CC BY
2
• the deteriorating and uncertain Outlook for the global economy, the risk of joining the world economy into a new recession;
• the uncertainty and instability of the world financial market, decrease of confidence in financial institutions, the volatility of interest rates;
• the rise of protectionism in foreign trade that affect the conditions of direct investment.
Overall, the current stage of development of global processes in the investment sector can be characterized by considerable volatility in the annual dynamics of the main ways of capital investment: mergers and acquisitions (M&A) and new projects (greenfield).
References:
1. World Investment Report 2011. Geneva: UNCTAD, 2011. http://unctad.org/en/docs/wir2011_en.pdf
2. World Investment Report 2011. Geneva: UNCTAD, 2015. http://unctad.org/en/PublicationsLibrary/wir2015_en.pdf
3. Dunning J., Lundan S. Multinational enterprises and the global economy / 2nd ed. Cheltenham, UK: Edward Elgar Publishing, 2008.
4. Limonova E. Modern trends and changes in investment strategy of TNCs. Psychology. Economics. Law. 2013, 3. Pp. 57-64.
УДК 001.201
Ivkin Alexey The first year master course student "International Finance" faculty Financial University under the Government of the Russian Federation
Moscow, Russia Research supervisor - Fedunin Alexander Ph.D. in Economics, associate professor «Finance and credit» department Financial University under the Government of the Russian Federation
Moscow, Russia
COMPARATIVE ANALYSIS OF THE INVESTMENT RISKS. THE EFFECT OF MARKET RISK ON THE PORTFOLIO SECURITIES Abstract
The subject of this paper are financial investment risks. A thorough definition of the risks is given. Types of risks are distinguished with respect to the type of financial instrument, systematic and market risks are considered as the major ones. Portfolio diversification is suggested as an efficient way of decreasing specific risk.
The practical part is dedicated to the one-factor model and beta coefficient as a pivotal tool of systematic risk assessment.
In conclusion, beta-coefficient assessments for two specific Russian companies are provided as an example of exploiting this tool while working with actual data.
Key words: risks, investments, investment portfolio, market risk, specific risk, one-factor model, multifactor model, linear regression, beta-coefficient.
INTRODUCTION
The range of possibilities of investing in securities, money market instruments, options and futures has considerably widened in recent years. This makes it increasingly difficult for investors to keep track of them as well as to be familiar with all the opportunities and risks involved.
Risk diversification is a means of dealing with the economic uncertainty. It does so by changing the uncertainty of the occurrence, the timing, and the financial impact of a particular event for a predetermined price.
Investment activities are risky and so require a thorough analysis of the risks occurring and their expected effects.
Ultimately, one should say that portfolios should be constructed according to an investor's investment goals, risk tolerance, time horizon, and overall financial standing.
1.1 Types of Investors. Deviations and Set of Engendered Factors
Concerning the initiator of the process, it is considered that if one has an opportunity to win, he will bear risk in equal range. It goes from the established rule, which states that the correlation between yield and risk is too close. If a potential investor seeks for a higher yield from investment, he will risk in equal extent.
Nevertheless, there is a controversially formed group of investors, which seek for careful (non-risky) investments. If one makes a decision to invest, he will create such set of portfolio, which has a minimum risk. However, it goes without saying that the less your risks are, the less your reward will be. In other words, bearing the minimum level of risks, one will get the minimum yield.
Any potential investor reckons for making a profit from the investments -in other words, he takes into consideration expected return. Simultaneously, there are a set of deviations from the expected return, which could be classified as random variables. To make it clear, these very deviations can be considered potential investment risks.
In turn, deviations can be divided to the positive, which increase the return on the investment, and negative ones, that sequently decrease the yield.
Accordingly, such deviations are brought about by a set of factors. Ones could influence overwhelmingly the whole market, others, could affect a small-scaled distinctive group of financial instruments.
For example, such events as change of government, political feuds have spectra influence on the whole financial market.
And such factor as technological breakthrough can be directly applied to the self-contained group of securities.
