DOC

Alberts Auzi- Investment decision-making under conditions of ---

By Lewis Greene,2014-08-11 18:56
7 views 0
Alberts Auzi- Investment decision-making under conditions of ---

    RIGA TECHNICAL UNIVERSITY

    Alberts AUZIƅŠ

    INVESTMENT DECISION-MAKING UNDER

    CONDITIONS OF RISK

    Doctoral Dissertation Compendium

    Riga 2007

    ANNOTATION

    The Dissertation deals with the development of a new comparatively universal method for investment decision-making under conditions of risk. In this Dissertation, conditions of risk mean the conditions where the outcome of the decision is not known certainly, but the possible outcomes of the decision are known and the probabilities of occurring these outcomes are known.

    As a result of the research carried out within the frame of the Dissertation, a new method - the method of the application of probabilities of not occurring (occurring) outcomes of certain extent - has been developed. In its essence, this method is a universal method for making commercial investment decisions under conditions of risk. Moreover, this method is applicable to making other economic decisions (decisions aimed at increasing the decisionmaker's welfare) under conditions of risk. Thus, this method has a wide scope of application.

    In the Dissertation, the existing methods, approaches and techniques for investment decision-making have been investigated, as well as general aspects of investment analysed, especially the issues related to the specifics of risk.

    The method of the application of probabilities of not occurring (occurring) outcomes of certain extent has been built on the basis of risk profile approach. By developing this method, the issue of a full-fledged use of the information provided by risk profile in investment decision-making was solved. For this purpose, the set of indicators calculable on the basis of risk profile has been developed. This set of indicators is comprised of probabilities of not occurring (occurring) outcomes of certain extent.

    The method of the application of probabilities of not occurring (occurring) outcomes of certain extent has been practically approbated by applying it to the evaluation of a project of afforestation. The evaluation of the project of this kind by traditional methods would have been very problematic.

    The total volume of the Dissertation is 176 computer-aided pages. In the Dissertation there are 22 tables, 30 figures and 71 formulae.

    GENERAL REVIEW

    General Essence and Topicality

    Investment decision-making under conditions of risk has been topical in the economy since ancient times. The topicality of this issue in the world has increased substantially by developing economic systems that are based on the principles of market economy.

    In Latvia this issue has become topical since the introduction of the principles of market economy in the economy of Latvia after the regaining of independence. This issue has especially become topical after the recent shocks in the world's economy (Asian crisis, Brazilian crisis, mass bankruptcies in IT industry, etc.). The topicality of the issue has been also promoted by the structural changes in the economy of Latvia (the emerging of new industries and market gaps, the stagnation and even disappearing of traditional industries, etc.) and the availability of various investment opportunities (the local public fund market, investment funds, trust operations, etc).

    The topicality of the issue on investment decision-making under conditions of risk is not expected to decrease in the foreseeable future because at present observable tendencies do not indicate that there are some oncoming fundamental changes in the current economic system that would lower the necessity to take investment decisions under conditions of risk.

    Investment decisions have a significant position among economic decisions. The welfare of investors depends on the outcomes of these decisions. Now the issues related to the investment decision-making under certainty are well investigated in economic theory. However, investment decision-making under conditions of risk is insufficiently investigated. Therefore the available methods and approaches for investment decision-making under conditions of risk are specific (oriented to certain types of decisions) with incomplete theoretical foundation, and they lack universality. Accordingly the making of investment decisions in practice is complicate because the main part of investment decisions has to be made under conditions of risk. Hence, it is necessary to continue the research of this issue further and to develop new methods.

    The goal of the Dissertation is, by investigating existing methods for investment decision-making and the issues related to the investment decision-making under conditions of risk from the positions of economic theory, to develop a new method for investment decisionmaking under conditions of risk that would has comparatively complete theoretical foundation and would be in essence universal enough. According to this goal, the following tasks have been solved in the Dissertation:

     the research of exiting methods, approaches and techniques for investment

    decision-making;

     the analysis of measures applicable to investment decision-making under conditions

    of risk and the determining of the suitable set of measures for the developable

    method;

     the formulation of principles for investment decision -making on basis of the

    determined set of measures and the formulation of a new method for investment

    decision-making on basis of the formulated principles;

     the research of aspects related to the developed method for investment decision-

    making and the developing of appropriate theoretical solutions to promote the wider

    use of the developed method:

     the practical approbation of the developed method by using an investment project

    that is complicate from the potions of using traditional methods.

