BUFN 740: Capital Markets
Topic 2: Part I
Risk Aversion and Capital Allocation
to Risky Assets
(BKM 6)
BUFN 740: Capital Markets Topic 2: Part I
1
Capital Allocation
Capital Allocation: Allocating your investments across different
assets such as stocks, b

Homework 7
1. Consider an American June 75 put on IBM trading at $1.05.
(a) Draw the payoff diagram on the maturity date for the buyer and seller.
(b) Draw the profit diagram on the maturity date for the buyer and the seller.
(c) What is the break-even ma

Homework 6
Illustrate the strategy and the cash flow table as what we did in the class.
4.
5.
6. You will be paying $10,000 a year in tuition expenses at the end of the next 2 years. Bonds
currently yield 8%.
(1) What is the present value and duration of

Homework 4
1: Chapter 11 questions: 7, 9, 14, 19.
2. (Chapter 12 CFA problems 4) During an interview with her investment adviser, a retired investor
made the following two statements:
(a) I have been very pleased with the returns Ive earned on Petrie stoc

Homework 2
Part 1: Chapter 6 questions: 13, 14, 15, 16, 17
Part 2: Additional questions:
1. Can indierence curves of the same individual cross one another? Why or why not? Can
indierence curves of one individual cross the indierence curves of another indi

BUFN 740: CAPITAL MARKETS
DIMENSIONAL FUND ADVISORS
YAJUN WANG
1
DIMENSIONAL FUND ADVISORS
The purpose of this case:
A brief review of the efficient market theory and
CAPM
How to turn new academic findings into
productive investment strategies.
Examine

Financial Management (BUSI 640)
Professor Fresard
Investment Detective
Case Questions
The purpose of this case is to practice estimating the value created from taking on
different projects and how those values change given differences in rates of return a

1.
Data Exercise lDne
Using the Bloomberg, the DataStraam database, or Yahoo utilitarian5 download monthly
prices on an Excel spreadsheet for the period December 199? to December 1998 on the
SELF 500 Index. and the GM and lCisco stocks. Be sure to include

Homework 5
1. Consider a bond with a 10% coupon and with yield to maturity of 8%. If the bonds yield
to maturity remains constant, then in one year, will the bond price be higher, lower, or
unchanged?
2. A 20-year maturity bond with par value of $1000 mak

Homework 3
1. Chapter 9 questions: 1, 2, 3.
2. We will learn to estimate alpha and beta for stocks here. Go to yahoo finance webpage.
Download the monthly adjusted closing prices for the following stocks: Boeing, Bank of America, Coca-Cola Co., and Exxon

BUFN 740: Capital Markets
Topic 2: Part II
Optimal Risky Portfolios
(BKM 7)
BUFN 740: Capital Markets Topic 2: Part II
1
Optimal Risky Portfolio
We have examined how to allocate capital between risky and
riskfree assets, we need to know how to choose amon

BUFN 740: Capital Markets
Topic 3
The Capital Asset Pricing Model
(BKM 9, 13)
BUFN 740: Capital Markets Topic 3
1
Capital Asset Pricing Model (CAPM)
It is the equilibrium model that underlies most modern financial
theories.
Derived using principles of div

BUFN 740: Capital Markets
Topic 4
Multifactor Models and Market Efficiency
(BKM 11, 12, 13)
BUFN 740: Capital Markets Topic 4
1
Multifactor Asset Pricing Models
CAPM is a model that can be used to (1) explain why certain firms
have certain returns; and (2

BUFN 740: Capital Markets
Topic 1
The Investment Environment and
Historical Record
BKM 1-5
Course Objective
How do financial markets function? What are the
properties of security prices?
What models can we use to make sense of reality?
No-arbitrage and e

BUFN 740: Capital Markets
Topic 7
Forwards, Futures and Swaps
(BKM 22, 23)
BUFN 740: Capital Markets Topic 6
1
Forward Contract
A forward contract is an agreement today to buy or sell an asset
on a fixed future date for a fixed price.
-The fixed future da

BUFN 740: Capital Markets
Topic 6
Options
(BKM 20, 21)
BUFN 740: Capital Markets Topic 7
1
The Option Contract: Calls and Puts
A call option gives its holder the right to buy an asset:
At the exercise or strike price
On or before the expiration date
Exe

BMGT 740: Homework 2
In this assignment we nd the minimum variance frontier with multiple risky
assets. You should complete the assignment using Matlab. Your solution should
a .m le with precise commenting and a brief printed writeup.
1. Import the le ret

Homework 3
1. BKM 4, 5, 6, 9, 10-16, 17-19, CFA 1-7 Do not turn this part in.
2. In the first homework you calculated excess returns for the four stocks in the file returns.csv.
Use this and the excess returns on the market portfolio to estimate the alpha

Study Questions for Itos Dilemma Case
1. Using the Black-Scholes pricing function in Excel, compute an option value for each
strike price and maturity date in case Exhibit 2. For simplicity, assume zero dividend
yield. Also, use Louise Itos volatility est

Homework 5
1. Consider a bond with a 10% coupon and with yield to maturity of 8%. If the bonds yield
to maturity remains constant, then in one year, will the bond price be higher, lower, or
unchanged?
2. A 20-year maturity bond with par value of $1000 mak