1.2 The Definition and Distinctive Features of Two Major Investment
Risks
1. Unsystematic risk
Specific (business) risk, also called "unsystematic risk" is tied directly to the
performance of a particular security. Generally speaking, all businesses in the same industry have similar types of business risk. But used more specifically, business risk refers to the possibility that the issuer of a stock or a bond may go bankrupt or be unable to pay the interest or principal in the case of bonds.
A common way to avoid unsystematic risk is to diversify it - to create a mutual funds portfolio. In other words, to make a set of investments in various companies which hold securities with distinctive characteristics and investment direction.
Considering that very case, even conducting the blind risk diversification -when the portfolio is saturated by random variables (financial instruments), could remarkably diminish the uncertainty, therefore hedge risks.
For example, creating a portfolio comprised from various financial instruments of one and only one enterprise, in the case of unhealthy market environment, one can ultimately induce the negative deviation of the return.
On the contrary, if to undertake homogeneous spread of financial instruments among a vast number of companies, in the case of an emergency, it may put a negative effect on the return, but it is hardly probable. Controversially, according to the portfolio theory, it is highly likely that the return will be even positive considered that the negative deviation could be covered and outbalanced by the influence of the favorable events which will occur in the rest of securities included in the portfolio.
2. Systematic (country) risk
However, such risk hedging procedure could be only applied to the specific risk elimination. Such way of diversification is unable to preclude the systematic risks, taking into account that their influence is considered as widespread at all financial instruments, even regardless the economic entity. Therefore, the systematic risk can be considered as undiversified.
To be more clear, it refers to the uncertainties associated with investing in the broader market. Systematic risk, also known as "undiversifiable risk," "volatility" or "market risk," affects the overall market, not just a particular stock or industry.
The examples of such risks are such events as wars, recessions, etc. It worths mentioning, that the definition "systematic risk" has the relation nature.
For instance, if to create a portfolio within a framework of a one country, the systematic risk will be induced by the global factors, affecting overwhelmingly the country market environment.
However, if we fall back on creating the foreign portfolio - going global, it will enable us to eliminate the country risk and transform it into the specific - as the other economics events will shape such environment.
1.3 Common Types of Risks
It is vital to note that every asset class or investment strategy is subject to various risks that affect their performance in different market cycles.
Bonds are subject to credit risk, default risk, and interest rate risk.
1. Credit Risk
Credit risk can be defined as 'the potential that a contractual party will fail to meet its obligations in accordance with the agreed terms'. In other words, it refers to the possibility that a particular bond issuer will not be able to make expected interest rate payments and/or principal repayment. Credit risk is also variously referred to as default risk, performance risk or counterparty risk.
To be more precise, one can say that such type of risk is closely connected to the financial insolvency. Such kind of risk is more likely to be applied to such securities with tight liabilities, in particular to bonds and notes. To some extent, they could be also referred to such securities as shares, but the terms of financial insolvency is not too obligatory - the decision to pay dividends or not is kind of open to question.
2. Interest rate risk
Interest rate risk is common for all bonds, particularly the ones with a fixed rate coupon. Interest rate risk is the vulnerability of current or future earnings and capital to interest rate changes. Fluctuations in interest rates affect earnings by altering interest-sensitive income and expenses. Excessive interest rate risk can threaten liquidity, earnings, capital, and solvency.
3. Inflationary Risk
Also known as purchasing power risk, inflationary risk is the chance that the value of an asset or income will be eroded as inflation shrinks the value of a country's currency. That is to say, it is the risk that future inflation will cause the purchasing power of cash flow from an investment to decline. The best way to fight this type of risk is through appreciable investments, such as stocks or convertible bonds, which have a growth component that stays ahead of inflation over the long term.
4. Call Risk
Call risk is specific for bond issues and refers to the possibility that a debt security will be called prior to maturity. Call risk usually goes hand in hand with reinvestment risk, discussed below, because the bondholder must find an investment that provides the same level of income for equal risk. Call risk is most prevalent when interest rates are falling, as companies trying to save money will usually redeem bond issues with higher coupons and replace them on the bond market with lower interest rates issues. In a declining interest rate environment, the investor is usually forced to take on more risk in order to retain the same income stream.
