Capital Budgeting Techniques

Sharpe, Treynor and Sortino Ratio! 3 Measures of Risk Adjusted Returns.. Let's decode in this post! SAVE this post for future reference SHARE this with your network to help them. First up, what is the need to look at Risk Adjusted Returns? When comparing portfolios of various Fund Managers, most people rely on Returns. But Returns cannot be looked at in isolation. Understanding the risk taken to generate those returns is also to be considered A fund manager could have taken excessive risk to generate returns. For example, high concentration in a single risky stock. If it does well, returns could be very high, but this could be purely due to luck. To standardize returns against risk, we use Risk Adjusted Returns Also, let us define Excess Return. Excess Return is given by Portfolio Returns minus Risk Free Rate. One can get Risk Free Returns without taking any risk. Thus, the fund manager is assumed to be taking risk only for the Excess Return. Let us now decode the metrics. ✅ Sharpe Ratio - This is given by Excess Return / Standard Deviation of Fund Returns - (Portfolio Return - Risk Free Rate)/ (Standard Deviation of Portfolio Returns) - Higher the better, as a higher number denotes higher excess return generated per unit of risk ✅ Treynor Ratio - This is given by Excess Return / Portfolio Beta - (Portfolio Return - Risk Free Rate)/ (Portfolio Beta) - Higher the better - Usually funds appearing higher on Sharpe Ratio will also rank higher on Treynor, unless they are not diversified properly ✅ Sortino Ratio - This is slightly complicated - Standard Deviation does not distinguish between upside and downside risk - In long only Investing, upside risk is not really a risk - So we come with a concept of Downside Standard Deviation - This is the standard deviation as calculated by using returns on down days - Now the Sortino Ratio is calculated as (Portfolio Return - Risk Free Rate)/ (Downside Standard Deviation) - Once again, higher the better - This tells you which portfolio is doing better on a risk adjusted basis when the returns are negative When investing in funds, it is important to consider these parameters! One of these numbers is also mentioned on all equity fund factsheets. Do you know which one? ------ Peeyush Chitlangia, CFA I help you decode complex financial concepts!

I've been dedicating time to collecting grant opportunities for impact-driven companies. I couldn't resist using AI tools to dive deep into the data and analyze where the money is actually flowing... The most surprising finding hit me immediately: -Innovation and Development grants (35% and 33% respectively) vastly outnumber traditional "aid" categories. -Out of 226 grants analyzed (totaling $402M), For-profit organizations now have access to 84% of opportunities. But here's where it gets really interesting for our regions: -🌎 LATIN AMERICA (52 opportunities, 23% of total) The sweet spot? Digital Innovation dominates the landscape. If you're building fintech, edtech, or cleantech solutions in LATAM, you're sitting in the hottest sector for grant funding. -🌍 AFRICA (53 opportunities, 23.5% of total) Climate Action and Global Health lead the charge. The funding priorities reflect urgent continental needs, but there's a strategic opportunity for organizations that can bridge sectors. Think climate-health nexus or education-climate solutions. -The game-changer insight? Few grants explicitly require impact measurement, yet our analysis shows the highest-value grants tend to demand it. This is your competitive advantage: while most organizations scramble to meet basic legal requirements (35% require legal registration, 29% years of operation), investing in robust impact measurement frameworks sets you apart. My strategic recommendations for both regions: 1. Don't just apply to grants in your exact sector. The data shows cross-sector solutions (like digital innovation for climate action in LATAM, or health-tech for education in Africa) are hitting multiple funding streams. 2. Think globally, not just locally. With global grants representing 35% of all opportunities, don't limit yourself to regional funding. Go international from day one. 3. Frame your impact through a digital or AI lens, even if it's not primarily a tech solution. Given digital innovation and AI's dominance in funding opportunities, positioning your work within digital transformation narratives can unlock significantly more funding doors. Want the full report? Comment and I send it out in a DM:  - ➡️ 🇬🇧 "English report" for the complete analysis in English  - ➡️ 🇪🇸 "Reporte en español" for the Spanish version 🔺 Disclaimer: This analysis is based on grant opportunities we've manually collected, so there may be selection biases we cannot control (you'll notice it's heavily focused on companies rather than traditional NGOs). This isn't academic research, but our own analysis aimed at helping the entrepreneurship and social innovation ecosystem. Courtney Sipes Shoshana Grossman-Crist #Grants #ImpactInvesting #SocialEntrepreneurship #LatinAmerica #Africa #Innovation #DigitalTransformation #ClimateAction #GlobalHealth

