lec11-ReviewForTest1(old) - Fin406 Spring 2010 Smeal...

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Fin406 – Spring 2010 Smeal College of Business Penn State University 2/12/2010 ©2010 JingZhi Huang 1 Lecture 11: Review for Test 1 Fin 406 - Spring 2010 See the review sheet for a more complete list of related concepts Professor Jingzhi Huang Smeal College of Business Penn State University Copyright © 2010 JZH Main Questions Addressed Dynamic Portfolio Management Process: How to determine the optimal asset allocation? How to implement such an allocation? Evaluate Performance Trade Security Selection Asset Allocation Define Objectives and Constraints Develop Market Expectations 2 Instruments: Mutual funds and ETFs Trading strategies: Long, short, leveraged long Estimation of input parameters: E[r], , How to measure of a fund’s performance? Risk adjusted performance measures Return attribution analysis Index funds or actively managed fund? I. Investment Companies ETFs vs. mutual funds Pros and cons of each type Info about ETFs and mutual funds is available on Yahoo! Finance 3 Mutual funds vs. hedge funds Regulations Trading strategies Popularity of 130/30 mutual funds Compensation structures II. Two Trading Strategies Buying on margin (borrowing cash) if Bullish on a stock and Desire to enhance the return Selling short (borrowing stock and then selling it) if you are bearish on a stock and 4 you are bearish on a stock and you want to make money in a down market Both are leveraged and face the risk of getting a margin call One main factor that directly triggered the collapse of LTCM, Bear Stearns, Lehman, and AIG Portfolio Weight The weight for a long position is positive The weight for a short position is negative The weight for borrowed cash is negative The weight for stock bought on margin or bought using proceeds from short selling could be greater than one 5 could be Applications: The “130/30” strategy (WSJ, 10/13/06) The return of a portfolio is given by r p = W long *r long + W short *r short , A long-only fund: W long = 100%,W short = 0 A 130/30 fund: W long = 130%, W short = -30% III. Portfolio Theory The optimal portfolio for a given investor is the highest ranking portfolio under a particular measure of risk-return tradeoffs in general, depends on the risk-return profile of securities and the investor’s risk preference Measure of risk Std dev (volatility): the tota risk 6 Std. dev. (volatility): the total beta : the systematic (or market) risk Measure of risk-return tradeoffs The mean-variance criterion ( based) The Sharpe measure ( based) The utility measure ( based) The Jensen alpha ( based) The Treynor measure ( based)
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Fin406 – Spring 2010 Smeal College of Business Penn State University 2/12/2010 ©2010 JingZhi Huang 2 Terminology Asset, portfolio, allocation, and mix (combination) are used interchangeably A single asset can be considered to be a (one-asset) portfolio
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This note was uploaded on 04/06/2010 for the course FIN 100 taught by Professor Staff during the Fall '08 term at Pennsylvania State University, University Park.

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lec11-ReviewForTest1(old) - Fin406 Spring 2010 Smeal...

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