5. Reinvestment risk
The possibility that the cash flows produced by an investment will have to b e reinvested at a reduced rate of return. For example, the owner of a certificate of deposit faces the risk that lower interest rates will be in function when the certificate matures and the funds are to be reinvested.
6. Liquidity risk
Liquidity risk is the risk that a business will have insufficient funds to meet its financial commitments in a timely manner. The two key elements of liquidity risk are short-term cash flow risk and long-term funding risk.
This kind of risks can be referred to various types of financial securities: from over the counter securities up to blue chips.
7. Gearing risk
Gearing risk or the use of borrowed money can increase the exposure to the underlying investments and as such can magnify losses as well as gains. The gearing ratio measures the proportion of a company's borrowed funds to its equity. The ratio indicates the financial risk to which a business is subjected, since excessive debt can lead to financial difficulties. A high gearing ratio represents a high proportion of debt to equity, and a low gearing ratio represents a low proportion of debt to equity.
Stocks are subject to market risk or the risk of loss due to adverse company, general economic decline. Besides the fluctuations can be caused by social, political, and economic conditions, currency fluctuations
1. Currency/Exchange Rate Risk
Currency risk arises when obligations an entity has promised to fulfil are in a different currency from the assets it holds to cover those liabilities. This exposes the entity to fluctuations in exchange rates. In particular, it poses a threat if the value of the currency pricing the liabilities appreciates relative to the currency of the assets.
2. Social/Political/legislative Risk
Risk raised from various social or political disputes of this or that country. Political risks are associated with government actions which deny or restrict the rights of an investor/owner. Political risks include war, revolutions, government seizure of property and actions to restrict the movement of profits or other revenues from within a country
3. Sovereign Risk
Risk of the financial insolvency of the security issuer. In other words, it happens when the foreign state proclaims itself as a going in concern institute. The primarily factor of this states for high level of foreign debt and the inability to repay it.
4. Municipal risks
The Sovereign Risk is subject to risks division. The municipality, can be considered as the government agency, which borrows funds from the higher statelevel authorities. The inability to pay these funds is considered as municipal risks.
1.4 Risk Measurement Procedure. One-Factor Model
Measuring the risks of every type has no value unless put in relation with the yield, i.e. optimizing the risk-return ratio.
Thus one needs to calculate the rates of return first and further on relate them to the potential risk. There are a number of mathematical, statistical measures and measurement procedures.
The most important among them are: range measuring; standard deviation; and coefficient of variance.
We consider the return as a random variable, and the risk (sigma) - the deviation from the expected value, then risk could be measured by standard
deviation.
If the expect return is closely connected with expectancy, then the risk will be attributed by the deviation from that return, in other words dispersion and standard deviation.
It goes without saying that we are highly interested in the negative deviation of the variable. However, in the case of accepting the hypothesis of symmetric spread, the negative deviation has a positive equivalent, and as the measure of risk we can use such measure as dispersion.
Ultimately, in the modern portfolio theory, the optimized portfolio is based on two pivotal characteristics.
1. Expectancy of a random variable - expected return
2. The dispersion (standard deviation - risk)
In the portfolio theory, the factor market models are commonly used with the primary goal of having an opportunity to split the systematic and specific risk.
Frequently, while calculation of the portfolio risk, the multifactor model is used, considering a set of macroeconomic variables.
In the primitive case, we use the one-factor model, whereas the risk of the portfolio is splited to the systematic and specific one.
Mathematically, we can achieve such condition by division of our return into two summands and get to the expression:
R Systematic+ R Unsystematic
The R Systematic could be adduced by the overall market return, with the help of introduced coefficient p.
To calculate RSystematic the following formula is used:
R Systematic = ¡*rsystematic
where 3 - correlation ratio of our instrument with the market one, i.e. the influence of market risk on our value.
The large values of beta coefficient are the proof of this tool being vulnerable to the market volatility.
There are 4 possible value of beta:
1. ¡>1: in this case factors affecting market profitability spawn even more changes in return. These factors called "aggressive".
2. ¡=1: the market factor still effects the market return, but without causing any extra deviation.