Last week I wrote about running a proper fundraising process. This week is about the decisions most founders get wrong: whether to raise at all, how much, from whom, and what kind of capital. First, raising external capital should be a last resort. Can you grow slower, stretch runway to profitability? Are there grants available? Can you take debt instead of equity to minimise dilution and maintain autonomy? These are the questions worth sitting with before you open a round. Second, do your due diligence on investors. Many founders I talk to are surprised by this. Once investors are on your cap table, it can be a venture-lifelong marriage. Bad investors can make your life hell, hinder decision making, create extra work, or even kill the company. Speak to their portfolio company founders about how they were treated in the good and bad times, and what value they really added versus the promise. Third, raise less than you think you need. A large round and high valuation feels like validation, but it often comes with heavy dilution, super-high expectations, and pressure that compounds founder stress. Far better to raise a smaller amount fast and oversubscribe than face a never-ending process. My preference is milestone-based raising. Raise what you need to hit clearly defined milestones over 18 to 24 months. Under promise, over deliver. Build trust and the next raise happens at a higher valuation with less dilution. Fourth, be deliberate about who you raise from. Most founders chase the biggest name or engage whoever knocks on the door first. Mistake. Prioritise investors who can genuinely help, have strong networks in your sector, can access the best talent, and can introduce partners and customers at C level. At PropertyGuru, that discipline allowed us to select the right partner at each stage, rather than whoever could write the biggest cheque. For climate founders specifically: what kind of capital do you actually need? Climate businesses are mostly physical, with upfront hardware requirements. Equity is expensive for that. Ideally you want a capital stack. Grant capital to fund R&D and de-risk first deployments. Equity to build the IP, team, brand, and operating platform. Debt to finance working capital and the assets. The challenge is that grant and debt capital remain scarce, immature, and heavy on admin in emerging markets. It is one area we collectively need to fix if we want to accelerate green adoption. Founders obsess over valuation. The ones who build the best companies obsess over funding strategy and process. This is part of a weekly series on scaling lessons from building PropertyGuru to NYSE and backing 40+ climate ventures. Follow along if useful.

◾ High volatility and low returns have weighed on risk-adjusted performance across US equity indices so far this year. The S&P 500’s 2% return year-to-date and volatility of 17 have yielded an annualized risk-adjusted return ratio of 0.1, well below the median annual reading since 1990 of 1.0. ◾ We define a stock’s prospective risk-adjusted return as the return to the stock’s consensus 12-month price target divided by its 6-month option-implied volatility. Currently, the median S&P 500 stock is expected to post an 11% return to its 12-month consensus price target with a 6-month implied volatility of 28, yielding a prospective risk-adjusted return of 0.4. ◾ Within the S&P 500, our High Sharpe Ratio basket (ticker: GSTHSHRP) contains companies with the highest prospective risk-adjusted returns relative to their sector peers. The basket’s median constituent has a prospective risk-adjusted return of 0.9. Our High Sharpe Ratio basket has posted a YTD return of 3%, outperforming both the cap-weighted S&P 500 (2%) and equal-weighted S&P 500 (1%). The basket contains 50 S&P 500 stocks and is sector-neutral and equal-weighted. ◾ We rebalance our High Sharpe Ratio basket in this report. Consensus price targets indicate that the median stock in the basket will generate more than two times the price return of the median S&P 500 stock (29% vs. 11%) with only slightly higher implied volatility (30 vs. 28). Stocks in the basket with the highest prospective risk-adjusted returns include LKQ, VTRS, and OMC.

