Note-1 - Review of basics

Note-1 - Review of basics - Economics 106V Investments...

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Economics 106V Investments : Lecture Note-1 Daisuke Miyakawa UCLA Department of Economics June 27, 2008 1st lecture covers the following items: (1) the outline of this course, (2) the target of Investment Theory, (3) the reviews for statistical tools, (4) mathematical tools, and (5) economics concepts which we will intensively use during this course. 1 Introduction 1.1 What is "Investment Theory"? Throughout this course, we will discuss the following two questions: (i) how to construct a portfolio (i.e., a set of &nancial/physical objects bought by you) and (ii) how to evaluate/price the portfolio. In this sense, "Investment Theory" is targeting the asset-side side of an economic player±s balance sheet. On the other hand, "Corporate Finance 1 " mainly analyzes the liabilities and equity sides. In other words, the question asked on Corporate Finance course is (i) how to &nance a portfolio and (ii) how to evaluated/price the &nance scheme. Figure-1 summarizes a typical balance sheet of a company. You can see that the left-hand side of the balance sheet is our target on this course. Current Asset Cash Receivables Inventories Short-term lending etc. Fixed Asset Plant Long-term investment (Long-term lending, Stock) etc. Current Liabilities Debt due for Repayment Accounts payable etc. Long-term Liabilities Long-term debt etc. Equity Common stock Retained earnings etc. One remark is that "Corporate Finance" often contains the discussion of the topics taught in "Investment Theory". For example, Brealey et al. (2006), which is the most widely used corporate &nance textbook 1 For example Econ 106F is a course for Corporate Finance. 1
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in business schools, is carefully discussing some of the topics covered in this course, hence in Bodie et al. (2006). You may think this is obvious since one&s asset is others&liabilities. The topics of this course are divided into the following two parts: (i) Asset pricing and (ii) Derivatives. Considering the time constraints, we will mainly discuss the ±rst part through Lecture-8 and use the last two or three lectures for the second part. 1.2 Outline of the course 1.2.1 Risk and Return Throughout this course, we will discuss how to construct and evaluate a portfolio. The key tool is micro- economics. As you have already seen in a basic microeconomics course, we will consider an economic player who is trying to optimize his/her choice over some economic objects. More precisely, the player who seeks an optimal composition of risk and return is our interest. As a preparation for a detailed analysis of the optimal portfolio choice, we will ±rst discuss how to measure the risk and the return of "one security", then discuss a commonly used criteria for the choice of a preferable security from a set of securities (i.e., Mean-Variance Criteria and Sharpe Ratio).
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Note-1 - Review of basics - Economics 106V Investments...

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