F420-2 - Learning About Risk and Return from the Historical...

Info iconThis preview shows pages 1–15. Sign up to view the full content.

View Full Document Right Arrow Icon
Click to edit Master subtitle style BUS-F420 Learning About Risk and Return January 13, 2011
Background image of page 1

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

View Full DocumentRight Arrow Icon
Announcements: Everybody should have a group (5-7 students) Please email me your groups today By next Tuesday, I’d like you to rank your preferences for BOTH presenting and acting as management. For example: Present (in order of preference) Case 3, Case 2, Case 4, Case 1 I’ll assign you roles based on order received and your preferences.
Background image of page 2
Portfolio Theory and Practice: Next Tuesday: Group Work Day/No Class Learning About Risk and Return from the Historical Record Asset Allocation Optimal Risky Portfolios International Diversification Case 1: Harvard Management Co Case (2/1)
Background image of page 3

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

View Full DocumentRight Arrow Icon
Factors Influencing Interest Rates Supply Households Demand Businesses Government’s Net Supply and/or Demand Federal Reserve Actions
Background image of page 4
Real and Nominal Rates of Interest Nominal interest rate Growth rate of your money Real interest rate Growth rate of your purchasing power If R is the nominal rate and r the real rate and i is the inflation rate:
Background image of page 5

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

View Full DocumentRight Arrow Icon
Equilibrium Real Rate of Interest Determined by: Supply Demand Government actions Expected rate of inflation
Background image of page 6
Background image of page 7

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

View Full DocumentRight Arrow Icon
Equilibrium Nominal Rate of Interest As the inflation rate increases, investors will demand higher nominal rates of return If E ( i ) denotes current expectations of inflation, then we get the Fisher Equation:
Background image of page 8
Equilibrium Nominal Rate of Interest If the real interest rate is 3% and the expected inflation rate is 8%, then the nominal interest rate is 11% Now suppose investors expect inflation to increase to 10%. What will happen to the nominal rate?
Background image of page 9

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

View Full DocumentRight Arrow Icon
Taxes and the Real Rate of Interest Tax liabilities are based on nominal income Given a tax rate ( t ), nominal interest rate ( R ), after-tax interest rate is R (1- t ) Real after-tax rate is:
Background image of page 10
Taxes and the Real Rate of Interest Example: R = 12%, t = 30%, i = 4% R(1 – t) – i = (0.12)(0.7) – 0.04 = 4.4% If taxes were indexed, the after-tax real return would be 5.6% What if R = 5.5%?
Background image of page 11

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

View Full DocumentRight Arrow Icon
EAR and APR EAR – Effective Annual Rate Percentage increase in funds invested over a 1-year horizon T < 1 year : compound per-period return for 1 year T > 1 year: annual rate that would compound to the same value
Background image of page 12
APR APR – Annual Percentage Rate Typically used for short term investments (T < 1) Annualize using simple rates rather than compound interest
Background image of page 13

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

View Full DocumentRight Arrow Icon
Table 5.1 Annual Percentage Rates (APR) and Effective Annual Rates (EAR)
Background image of page 14
Image of page 15
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 02/07/2011 for the course BUS-F 420 taught by Professor Israelison during the Spring '11 term at Indiana.

Page1 / 55

F420-2 - Learning About Risk and Return from the Historical...

This preview shows document pages 1 - 15. Sign up to view the full document.

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