    The Object and Subject of the Research

    The Object of the Research is the realisation of investment process under conditions of risk and the theoretical and practical issues related to it.

    The Subject of the Research is method for investment decision-making under conditions of risk.

    Research Methods

    In the research there are used generally accepted scientific qualitative and quantitative methods, including monographic method, analysis and synthesis, logical constructive, mathematical and statistical methods.

    Limitations

    Investment decision-making under conditions of risk embraces very extensive range of issues. Due to limited volume of the Dissertation and the specifics of the subject of the Dissertation the following limits are set to the Dissertation:

     in the Dissertation there have been performed only the indicative analysis of the

    economic significance of investment decisions because the more detailed analysis of

    the issue does not refer to the goal of the Dissertation;

     in the Dissertation investment decision-making under conditions of risk and the

    issues related to it are discussed only from the positions of one economic agent -an

    investor (a decision maker);

     commercial investment decision-making is only examined in the Dissertation;

     the general essence of risk profile and the economic interpretation of risk profile are

    investigated, but technical aspects (aspects of sensitivity analysis, risk simulation,

    etc.) of constructing risk profile are no investigate in the Dissertation;

     only one case of the practical approbation of the developed method is discussed in

    details in the Dissertation.

    The theoretical basis and methodological basis of the Research

    The theoretical and methodological basis of the Dissertation is formed by the

    theoretical and practical findings of Latvian and foreign scientists (K.Didenko, N.Lace, V.Nešpors, J.F.Jaffe, F.H.Knight, O.Morgenstern, J.Neumann, S.A.Ross, P.A.Samuelson, R.W.Westerfield, etc.) in the field of investment decision-making and related fields.

    In the Dissertation there are used works and scientific publications of Latvian and foreign scientists, the data published by the Central Statistical Bureau of Latvian Republic, the data published by the Latvian Bank and the Financial and Capital Market Commission, the materials published by the LR's cabinet of ministries and ministries, resources published in the Internet, LR's legislative acts.

    The scientific novelty of the research

    The main scientific novelty of the Dissertation is the developed method for investment decision-making under conditions of risk - the method of the application of probabilities of not occurring (occurring) outcomes of certain extent. The more essential elements of this novelty are the following:

     the co-use of several probabilities of not occurring (occurring) outcomes of definite

    unfavourable extent;

     the developed scheme for the evaluation of investment projects based on the

    evaluation investment projects according to all the measures incorporated into the

    method's set of measures;

     the developed methodology to construct indifference curves towards the

    probabilities of not occurring (occurring) outcomes of definite unfavourable extent;

     the use of characteristics of function graphics transformation (deformation) in risk

    profile approach;

     the developed solutions for the evaluation of techniques for decreasing the level of

    risk, the evaluation of options, the evaluation of collective investments.

    The novelty of the Dissertation is also:

     the specifying of concept of risk and the improvement of the classification of

    investments;

     the improvement of the classification of types of investment decisions;

     the defining of the concept of the technique for decreasing the level of risk. The Approbation and practical application of the most relevant results of the research

    The most relevant results of the research are presented and discussed at several scientific conferences.

    The developed method of the application of probabilities of not occurring (occurring) outcomes of certain extent has been practically approbated in peasant farm "Oškalni" by evaluating the project of afforestation. The elements of this method have also been used in the consulting company "Edo Consult". The author also participate in a project "Theoretical price of land and theoretical rent of land that is formed by acreage payments not related to production and the breakdown of these acreage payments in several economic groups" realised by Latvian State Institute of Agrarian Economics in 2005.

    The results contained in the Dissertation and published can be used for practical making various commercial investment and other economic decisions under conditions of risk. Publications

    Since 2001 the total number of publications is 13 including the following publications published in international generally recognized and reviewed collections of scientific proceedings:

    1. Use of probabilities in investment decision-making under conditions of risk //

    Problems of development of national economy and entrepreneurship: proceedings of

    the international scientific conference: Riga 3-11 October 2003. - Riga: Publishing

    House, 2004. - p. 25-30.

