Purdue University Krannert School of Management MGMT 411: INVESTMENTS Assignment #3 Solution 1. Suppose that your job is to hire two portfolio managers and let each one of them run his investment strategy independently. Unfortunately, you know little abou
MGMT41100 Spring 2014 Midterm 1 (Prep Kit)
Midterm #1 Preparation Kit
Logistics:
Wednesday, 19th February, during regular class time/regular class room. Please attend the section to
which you are registered to.
The exam is closed book and closed notes. I
Purdue University Krannert School of Management MGMT 411: INVESTMENTS Assignment #4 Solutions 1. Read the article "Timberland as a Portfolio Diversifier" posted on Mays Portal. a) What are some potential dangers of holding JUST timberland investments in y
MGMT41100 B.H. Hwang Spring 2010
Practice Problems #2  Solutions 1. You invest a total of $100 in (1) a risky asset with an expected rate of return of 0.11 and a standard deviation of 0.21 and (2) a riskfree asset with a rate of return of 0.045. a) How
Review
(for Midterm #1)
This is not a substitute for the actual lecture slides.
Our class
Overview/
Basics
(Lect 1+2)
Security Analysis
 Fixed Income (Lect 3)
 Equity (Lect 4)
Modern Portfolio Theory, Asset
Pricing Models, Market Efficiency
 Quant Revi
Course Syllabus
Krannert School of Management, Purdue University
MGMT 41100: Investment Management (Sections 001 and 002), Spring 2014
Professor: ByoungHyoun Hwang, bhwang@purdue.edu
This course introduces students to the essentials of investment managem
MGMT41100 B.H. Hwang Spring 2010
Practice Problems #1  Solutions 1. Toyota stock has the following probability distribution of expected prices one year from now:
a) If you buy Toyota today for $55 and it will pay a dividend during the year of $4 per sha
Econ 370
MidTerm, Fall 2009
Chong Xiang
The exam consists of 3 parts, multiple choice questions (18 points), true/false questions (27 points), and short answer questions (18 points). Please write your answers to true/false questions and multiple choice q
MGMT41100 Spring 2012 Midterm 2 (Practice)
Practice Problems
1. Assume you are a fund manager. You manage a risky portfolio with an expected rate of return of
17% and a standard deviation of 27%. The Treasury bill rate is 7% Treasury bill rate=0%).
a. You
SAMPLE EXAM QUESTIONS FOR CH 15, 11 MGMT 451 JACOBSON FALL 2009 Chapter 1 1. Aboveaverage returns are: a. More profits than the firm earned last year b. More profits than the industry average c. Profits in excess of what an investor expects to earn from
MGMT 411, Fall 2009 Investment Management Time Value of Money Review
August 27, 2009
What is the Time Value of Money?
$100,000 today or $X one year from todaywhat is your $X value? How much money is it going to take to make you wait one year for your mone
Financial Markets
Lecture 3
Class Overview
How are securities issued?
How are securities traded?
 You should be able to open an broker
age account and to know how to trade st
ocks after todays class.
How Firms Issue Securities
Primary vs. Secondary
Inves
Quant Review and Return
Analysis
Lecture 4
Class Overview
How should we measure asset returns?
 single asset returns
 portfolio returns
How do returns behave?
 random variables, means, variances
How do returns move together?
 covariance and correlatio
Introduction
Lecture 1
Investment
Investment: the current commitment of mone
y (resources) in the expectation of reaping fu
ture benefits.
 <Essentials of Investments>
Gambling: the (current) wagering of money o
n an event with an uncertain (future) outc
Equation Sheet
1. Expected return on a stock
2. Expected return on a portfolio
3. Variance of a stock
4. Covariance
5. Variance of a portfolio with two risk assets
6. Variance of a portfolio with three risk assets
7. Covariance using single factor model
8
Investing in A Risky Asset
Lecture 5
Review
Expected return on a stock
E (r ) = p ( s )rs
s
N
Expected return on a portfolio(rp ) = wi E (ri )
E
i =1
Variance of a stock
Var (r ) = p ( s )[rs E (r )]2
s
Variance of a portfolio
Var (rp ) = Var ( w1r1 + w2
Financial Securities
Lecture 2
Class Overview
Money Market Securities
Fixed Income Securities
Bond Market Securities
Equity Market Securities
Derivative Market Securities
Fixed Income Securities
A list of things we should know:
Issuer
Maturity