The Cost Efficiency of Retail Funding Over Wholesale Funding: A Closer Look In the dynamic world of banking finance, the debate on funding sources is ever-present. Among these, retail funding and wholesale funding stand out as primary channels for banks to gather the capital required to finance lending activities. It is essential to understand the nuances of both to appreciate why retail funding often emerges as a cost-effective choice for financial institutions. Retail funding, sourced from deposits made by the general public, presents a relatively stable and less expensive source of capital. This stability is attributed to the loyalty and trust of retail customers, who are less likely to withdraw their deposits hastily, even in times of financial uncertainty. The cost advantages of retail funding are underscored by its lower interest rates compared to those offered on wholesale funds. Wholesale funding, on the other hand, involves raising capital through the financial markets or institutional investors, which typically demands higher interest rates, reflecting the greater risk perceived by these sophisticated investors. Moreover, the regulatory landscape plays a pivotal role in shaping the cost dynamics between these two funding sources. Retail deposits are often insured by government schemes, which enhances depositor confidence and reduces the bank's cost of capital. In contrast, wholesale funds, being market-driven, are subject to the volatility and pressures of the financial markets, leading to potentially higher costs during periods of market stress or liquidity crunches. Another aspect to consider is the relationship management and administrative costs associated with each type of funding. Retail funding, while requiring a broad network of branches and customer service facilities, capitalises on long-term customer relationships and loyalty. Wholesale funding, albeit less reliant on physical infrastructure, necessitates sophisticated risk management and negotiation skills to secure favourable terms, adding to the indirect costs. It is, however, important to recognise the strategic role of both funding sources in ensuring a diversified and robust capital base for banks. While retail funding offers cost advantages and stability, wholesale funding provides flexibility and access to large sums of capital quickly. A prudent and conservative approach would be to maintain a balanced mix of both, ensuring the bank can navigate through varying economic cycles with resilience. In conclusion, the preference for retail funding as a cheaper option is not without reason. Its inherent cost efficiency, underpinned by stability, regulatory support, and lower interest rates, makes it an advantageous choice for banks aiming to optimise their funding costs. However, the importance of a diversified funding strategy cannot be overstated, highlighting the need for a holistic understanding of funding mechanisms within the banking sector.

Africa is NOT a Country And Treating It Like One Could Cost You Millions. Last week I said it, and I’ll say it again: the biggest mistake investors make is thinking Africa is a monolith. This infographic from Afridigest is the perfect explanation for why that mindset is so dangerous. If you are building or investing in Fintech, you are navigating FOUR market archetypes. You cannot copy-paste a winning strategy from Lagos to Nairobi. The infrastructure dictates the product: ➡️ Banking Bastions (South Africa, Morocco): Compete with entrenched banks; products must inspire trust.  ➡️ Mobile Money Mavens (Kenya, Ghana): Telcos are gatekeepers; if you don’t integrate mobile money, you’re invisible.  ➡️ Transformation Titans (Nigeria, Egypt): High-velocity fintech frontiers; startups shape the economy in real-time.  Now, this doesn't mean we should ignore the push for unity. The AfCFTA (African Continental Free Trade Area) is the most ambitious project on the continent. With the rollout of the Digital Trade Protocol and the Pan-African Payment and Settlement System (PAPSS), we are finally building the pipes to connect these 54 markets. The reality: AfCFTA is the goal; Afridigest’s map is the starting line. Bottom Line for 2026: To win in African Fintech today, you need a "Dual-Track" Strategy ✅ Respect the Archetype: Build for the specific infrastructure of the market you are in now. ✅ Prepare for Integration: Ensure your tech stack is ready for the cross-border interoperability that the AfCFTA promises. Capital alone isn’t enough. Context is everything. Don’t wait for a unified Africa to start building, but don’t build so narrowly that you’re trapped when the borders finally open.

