details...

MFs slowly emerging from FII dominance

If FII selling is blamed for the carnage in the last one year, increased buying by domestic mutual fund houses has seen the Indian equity market bounce back recently. Between March 12 and 23, mutual fund houses net bought equities worth Rs 1319 crore against Rs 1093 crore by foreign institutional investors. In the same period, the Sensex has risen to 9424 from 8343.

However, the MFs may be trying to shore up their balance sheet for year end consideration, and so the increased buying. This is also because they had been sitting on cash for too long. But does this suggest that MFs are gaining prominence in driving the indices? Domestic institutional investors have already started showing their dominance.

Given the expansion of mutual fund industry, domestic fund houses can play a vital role in driving the market in the next five years, experts feel. For the month of February, the AUM for mutual fund industry stood at Rs 5,00,973 crore.

Source:ET

What's your habit?

"It's not your salary that makes you rich, it's your spending habits. "

By, Charles A. Jaffe

Find out the most trustworthy Indian company

Ratan Tata’s Tata Group is the most trustworthy business house in India.This was found in a poll conducted among domestic investors. The trustworthiness is for financial reporting. This survey is in line with the previous survey conducted by Mint. Only difference is the Tata group companies were listed separately. In this case they were clubbed together .Because, in the group companies the DNA is already set. There won’t be much of a difference between Tata Chemicals and TCS in the way they operate.
10 Most trustworthy companies in India :

• Tata group
• Infosys
• HDFC Group
• L&T
• Aditya Birla Group
• Bharti Airtel
• Sundaram/TVS Group
• ICICI Bank
• Mukesh Ambani Group
• Anil Ambani group

However, the poll found that many companies may have resorted to window dressing their accounts, but on a smaller scale, others were of the opinion that the financial statements presented were of quality and are not necessarily tainted because of Satyam fiasco. (source) Satyam scam has not given one but two phrases so far. First one is the Hyderabadi discount and now window dressing.

PS : Hyderabadi discount is the discount that should be given by Hyderabad based companies to factor in the cooking. Read this ..

What best should be done

Mr.Jhunjhunwala- the Pied Piper of Indian bourses

Rakesh Jhunjhunwala is a Chartered Accountant by qualification but an investor / trader by profession. He is one of the most famous and respected equity investors in India and manages his own portfolio as a partner in his asset management firm, Rare Enterprises. He is tagged by the media as 'India's Warren Buffet' .For a man who purchased Tata Tea for Rs 5000 when he was only fifteen years old, Rakesh Jhunjhunwala has a total networth of ap-proximately Rs 6000 crore along with his wife Rekha Jhunjhunwala.

Mr Jhunjhunwala is a canny stock picker for long term investment and reputed for his eye on macroeconomics. Much like Mr Warren Buffet, he buys into the business model of a company and for judging the longevity and growth potential, he gives top priority to 'competitive ability', 'scalability' and 'management quality' of the enterprise. According to Mr Jhunjhunwala, believing in the vision and the beliefs of the entrepreneur and validating the risks that may not be perceived by the entrepreneur are the key success factors for an investor. The typical traits to look for while identifying potential multi-baggers are - low institutional holding, under-researched and general pessimism about the stock.

Mr Jhunjhunwala has managed to identify numerous multi-baggers in the past decade, notable being Praj Industries, Crisil, Titan, Nagarjuna and PSUs like BEML and Bharat Electronics, among others. He says -A good time to sell a stock is not based on any 'price' targets, but when the 'earnings' expectations have peaked or the business model has peaked or the valuations appear ridiculously unreasonable.

Look out for “What is the Big Man bullish on?” at http://www.theequitydesk.com/rakesh_jhunjhunwala.asp

The Great Depression (1929)

When: October 21, 24 and 29, 1929

Where: USA

The amount the market declined from peak to bottom: A string of terrible days led to a more than 40% drop in the market from the beginning of September 1929 to the end of October 1929. In fact, the market continued to decline until July 1932 when it bottomed out, down nearly 90% from its 1929 highs.

Synopsis: Despite the Florida crash, Americans were as bullish as ever. The stock market was guaranteed to make everyone rich as the first world war had been won, and industrialization was resulting in previously-unimaginable luxuries.

Investment bankers, brokers, traders, and sometimes owners banded together to manipulate stock prices and get out with gains. They did this by subtly acquiring large chunks of stock between them and trading them between each other for slightly more each time. When the public noticed the progression of price on the ticker tape, everyone would buy the stock. So, the market manipulators would then sell off their overpriced shares for a healthy profit. On and on the cycle went as uneducated investors turned a profit by selling the manipulated, over-priced shares to someone who wanted to have a rising stock.

During the craze before the Great Depression (details) a number of academics were predicting a crash if things didn't “calm the hell down.” The twelve-year worldwide depression came and ended only with the declaration of war. This stands as the worst financial blow to the USA ever. The crash itself, though large in its own right, was nothing compared to the ensuing graveyard market and devastating depression.

(Source:Wikipedia & Investopedia)