FBE441_01_Introduction_REVISED

FBE441_01_Introduction_REVISED - Lecture 1 Introduction...

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Lecture 1: Introduction Course Introduction and Syllabus Overview of Capital Markets Readings: BKM chapters 2, 3 and 4
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Aims and Expectations How to Invest Money You can’t opt out of this choice! Tsuyoku naritai – I want to become stronger Japanese: Tsuyoku is "strong"; naru is "becoming" and the form naritai is "want to become".
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Harry Markowitz [D]eveloped a theory for households' and firms' allocation of financial assets under uncertainty, the so-called theory of portfolio choice. This theory analyzes how wealth can be optimally invested in assets which differ in regard to their expected return and risk, and thereby also how risks can be reduced. Nobel Prize Website
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So How Did Harry Markowitz Invest? “I should have computed the historical covariance of the asset classes and drawn an efficient frontier. Instead I visualized my grief if the stock market went way up and I wasn’t in it-or if it went way down and I was completely in it. My intention was to minimize my future regret, so I split my [pension scheme] contributions 50/50 between bonds and equities .” Harry Markowitz (1998), cited in Solnik (2005)
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DO BETTER!
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6 “We eat our own cooking” Warren Buffett
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7 1. Optimal portfolio selection How do we pick the portfolio (of asset classes or of individual securities) that maximizes return for a given level of risk? How does this allocation depend on our investment horizon, risk aversion, and existing assets in place? How can we solve implementation problems stemming from estimation error, short-sale restrictions, and portfolio constraints? What Is This Class About? Harry Markowitz (Nobel prize)
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8 [lecture 3]: How Vanguard does it Source: Vanguard preview
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9 [lecture 3]: How Vanguard does it Source: Vanguard preview
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10 2. The relation between risk and return What is the relevant measure of risk in each risk- return tradeoff? What expected return should the market demand for each asset? CAPM APT characteristic-based model How well does the evidence support these theories? What Is This Class About? William Sharpe (Nobel prize)
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11 preview [lectures 5-6]: Fama-French 3-Factor Model Three Equity Factors: . MARKET : Stocks have higher expected returns than bonds . SIZE: Small caps beat large caps (on average) . VALUE: “Value" stocks beat “Growth" stocks (on average) Source: Dimensional Fund Advisors
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12 3. Performance Evaluation How can a fund manager’s performance be measured? Can we separate skill in picking stocks from skill in picking sectors? How do we test the manager’s ability to time the market? What Is This Class About?
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13 [lecture 9]: Performance Evaluation of Fidelity Magellan (FMAGX in finance.yahoo.com ) hit “Profile” preview
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14 [lecture 9]: Performance Evaluation of Fidelity Magellan (FMAGX in finance.yahoo.com ) hit “Performance Details” preview
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15 [lecture 9]: Performance Evaluation of Fidelity Magellan (FMAGX in finance.yahoo.com ) hit “Risk Details” preview
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16 4. Other Instruments Fixed Income Securities:
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