Lecture 4 Sep 19 2011

Lecture 4 Sep 19 2011 - FINA3104 Lecture4 DarwinChoi...

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FINA 3104: Investment Analysis and Portfolio Management Lecture 4 – Portfolio Mathematics and Capital Allocation Darwin Choi September 19, 2011 Recap from Last Lecture How Securities are Traded Market order and limit order Buying on Margin Borrow money to leverage a bet Short Selling Borrow security and sell, then buy back later 2
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Outline of Today’s Lecture Mean Variance & Utility Indifference 3 -4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 0.0% 2.5% 5.0% 7.5% 10.0% 12.5% 15.0% Utility Indifference: Utility Indifference: The return risk combinations that are equally agreeable (i.e., generate the same utility level) to a given investor. E( r ) E[ r ] = U + ½ A 2 AU E[ r ] 0% 5% 10% 15% 4 4 4 4 2% 2% 2% 2% Risk Averse The risk averse investor demands more return as risk increases. 4 2.0% 2.5% 4.0% 6.5%
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-4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 0.0% 2.5% 5.0% 7.5% 10.0% 12.5% 15.0% Utility Indifference: E( r ) E[ r ] = U + ½ A 2 AU E[ r ] 0% 5% 10% 15% 0 0 0 0 2% 2% 2% 2% 2.0% 2.0% 2.0% 2.0% Risk Neutral The risk neutral investor demands neither more nor less return as risk increases.
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This note was uploaded on 11/27/2011 for the course FINA 3104 taught by Professor Darwin during the Spring '11 term at HKUST.

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Lecture 4 Sep 19 2011 - FINA3104 Lecture4 DarwinChoi...

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