Bus 315 - Week8

Bus 315 - Week8 - Week 8 Portfolio Theory I: Return and...

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Week 8 Portfolio Theory I: Return and Risk: Analyzing the Historical Record - Bodie et al., Ch. 5 Risk Aversion and Capital Allocation to Risky Assets - Bodie et al., Ch. 6 1 Jorge Cruz Lopez - Bus 315: Investments
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Return and Risk: Analyzing the Historical Record Objective: To introduce key concepts and issues that are central to informed decision making in financial markets. 2 Jorge Cruz Lopez - Bus 315: Investments
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Return and Risk: Analyzing the Historical Record 1. Determinants of Interest Rates 2. Comparing Rates of Return for Different Holding Periods 3. Bills and Inflation 4. Risk and Risk Premiums 5. Time Series Analysis of Past Rates of Return 6. The Normal Distribution 7. The Historical Record 8. Risk with Non-Normal Distributions 3 Jorge Cruz Lopez - Bus 315: Investments
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1. Determinants of Interest Rates 4 Jorge Cruz Lopez - Bus 315: Investments
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Factors Influencing Rates • Supply – Households • Demand – Businesses • Government’s Net Supply and/or Demand – Central Bank Actions 5 Jorge Cruz Lopez - Bus 315: Investments
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Real and Nominal Rates 6 i R r i i R r 1 Jorge Cruz Lopez - Bus 315: Investments
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Equilibrium Real Rate of Interest 7 Jorge Cruz Lopez - Bus 315: Investments
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Equilibrium Nominal Rate of Interest 8 ) ( i E r R Jorge Cruz Lopez - Bus 315: Investments
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2. Comparing Rates of Return for Different Holding Periods 9 Jorge Cruz Lopez - Bus 315: Investments
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HPR – Zero Coupon Bonds 10 1 ) ( 100 ) ( T P T r f Jorge Cruz Lopez - Bus 315: Investments
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Annualized Rates of Return 11 Jorge Cruz Lopez - Bus 315: Investments
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Formula for EARs and APRs 12 T T f n f APR T T r T r EAR / 1 / 1 ] 1 [ )] ( 1 [ )] ( 1 [ 1 n n f n APR T r EAR 1 )] ( 1 [ 1 n T where 1 , Jorge Cruz Lopez - Bus 315: Investments
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APRs and EARs 13 Jorge Cruz Lopez - Bus 315: Investments
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3. Bills and Inflation 14 Jorge Cruz Lopez - Bus 315: Investments
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Interest Rates and Inflation (1960-2006) 15 Jorge Cruz Lopez - Bus 315: Investments
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Nominal and Real Wealth Indices (1957-2006) 16 Jorge Cruz Lopez - Bus 315: Investments
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4. Risk and Risk Premiums 17 Jorge Cruz Lopez - Bus 315: Investments
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Rates of Return: Single Period • HPR = Holding Period Return • P 0 = Beginning price • P 1 = Ending price • D 1 = Dividend during period one 18 P D P P HPR 0 1 0 1 Jorge Cruz Lopez - Bus 315: Investments
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Rates of Return: Single Period Example Ending Price = 110 Beginning Price = 100 Dividend = 14 19 % 14 100 14 100 110 HPR Jorge Cruz Lopez - Bus 315: Investments
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Probability Distributions 1) Mean 2) Variance or Standard Deviation 3) Skewness 4) Kurtosis NOTE: If a distribution is approximately normal, the distribution is described by characteristics 1 and 2. 20
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This note was uploaded on 12/06/2011 for the course BUS 315 taught by Professor N.a during the Spring '09 term at Simon Fraser.

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Bus 315 - Week8 - Week 8 Portfolio Theory I: Return and...

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