Beta- Analyzing mutual funds

Guru Prasad -
 The risk of any investment made always depends on the volatility in the following investment. If we can have a factor that could tell us about the volatility of a investment and help us judge our risk and corelate it with our capability to take risk, how would that be? Well Beta factor is one such factor that could help us know the sensitivity of our stock or portfolio fund that we have chosen to invest. Beta ratio:- Understanding Beta:-  Beta is a metric used in fundamental analysis to determine the volatility of a stock with comparison to the overall market that has a fixed beta ratio of 1 always. Stocks or funds that are ranked with a beta ratio above 1 generally tend to fluctuate more and hence give access to more risk but yielding higher returns too at the same time if gone in favour. While the risk is slightly less in the funds with beta ratio below 1 they give less but yet stable return on investments generally. Hence, the beta factor can be said as a risk- reward factor, helpi
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Replacement cost theory

Guru Prasad -

 


Yes, he is none other than Harshad Mehta the well known market manipulator. You all must have seen the series scam 1992, the series which has blown everyone's mind in the last one year. If not no problem. But, what is this replacement cost theory that was propogated by him. Harshad Mehtha proclaimed that the rise of ACC stock was just due to the philosophy of  'Replacement Cost Theory'. 

Replacement cost is a cost that is required to replace any existing asset having similar characteristics or the cash outlay that firm has to pay in order to replace an old asset at the current market price. An organization often chooses to replace its assets when the repair and maintenance costs increase beyond an acceptable level over a period of time. It is found out by calculating the present value of the asset, followed by its useful life.

The insurance company’s primary function is to evaluate whether the decision of replacement is better than repair and maintenance or not. It is also vital for a company to correctly calculate the depreciation since it will have a significant impact on the decision of the continuation of the old asset or replacement with a new one. Sometimes it becomes a challenge to estimate the correct market value of the asset, and hence it may lead to making wrong decisions by the organization.

The companies, well in advance, estimate the funding requirements for the replacement so as to locate all the possible price points from where the replacement costs or value can be paid off.

It is calculated keeping all the other types of cost such as the capitalized cost, fixed cost, private cost, business cost and the long run cost in mind with the growing inflation. 

Hence, this is generally a term that is widely used in the insurance sector which Harshad Mehta proclaimed to also make a part of stock market and relate the theory.
 



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