What happens when African fund managers lead the investment strategy? In a recent CNBC Africa interview, DOROTHY NYAMBI, CEO of MEDA (Mennonite Economic Development Associates) shared powerful insights into how the Mastercard Foundation Africa Growth Fund is reimagining what it means to put African capital in African hands. The Fund demonstrates that capital can be reimagined and redirected to serve African fund managers, entrepreneurs, and especially women, using a gender-lens and locally led investment model that: 1. Rethinks gender-lens investing • It’s not about ticking diversity boxes- it’s about empowering women with real agency to influence investment decisions and strategy. • The Fund emphasizes patience and local context, shaping investment approaches to suit real-world African realities rather than imposing external templates. 2. Builds local ecosystems • Local leadership matters. The Fund invests in and supports African and female-led managers, ensuring they are not just invited to the table- but leading it. • It enables fund managers to spearhead strategy and draw in other stakeholders, strengthening the investment ecosystem from within. 3. Focuses on returns “on inclusion” • The Fund measures more than financial returns. It prioritizes social impact, like job creation and economic empowerment. • The goal: dignified, sustainable employment, particularly for African youth, moving beyond short-term fixes. 4. Is intentional about youth and women inclusion • The Fund challenges outdated narratives that investing in women is riskier, instead proving the financial viability of women-led enterprises. • It applies a holistic, end-to-end gender lens, supporting women as entrepreneurs, fund managers, and drivers of growth across the value chain. Impact so far: • ~US$150 million deployed across 18 African-led investment vehicles • 49 SMEs supported in 12 countries • 2,500 full-time jobs created, with 1,100 held by women • 75% of supported vehicles are female-led • Honored with the DEI Award at AVCA’s 20th Anniversary Conference In essence, African-led, gender-smart capital flows are delivering equity and economic resilience. Fund managers and entrepreneurs are shaping outcomes with a clear focus on inclusion, impact, and sustainability. This is a transformative model where African and female-led fund managers are no longer just recipients of capital, but drivers of it, reshaping the investment landscape to deliver both financial returns and lasting, meaningful change across the continent. Watch the full interview: https://lnkd.in/d9SuiuSj #Africa #GenderLensInvesting #InclusiveCapital #ImpactInvesting #Leadership #YouthEmployment

Can sustainable infrastructure become the engine that drives growth across Africa? What if international finance centres played a bigger role in connecting global capital to local solutions? This week on the Unlocking Africa Podcast, I had the pleasure of speaking with Dr Rufaro Nyakatawa-Mucheka, Sustainable Finance Lead at Jersey Finance, and a leading voice in rethinking how capital, climate, and development can align across the continent. With over 25 years’ experience across financial services, impact investing, and environmental policy, Dr Rufaro brings a rare cross-disciplinary perspective to Africa’s sustainability journey. At Jersey Finance, she champions the role of international finance centres in mobilising private capital for inclusive, climate-resilient growth. Framing the urgency of the moment, she explained... “Infrastructure is the bedrock of economic transformation. Without reliable energy, goods cannot be produced. Without efficient transport, markets stay fragmented.” Throughout the episode, Dr Rufaro shared practical insights into how African nations can move from ambition to action and why energy, transport, and water infrastructure are central to achieving that shift. She spoke about real-world projects like Egypt’s Benban Solar Park, Rwanda’s Green City Kigali, and South Africa’s Rea Vaya bus system, with each offering lessons in green innovation, public-private partnerships, and policy reform. But she also challenged us to recognise the deeper systemic barriers holding back progress. “Capacity development must accompany capital, or else funds will not translate into functioning infrastructure.” So what is the way forward? Dr Rufaro outlined three essential enablers: → Clear and consistent policy frameworks to unlock investor confidence → Blended finance ecosystems that de-risk private investment → Regional integration to turn isolated assets into engines of trade, mobility, and resilience She also spotlighted the role of Jersey, where fund managers are increasingly turning for structuring solutions aligned with ESG goals and long-term development impact. Through vehicles domiciled in Jersey, investments are already flowing into renewable energy, water, and inclusive finance projects across the continent. Reflecting on her personal mission, she left us with a powerful reminder… “Africa is not a problem to be solved. It is a partner to be invested in. If we align purpose with capital, the future will not just be sustainable; it will be extraordinary.” If you are working at the intersection of finance, climate, or infrastructure development or simply care about Africa’s future this is a conversation you will not want to miss. ⬇️ Listen now — link in the comments below ⬇️ #SustainableFinance #AfricaInvestment #GreenInfrastructure #ImpactInvesting #InfrastructureDevelopment #ClimateAction #Podcast

