Investments05

Investments05 - Portfolio Returns Professor Pierre-Olivier...

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1 Professor Pierre-Olivier Weill Portfolio Returns 2 Last time ± Compounding – Annual, semi-annual, quarterly, monthly, etc. . – Continuous ± Annualized HPR ± Yield to maturity 1 value Starting value d Accumulate / 1 t 3 Multiple-Period Realized Return ± Internal rate of return, IRR – Return if one can re-invest cash-flows at this rate – “Dollar-weighted average” – The IRR in the rate that makes: initial price = present value of future net profits = + = 1 ) 1 ( ) ( ) 0 ( t t IRR t C P
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4 IRR, Example 5 Short-selling ± Shorting ¾ Borrow a security ¾ Sell it now ¾ Buy it back later ¾ Give it back to owner – When do you make money? 6 Short-selling ± Short-sell IBM for $200 today, ± Buy IBM back for $100 tomorrow ± Looks like taking a loan of $200 – Implicit interest rate $200*(1+HPR) = $100 ¾ HPR = $100/$200 – 1 = -50% – Because buying price is unknown ¾ Implicit interest rate is uncertain
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7 SEC rules ± During the financial turmoil, the Securities and Exchanges Commission (SEC) prohibited investors from short-selling financial institution ± Why? 8 Why? http://www.sec.gov/news/press/2008/2008-235.htm ± SEC fears market manipulation ± We intend the prohibition to restore investor and market confidence by preventing short selling from being used to drive down the prices of securities in financial institutions even where there is no fundamental basis for a price decline other than general market conditions.
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This note was uploaded on 02/04/2010 for the course ECON 106v taught by Professor Miyakawa during the Spring '08 term at UCLA.

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Investments05 - Portfolio Returns Professor Pierre-Olivier...

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