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Unformatted text preview: ECON 4721H Money and Banking Lecture 02_01 Satoshi Tanaka University of Minnesota September 19, 2011 Satoshi Tanaka ECON 4721H Money and Banking Lecture 02_01 Stock Market I Optimal Portfolio Choice and Mean-Variance Frontier Satoshi Tanaka ECON 4721H Money and Banking Lecture 02_01 Today's Questions What is a stock? What is the optimal investment strategy for stock market? Satoshi Tanaka ECON 4721H Money and Banking Lecture 02_01 History What is a stock? Common stock or equity represent ownership of rms First appeared in the 16th century to raise funds for exploration Sir Franscis Drake, Henry Hudson, Vasco de Gama Voyages were dangerous Spread risk through joint-stock companies Satoshi Tanaka ECON 4721H Money and Banking Lecture 02_01 History Finance more than one expedition at once Shareholders received share of company's pro ts Shares could be resold Satoshi Tanaka ECON 4721H Money and Banking Lecture 02_01 Stocks: Important Characteristics 1 Residual Claim Stockholders are paid after everyone else 2 Limited Liability Maximum loss is the amount invested If rm owes money to Workers Suppliers Bondholders Stockholders are not liable for it Satoshi Tanaka ECON 4721H Money and Banking Lecture 02_01 Stock Market Indices Dow Jones Industrial Average Price-weighted: Measures the return to holding one share of each Calculate the average return Standard & Poor's Composite 500 Value-weighted (more accurately re ects the entire market): Measures the return to owning all 500 companies (a portfolio with weights equal to the value of each) Satoshi Tanaka ECON 4721H Money and Banking Lecture 02_01 Stock Market Indices...
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