3. ¡<1: one can say that the return is slightly impacted by systemic risk. In other works, such investment portfolio can be considered as secured.
4. ¡=0: this cancels the correlation between market risk and the profitability of portfolio.
However, one should mind that this tool still can't be considered as completely riskless. While the systemic risk is decreasing, the specific one is linearly increasing.
Now we consider the second summand from the expression (1):
R unsystematic = a + s
where a - expectancy of the random variable; s - deviation from the
mathematical expectancy; e = 0.
We assume that R systematic h R unsystematic are independent.
As a result, we get the following one-factor model equation
R = a + (fi*rsystematic) + s
It can be represented as the linear regression model.
The parameters of such model (a, P) could be evaluated with the help of the least squares method.
2.1 The Practical Evidence. The Analysis of Country Risk' Effect for Two
Russian Companies
The analysis beta coefficient (market risk) influence on the risk and return of the Magnit and Lukoil companies within the scope of Russian Federation.
This research was aimed at the formation of one-factor model, using the shares of 2 Open Joint Stock Companies, listed on the MSE (Moscow Stock Exchange).
1. "Magnit"
"Magnit" is the grocery retail chain in Russia.
The revenue of the company for 2015 is 950 613,34 million RUR.
The company is also a major employer in Russia. The total number of "Magnit" employees is over 260 000 people.
Market capitalization expressed in mln RUR is 7 456,929.92
2. Lukoil
Lukoil is one of Russia's largest oil companies. It is also one of the largest producer of oil. In 2012, the company produced 89.856 million tons of oil (1.813 million barrels) per day.
Sales revenue in 2015 counted tr 3,44 RUR.
The total number of "Lukoil" employees is over 110000 people.
Market capitalization is bn RUR 31,18.
In order to calculate beta coefficient, we use the data on the market return by the MICEX Index which is formed by MSE (Moscow Stock Exchange).
MICEX Index is the capitalization-weighted composite index calculated based on prices of the 50 most liquid Russian stocks of the largest and dynamically developing Russian issuers presented on the Moscow Exchange.
MICEX Index was launched on September 22, 1997 at basic value 100. The Index is calculated in real time and denominated in Russian rubles.
With the purpose of calculation, we have taken the prices range on deals concluded on the 1st day of each month, for the period from 2010 to 2016 using the source www.finam.ru.
On the basis of share values and the index figure, we have counted the revenue of each share on the 1 date of each month:
Rt = (Pt - Pt-1)/ Pt-1
where (Pt - Pt-1) - is the difference between price of sale and purchase.
In fact, to me more accurate, this common formula should have implied the dividends component. However, the latter has been neglected since the dividends fluctuations are relatively small as compared to the fluctuations of prices.
The formula used to calculate the profitability of the market MISEX index is given below:
R market = (It-It-1)/It-1
Thus we gained a sample of 78 spots.
The regression line was drawn through the points in the space of the both market and financial instrument profitability.
The conducted analysis represents the following results:
If we consider Magnit company, its beta coefficient (¡) = 1,14%.
Basing on this data we can conclude that the price fluctuations of Magnit company are even more drastic that market one.
It is obvious that Magnit portfolio is more likely to suffer from the specific risk rather than the systematic one.
Therefore, one can declare, that the Magnit portfolio can be related to the 2-tier equities. In other words, such companies as Magnit go with speculative investors.
It is non-surprising, that the situation with the Lukoil Company will differ in a considerable extent. It goes without saying that such company as Lukoil, covering a far more market share goes along with its high reputation.
Our suppositions were completely fortified by the deduced Beta coefficient, which is represented at the level of 0,82%.
Evidently, since p<1, one can say that the return is slightly impacted by systemic risk. In other works, such investment portfolio can be considered as secured. Moreover, that justifies the generally accepted fact of Lukoil stock being at high level for a long time, which is considered as "blue chips".
It can be concluded that such investment portfolio is comprised by one of the top companies.
The graph № 1 below visualizes the empirical data of conducted analysis.
If to compare the dispersion of Magnit and Lukoil, the "blue" and "orange" bubbles respectively, it can be concluded that, that Magnit investment portfolio is more unstable, for the reason of obvious fluctuations.