Default Ris
Equation Sheet
1. Expected return on a stock
2. Expected return on a portfolio
3. Variance of a stock
4. Covariance
5. Variance of a portfolio with two risk assets
6. Variance of a portfolio with three risk assets
7. Covariance using single factor model
8
Implementation of Optimal
Risky Portfolio Strategy
Lecture 7
Review
E(r)
Portfolio 1
Portfolio 2
First, it seemed the blue line is the best available
Capital Allocation Line (CAL).
Review
E(r)
New Portfolio created by investing
in Portfolio 1 and in Portf
Asset Pricing and the CAPM
Lecture 8
Class Overview
Introduce concepts of arbitrage +
equilibrium market forces
Talk about asset pricing
Introduce alternate measure of security
risk CAPM
Watch some SML (Security Market Line)
Markets in Equilibrium
(1) ARB
Portfolio Diversification
Lecture 6
Class Overview
Efficient Frontier of Risky Assets
Diversifiable vs. NonDiversifiable risk
Adding RiskFree Asset: An Optimal Ri
sky Portfolio
Review
set allocation = Portfolio choice among broad investment class
E(r)
S
Lecture 8
Fixed Income Securities Bond Duration
Definition: Yield to Maturity (YTM)
Consider a coupon bond paying a semiannual coupon of C with a face value of
$100. The yield to maturity or internal rate of return for this bond is the rate y that
solve
Lecture 7
Fixed Income Securities Floating Rate Notes
From the WSJ, March 7, 2013
Showdown Over Notes that Float
Companies and Cities Are Selling More of the Bonds as Investors Pile In to Hedge Against Rising Rates
By PATRICK MCGEE
Investors are facing of
Lecture 1
Fixed Income Securities  Spot Markets
Discount Factor Example
On August 10, 2006 the Treasury issued 182day Treasury bills. The issuance
market price was $97.477 for $100 of face value. That is, on August 10, 2006,
investors were willing to b
Lecture 2
Utility
Allocation between a RiskFree and a
Risky Asset
Modern Portfolio Theory
_
Ralitsa Petkova, Krannert School of Management, Purdue University
RiskFree Asset
For some assets the future return is certain
(effectively); they are called ris
LECTURE 1
Historical Behavior of US Asset Returns
Returns Basics
Statistics Review
_
Ralitsa Petkova, Krannert School of Management, Purdue University
Definitions
Market: valueweighted portfolio of all stocks trading on NYSE, AMEX,
NASDAQ
Small: valuewe
Fixed Income
Lecture 13
Our class so far
Lecture 13:
Overview,
Financial
Market and
Securities
Lecture 47:
Quant Review,
Modern Portfolio
Theory
Lecture 812:
Asset Pricing
Models, Market
Efficiency
Hold optimal risky portfolio + riskfree
asset
Underly
Market Efficiency II
Lecture 12
Review
Prices are (on average) right
d t +1
dt +2
Pt = Et
+
+
2
(1 + r ) (1 + r )
Investors use all available information in
forming expectations about future cash
flows
The discount rate reflects the riskiness of
the s
Market Efficiency I
Lecture 11
Review
CAPM (Capital Asset Pricing Model)
MultiFactor Model ( FamaFrench 3fac
tor)
Why do we need a model to explain ass
et return?
We believe market is efficient!
Class Overview
Efficient market hypothesis and eviden
ce
Multifactor Model and Anomal
ies
Lecture 10
Review
CAPM doesnt work well in practice

Higher betas do not guarantee higher return
Possible reasons

Proxy for market return

Financial market friction

Habits of individual investors
 i = E (ri ) cfw_r
Investment Management
Arbitrage Pricing Theory and Multifactor
Models of Risk and Return
MGMT 411
Krannert, Purdue
Outline
Multifactor Models: An Overview
Aribtrage Pricing Theory
Multifactor APT
The FamaFrench (FF) ThreeFactor Model
1
Previously: Singl
Investment Management
The Capital Asset Pricing Model
MGMT 411
Krannert, Purdue
Outline
The Capital Asset Pricing Model
Assumptions and Extensions of the CAPM
1
From CAL to CML
2
Assumptions
I
I
Investors optimize portfolios a la Markowitz
Investors use i
Project: Index Models
Part I
Parameters Estimation
We will use the same data set you have used in the Optimal Risky Portfolios project.
Question 1.
Plot the SCL for the 3 stocks you have picked.
You can accomplish this by first creating a scatter plot be
Project: CAPM
For this project, we can recycle the data used in the Optimal Risky Portfolio project. Pick one
stock. We will use the excess returns on this stock and also the excess returns on the S&P 500
index which will be our proxy for market portfolio