Week 5_APT - Next week: Midsession exam No formula sheet...

Info iconThis preview shows pages 1–10. Sign up to view the full content.

View Full Document Right Arrow Icon
1 Next week: Midsession exam ± No formula sheet ± Bring only pens, pencils, eraser, CALCULATOR ² None will be provided, and you will need them! ± Material covered: Weeks 1-5 ² Risk and return (expected, averaging) for assets and portfolios ² Markowitz Portfolio Optimization ² CAPM ² SIM ² APT ± Multiple choice and short answer/problems
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Risk and Return Arbitrage Pricing Theory
Background image of page 2
3 Last Time ± SIM ± Risk decomposition ± Multi- factor models
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
4 The Single-Index Model ± Motivation: to simplify the Markowitz model ± The excess return is assumed to have two independent components: one that is driven by the market (macro events), and the other driven by firm-specific events: r i -r f = α i + β i (r M f ) + e i
Background image of page 4
5 Security Characteristic Lines R Stock Individual Security The characteristic line: R i = a i + b i R M + e i , where R i = r i -r f , R M = r M - r f . R M R M R Port Portfolio
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
6 Risk Decomposition ± Variance: σ i 2 = β i 2 σ M 2 + σ ε 2 ² Systematic risk = β i 2 σ M 2 ² Firm-specific risk = σ ε 2 ² Systematic risk/total risk = ß i 2 σ M 2 / σ i 2 = ( ρ i,M ) 2 = R-sqr ± Covariance: ² No industry effects: Cov(e i ,e j ) = 0 for all i and j. ² Cov(r i , r j ) = Cov( β i r M , β j r M ) = β i β j σ M 2 ² Accurate? ± Parameters for 100 stocks = 100 means+100 variances+100 β ’s +3(r f , E(r M ), σ M 2 )=±303
Background image of page 6
7 Text reference ± This week lecture: Chapter 10 ² Tutorial problems due this week: ± Ch8: 1-17, CFA: 1-5 ± Next week BREAK ± Week 6 MIDSESSION EXAM ± Week 7 lecture: Chapters 11, 24 ² Tutorial problems due week 7: ± Ch10: 1-3,5-11, CFA: 1-8
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
8 Today ± Arbitrage and arbitrage pricing theory ± APT equations ² The factor model ² The pricing equation ± Proof/intuition ± An example
Background image of page 8
9 Tracking Portfolios and (risky) Arbitrage ± A tracking portfolio T for a target asset i is designed to match the systematic component of i’s return: ² Same risk exposures: β T,j = β i,j for factor j.
Background image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 10
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 05/02/2010 for the course ACCT 3756 taught by Professor Leung during the Three '09 term at University of Sydney.

Page1 / 29

Week 5_APT - Next week: Midsession exam No formula sheet...

This preview shows document pages 1 - 10. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online