Moreover, the Magnit curve slope is much steeper than Lukoil one, which indicates the fact that Magnit investment portfolio is more aggressive and riskiness that the Lukoil one.
Graph 1 - One-factor market model (Lukoil, Magnit)
One-factor Market Model (Lukoil, Magnit)
• x (return of Magnit) • x (return of Lukoil) -forecasted Y of Magnit-forecasted Y of Lukoil
CONCLUSION
The theoretical part of the article provides the definition and classification of risks. Besides, there is stated a comparative analysis of two core types of risks: specific and systematic.
Specifically, the one-factor model implying specific and market risk is described.
The significance of the practical part of the survey is that it exhibits the importance of beta instrument for making investment decisions.
The provided assessments of two Russian companies based on actual data are a clear illustration of the gravity of this model in designing business strategies.
List of references:
1. Ribeiro, R.D. Country Risk Analysis, George Washington University. [PDF ebook version]. (URL https://www2.gwu.edu/~ibi/minerva/spring2001/renato.r..). (Accessed 20 November 2016).
2. Conklin, D. Analyzing and Managing Country Risks, in Ivey Business Journal, January/February 2002. [PDF e-book version]. (URL http://iveybusinessjournal.com/publication/analyzing-..). (Accessed 13 November 2016)
3. Giles, D. Large and Small Regression Coefficients, in Econometrics Beat, August 10, 2013. (URL http://http://davegiles.blogspot.ru/2013/08/large-and-small-..). (Accessed 16 November 2016)
4. Chris Tofallis, C. Investment Volatility: a Critique of Standard Beta Estimation and a Simple Way Forward, Department of Management Systems, The Business School, University of Hertfordshire. [PDF e-book version]. (URLhttps://arxiv.org/pdf/1109.4422.pdf). [Accessed 10 November 2016]
5. Karacic, D., Bukvic, I. B., Research of Investment Risk Using Beta Coefficient. / Faculty of Economics, University of Osijek, Republic of Croatia. [PDF e-book version]. (URLhttps://bib.irb.hr/datoteka/837405.IMR10a38.pdf). [Accessed 14 November 2016]
Krasnoperova V. Shchetkina A. Martyn D.
Gizbrekht E.
2nd year students of the Faculty of tourism, service and sport
Mlynar E.
Senior Lecturer, Department of foreign languages
Sochi State University Sochi, Russia
THE ROLE OF THE HOTEL INDUSTRY IN THE WORLD ECONOMY
The hotel industry is a sector of business that revolves around providing accommodations for travelers. Success in this industry relies on catering to the needs of the targeted clientele, creating a desirable atmosphere, and providing a wide variety of services and amenities. The foundation of the hotel industry is, of course, the business of providing lodging. Travelers depend on hotels to supply a secure, pleasant place for a temporary stay.
Quality is perhaps the most variable feature of the hotel industry. Modest hotels charge minimal fees and provide only the most essential amenities, whereas luxury hotels geared toward wealthy travelers can be extremely expensive. The most basic hotels might offer small, one-bedroom units, but pricier hotels come equipped with vast suites. Both extremes on this spectrum have clients, a fact which serves to emphasize the massive reach of the hotel industry. As long as the rooms are filled and the customers receive the services they anticipate, a hotel, no matter how big, small, affordable or luxurious, can consider itself successful.
Many hotels have in-house bars and restaurants that require their own staff. A critically acclaimed restaurant can earn money for a hotel even if its patrons are not room-renting guests. It is also common for hotels to have pools, fitness facilities, or activity centers available for guests seeking recreation. Some companies even offer valet and laundering services, Internet access, and child care.
Featuring all of these additional perks is a two-fold strategy within the hotel industry. The convenience or luxury of special amenities makes a hotel seem more appealing to guests, and by including them the management is hoping to make their location appear superior to competitors. Also, by providing a wide variety of services in-house, the hotel management stands to benefit financially. Hotels are certainly necessary all over the world, wherever there are travelers who need lodging.
Hostel
The hostel industry is growing rapidly in many cities around the world,
