LECTURE 1 - FINS 5513 Investments and Portfolio Selection...

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Unformatted text preview: FINS 5513 Investments and Portfolio Selection University of New South Wales Semester 1 2012 Week 1 Russell Jame 1 Brief Road Map 2 Part 1: Introduction (Jame) Introduction to different asset classes How are assets traded? Mutual Funds and other Investment Companies Road Map (Continued) Part 2: Portfolio Theory (Jame) Statistics of Random Variables Why do we care about statistics in finance? Risk and Risk Aversion The risk-return tradeoff & optimal capital allocation The relationship between diversification and portfolio risk Creating Optimal Portfolios 3 Road Map Continued Part 3 – Equilibrium in Capital Markets (Reeves) What determines the price and the return of the stock? Do stock prices incorporate all value- relevant information? (EMH) Theory & Evidence 4 Road Map (Continued) Part 4 – Fixed Income (Northcott) Bond Pricing Term Structure of Interest Rates Interest Rate Risk Part 5 – Derivatives (Northcott) Option contracts and trading strategies Option Pricing Futures Markets 5 Investments: Background and Issues 6 BKM: 2.1-2.3 Financial Markets and Assets Financial asset: a claim to a stream of future cash flows. The means by which individuals hold claims on real assets Financial Market: a location or mechanism by which buyers and sellers get together and trade financial assets. Why do people trade financial assets? 7 Types of Financial Assets Read BKM Chapter 2.1-2.3 for details Stocks – Primary focus Assets with ownership and claims to the firms’ profits - Residual claims Receive dividends, earn capital gains from stock price appreciation Limited liability Options Call option – Gives the holder the right to buy a stock at strike price X Put option – Gives the holder the right to sell a stock at strike price X Stock Index Futures 8 Types of Financial Assets Treasury Securities Treasury Bills – Zero-Coupon short maturity debt issued by the U.S. Treasury – No default risk Treasury Notes and Bonds – Semi-annual coupon debt issued by the U.S. Treasury – No default risk T-Notes are issued with maturities from two to ten years T-Bonds are issued with a maturity of 30 years. See http://www.treasurydirect.gov/tdhome.htm Corporate Bonds 9 Returns: Review Key Ideas Calculating Returns Present Value and Future Value Returns and Compounding Returns to a portfolio 10 CFA P. 3 -8 Measuring Performance: Price, Payoff, and Return 1 Share of Cisco Stock You buy it now for $100 In three months you sell it for $110 1 Share of Apache Stock You buy it now for $200 In three months you sell it for $215 What is the correct “measuring stick?” Payoff: what you get at the end of the investment Profit: payoff minus price Return: gross returns and net returns 11 Gross Returns Gross returns measure payoff as a percentage of...
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LECTURE 1 - FINS 5513 Investments and Portfolio Selection...

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