**Unformatted text preview: **FINC-241: Principle of Investments
Prof. Quan Wen
Midterm I Review Risk and Return (Lecture 2) Holding period return (HPR) Arithmetic and geometric average How to compute? What’s the difference between the two? Annualized holding period return (AHPR) Use AHPR to compare rates of return for different investment horizons Effective annual rate (EAR) and annual percentage rate (APR) U.S. Capital market history: 1926-2009 Which group of asset delivers the highest return but also the highest risk?
Intuitively, why? Standard deviation, Normal distribution, Skewness and Kurtosis What does it mean when a stock is positively skewed? (right skewness) What does it mean when a stock is negatively skewed? (left skewness) The pricing implications of volatility, skewness, and kurtosis for stock
returns. Skim through “Lecture 2 - Theory and Empirical Literature on
Return Moments” Sharpe ratio Definition and intuition Expected return, measuring risk using probability What’s the relation between monthly standard deviation (sigma) and
yearly standard deviation (sigma)? Computing expected return and risk from historical data Risk premium and risk aversion Portfolio Risk and Return, One Risky Asset (Lecture 3) Formulas for portfolio risk and return with one risky asset, and one risk free
asset Capital allocation line (CAL) Definition In the lecture notes, what does point F mean? Point P? What about the
points to the right of portfolio P? What does leverage mean? Slope of the CAL For the U.S. Capital market history, 1926-2009, which type of asset
delivers the highest Sharpe ratio? Intuitively, why? What’s the role of risk aversion in CAL? FINC-241: Principle of Investments
Prof. Quan Wen Portfolio Risk and Return, Two Risky Assets (Lecture 4) Covariance and correlation coefficient Portfolio expected return and variance Diversification Benefits of diversification The portfolio of two assets X and Y with minimum risk (i.e. variance or standard
deviation) is called MVP, and has the weights, P. 213 in BKM y2 COV ( Rx , Ry )
wx 2 x y2 2COV ( Rx , Ry ) wy 1 wx The portfolio of two assets X and Y with maximum reward-to-risk ratio (i.e.
Sharpe ratio) is called optimal portfolio, and its weights are given in formula
(7.13) on P.217 in BKM Portfolio Risk and Return: Multiple Risky Assets (Lecture 5) Portfolio expected return and variance Number of assets and reduction in portfolio risk Inputs required for mean-variance analysis – means and variance covariance
matrix Markowitz optimization Objective function and constraints Quadratic programming problem Minimum Variance Frontier (MVF) Efficient frontier Global Minimum Variance Portfolio (GMVP) Efficient frontier with a risk-free asset Optimal risky portfolio and the tangency portfolio Factor model (Lecture 6) A single factor model and the market model Definition Systematic and firm-specific risk How to estimate the market model? What does alpha, beta and R-square mean? Total variance, systematic variance, and firm-specific variance FINC-241: Principle of Investments
Prof. Quan Wen How to compute R-square? Use factor model to compute covariance between two stocks Multifactor models: intuition behind the Morgan Stanley Macro Proxy model,
how to choose factors Size and value premium Fama-French 3 factor models: what are the three factors? How to interpret the
model? ...

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- Spring '14
- TuranBali
- Standard Deviation, Mean, Modern portfolio theory, Prof. Quan Wen