Saturday School: 𝗨𝗻𝗱𝗲𝗿𝘀𝘁𝗮𝗻𝗱𝗶𝗻𝗴 𝗜𝗻𝘃𝗲𝘀𝘁𝗺𝗲𝗻𝘁 𝗥𝗲𝘁𝘂𝗿𝗻𝘀 - 𝗜𝗥𝗥 𝗣𝗮𝗿𝘁𝗶𝘁𝗶𝗼𝗻 This is a key component to understanding the risk in any investment plan, so listen up. In the Equity Analysis section of the CFA curriculum, we are trained to understand the components of return between dividends and exit value or terminal value. The same analysis can be done on a commercial real estate investment. Dividends and net cash flow are one in the same to a multifamily sponsor, LP or equity investor. The same can be said of exit price or terminal value. Dividends and cash flows are both (relatively) more certain than exit valuations. Exit valuations are prone to much more variance, due to the fact that these are levered and based on an applicable P/E in the case of equities or cap rate in the case of CRE. On a recent post, my good friend @trey pointed out something of critical importance. 𝗜𝗻 𝗿𝗲𝗮𝗹 𝗲𝘀𝘁𝗮𝘁𝗲, 𝘁𝗵𝗲 𝗺𝗼𝗿𝗲 𝘆𝗼𝘂𝗿 𝗿𝗲𝘁𝘂𝗿𝗻 𝗺𝗲𝘁𝗿𝗶𝗰 (𝘁𝘆𝗽𝗶𝗰𝗮𝗹𝗹𝘆 𝗜𝗥𝗥) 𝗿𝗲𝗹𝗶𝗲𝘀 𝘂𝗽𝗼𝗻 𝘁𝗵𝗲 𝗲𝘅𝗶𝘁 𝘃𝗮𝗹𝘂𝗮𝘁𝗶𝗼𝗻 𝘃𝘀 𝗿𝗲𝗴𝘂𝗹𝗮𝗿 𝗰𝗮𝘀𝗵 𝗳𝗹𝗼𝘄𝘀, 𝘁𝗵𝗲 𝗺𝗼𝗿𝗲 𝗿𝗶𝘀𝗸 𝗶𝘀 𝗶𝗺𝗯𝗲𝗱𝗱𝗲𝗱 𝗶𝗻 𝘆𝗼𝘂𝗿 𝗯𝘂𝘀𝗶𝗻𝗲𝘀𝘀 𝗽𝗹𝗮𝗻. You are essentially layering the risk of your cash flow assumptions on top of the risks of the market and cap rates. If you want to determine just how much cash flow vs exit value play into your return, you want to do what is called an 𝗜𝗥𝗥 𝗣𝗮𝗿𝘁𝗶𝘁𝗶𝗼𝗻. To do this, you will take the NPV of the interim and exit cash flows, and divide each of them by the total NPV to determine how much of value is being created from each set of cash flows. In the below example. I made a simple model of a possible value-add transaction. You can see here that 75% of the return is based on the exit value achieved, reflecting high business plan risk I hope you all find this useful!