    2. Evaluation of the economic efficiency of the use of methods of reduction of risk //

    Problems of development of national economy and entrepreneurship: proceedings

    of the international scientific conference: Riga 14-16 October 2004. - Riga:

    Publishing House, 2005. - p. 10-22.

    3. Evaluation of Economic Effectiveness of Using Insurance // Problems of

    development of national economy and entrepreneurship: proceedings of the

    international scientific conference: Riga 14-16 October 2004. - Riga: Publishing

    House, 2005. - p. 23-33.

    4. Valuation of Options by Using the Method of Net Present Value // Problems of

    development of national economy and entrepreneurship: proceedings of the

    international scientific conference: Riga 13-15 October 2005. - Riga: Publishing

    House, 2006. - p. 10-18

    Reports in scientific and practical conferences and seminars: th1. 44 International scientific conference of Riga Technical University "Problems of

    development of national economy and entrepreneurship". - Riga, 9-11 October 2003. th2. 45 International scientific conference of Riga Technical University "Problems of

    development of national economy and entrepreneurship". - Riga, 14-16 October

    2004. th3. 46 International scientific conference of Riga Technical University "Problems of

    development of national economy and entrepreneurship". - Riga, 13-15 October

    2005. th4. 47 International scientific conference of Riga Technical University devoted to the th40 anniversary of Faculty of Engineering Economics "Problems of development of

    national economy and entrepreneurship". - Riga, 21-23 September 2006.

    5. International conference „ Agricultural insurance as a tool for risk management"

    (conferencia internacional: „E1 seguro agrario como instrumento para la gestion de

    riesgos"). - Madrid, 15-17 November 2006.

    The Structure of the Dissertation

    The Dissertation is an independent research and it consists of Introduction, Principal Text, Conclusions and Proposals, List of Bibliography, and Appendices.

     The principal text comprises 4 parts:

    1. ECONOMIC SIGNIFICANCE OF INVESTMENT DECISIONS.

    2. ANALYSIS OF THEORETICAL ASPECTS OF INVESTMENT DECISION-

    MAKING.

    3. METHOD OF USE OF PROBABILITIES.

    4. PRACTICAL APPROBATION OF METHOD OF USE OF PROBABILITIES

    In the first part the author has carried out an indicative analysis of economic significance of investment decisions. The measures that approximately characterise the general economic significance of investment decisions, e.g. the share of gross capital formation in gross domestic product (GDP) and the structure of gross capital formation, the structure of non-financial investment by different features, stock market capitalisation to GDP ratio, have been examined.

    In the second part there have been analysed the general aspects of investment, basic methods for investment decision-making, methods for investment decision-making under conditions of risk. Special attention is paid to the issues related to the specifics of risk - the

    concept of risk and uncertainty, the measurement of risk and return, investor's attitude towards risk, etc.

    The third part deals with the method of the application of probabilities of not occurring (occurring) outcomes of certain extent developed by the author. In this part there have been formulated the general principles of the method, carried out the analysis of the measures useable in the framework of the method, developed the general formulation of the method, discussed additional aspects related to the use of the method.

    The fourth part discusses the practical approbation of the method of the application of probabilities of not occurring (occurring) outcomes of certain extent developed by the author. In this part the practical approbation of the method in peasant farm "Oškalni" has been examined in details.

    In conclusion, there are presented conclusions and proposals obtained by the research.

    The theses presented for the defence of the Dissertation:

     a mean net present value and probabilities of not occurring (occurring) outcomes of

    certain extent form the sufficient set of measures for investment decisionmaking

    under conditions of risk;

     the developed method of the application of probabilities of not occurring (occurring)

    outcomes of certain extent is a comparatively universal method for commercial

    investment decision-making under conditions of risk;

     it is also possible to use net present value method for the evaluation of options;

• is possible to apply the method of the application of probabilities of not occurring

(occurring) outcomes of certain extent to making other economic decisions under

conditions of risk.

Report this document

For any questions or suggestions please email
cust-service@docsford.com