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Describe the sequence of steps involved in investment analysis.

Describe the sequence of steps involved in investment analysis.

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Answer #1

Investment analysis is nothing but the process of evaluating an investment Asset for its profitability, payback period and various risks attached to the assets. Here, the Investment asset can be stock or bond or can be portfolio of securities or it can be investment in new Business. The steps for Investment analysis are as follows.

1. Estimate the casflows for the proposed investments

Under this step both intial investment and periodic projected cash flows pertaining to the asset to be considered.

2. Find out the Risks associated with the investment. Then do probability analysis of the cash flows and determine the appropriate risk factor for discounting the cash flows.

3. Determine the risk adjusted cash flows by taking the risk factor calculated in previous step.

4. Determine the rate of return and Net present value or payback period of Investment.

5. Compare the rate of return calculated above with required rate of return or test other parameters(like NPV or Payback period) for the selection of the investment options.

Note:

1. For assets like securities and bonds along with expected return statistical tools like standard deviation, Coefficient of correlation and covariance are used to determine the risk associate with asset.

2. Based on Risk and Return analysis of different assets the selection is made by picking assets having optimum return with lower rate of risks.

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