Questions Modern Portfolio Theory
1/ Draw the shape of the Markowitz efficient frontier. Discuss the concept of dominance.
2/ What is the mutual fund separation theorem?
3/ Draw the shape of the Markowitz efficient frontier. Draw the utility curve of an
i
Questions Modern Portfolio Theory
1/ Draw the shape of the Markowitz efficient frontier. Discuss the concept of dominance.
The concept of dominance: States that among all investments with a given the same level
of risk, the one with the highest return is
Investment
Analysis
Class 4
Capital Market Theory
Capital Market Theory
From the portfolio theory developed by Markowitz, a model for pricing all
risky assets has been created: the capital asset pricing model (CAPM). This is
based on the capital market th
Investment Analysis
Instructor: Luc Marest
Problems APT
Problem 1:
An analysis has showed the historical risk premiums associated with four risk factors
that could be incorporated in the calculation of expected return of a stock LGM.
The factors are:
1/ t
Investment Analysis
Instructor: Luc Marest
Problems Modern Portfolio Theory
Problem 1:
You bought 100 shares of stock LGM for $41 a share and a year later you sold it for $49 a share.
a/ Compute the HPR and the HPY.
b/ During the year, you received a cash
Investment
Analysis
Class 1
Market Securities
Why to invest?
When current income exceeds current consumption desires, people
can do many things with their savings.
One possibility is to put the money under a mattress.
However, it is important to invest.
D
Investment
Analysis
Class 2
Market Efficiency
Disequilibrium Vs Efficient
Markets
When we try to find out if we can predict the evolution of prices in
financial markets, two main views dominate the debate.
The view that markets are efficient in the sense
Investment
Analysis
Class 3
Modern Portfolio Theory
Modern Portfolio Theory
Now, we are going to consider the portfolio manager perspective.
We will examine how they deal with return and risk to make their investment
decision.
As a remainder, risk means t
Investment
Analysis
Class 5
Arbitrage Pricing Theory
Arbitrage Pricing Theory
As a consequence of problems encountered with the CAPM, the academic
community looked for an alternative model still within the assumption of
market efficiency.
Ross (1977) deve
Investment Analysis
Instructor: Luc Marest
Problems CAPM
Problem 1:
Based on 10 years of monthly data, you derive the following information for the companies
listed:
Company
LGM
ABX
S&P500
i
11.82%
9.87%
5.3%
rim
0.68
0.61
1
rim is the correlation of the
Queens College
BUS 350: Investment Analysis
Instructor: Luc Marest
Problems Equity Portfolio
Problem 1:
We have the following stocks that compose an index:
Stock
A
B
C
Number of shares
2,000,000
13,000,000
15,000,000
Price at time t
34
72
41
Price at time
Investment Analysis
Instructor: Luc Marest
Problems Valuation Stocks
Problem 1: One-stage model (from now constant growth for ever)
You want to determine the potential valuation for the firm LGM using the dividend discount model.
You anticipate that the f
Support and Resistance
Short 1
Buy 1
Short 2
Buy 2
When drawing the support/resistance, traders may use either the lowest/highest of the day or the
lowest/highest part of the body of the candlestick.
Short 1 reached the resistance using the body while sho
Questions Stock Fundamental:
1/ What is a leading indicator? (Give definition and an example)
2/ What is a coincident indicator? (Give definition and an example)
3/ What is a lagging indicator? (Give definition and an example)
4/ What is a mutual fund?
5/
Questions Equity Portfolio Management Version 2
1/What is the concept of passive equity portfolio management?
The passive strategy consist of holding stocks so the portfolios return will track those of
a benchmark over time.
The concept of a passive equit
Investment Analysis
Instructor: Luc Marest
Problems Modern Portfolio Theory
Problem 1:
You bought 100 shares of stock LGM for $41 a share and a year later you sold it for $49
a share.
a/ Compute the HPR and the HPY.
b/ During the year, you received a cash
Efficient Market Hypothesis:
1/ What are the assumptions behind the efficient market hypothesis?
On average, neither buyers nor sellers consistently know more about the future.
At any given time, speculators cannot know if markets will go up or down
since
Questions Market Securities:
1/ What is the required rate of return composed of?
the rate of return which compensate for the time, the rate of inflation, and
the uncertainty of the return.
1/ What are the risks associated with investments?
Questions 2-6
2
Investment
Analysis
Class 6
Equity Portfolio
Portfolio Management
According to the efficient market hypothesis, investors are allocating their
funds between the risk free rate securities and the market portfolio.
It is the base of mutual fund theory.
Inve
Investment
Analysis
Class 7
Fundamental Analysis of
Stocks
Fundamental Analysis
We are now going to study the value investment approach or fundamental
approach. This investor approach is different than the speculator approach
because it relies thorough an
Questions Market Securities:
1/ What are the risks associated with investments?
Business Risk
Financial Risk
Liquidity Risk
Exchange Rate Risk
Country Risk
2/ Define Business risk.
Business Risk
Uncertainty of income flows caused by the nature of a
Efficient Market Hypothesis:
1/ What are the assumptions behind the efficient market hypothesis?
1. Security price changes should be independent and random
2. The security prices that prevail at any time should be an unbiased reflection of all currently a
Investment
Analysis
Class 23
Valuation of Options
Valuation of Options
We are going to examine two ways to value an option:
The binomial tree model
The Black-Scholes model
One-Step Binomial Model and lets start with an example:
Assumptions:
The current st
Investment
Analysis
Class 22
Options
Options
Options are traded in many exchanges.
Options give certain rights of the owners of an option to buy or sell an
underlying assets such as stocks, bonds, currencies, commodities, futures,
and stock indices.
There
Investment
Analysis
Class 20
Hedge Funds Strategies Part 3
Trilemma
The trilemma in international economics states that it is not possible for a
country to adopt the three following policies at the same time:
A fixed exchange rate
A free capital flow, s
Investment
Analysis
Class 18
Commodities
Forwards and Futures
A derivative is a financial instrument whose payoff to the investor depends on values of
other more basic underlying financial instruments such as commodities, stocks or
currencies.
The two mor
Investment
Analysis
Class 24
Hedging Risk
Hedging Risk
Entering into some position, an investor may expose himself to adverse
moves of markets.
One risky position is when an investor shorted a call or a put and the
option is not covered in the sense that
Investment
Analysis
Class 21
Swaps
Swaps
Swaps are agreements between firm or investors to exchange cash flow in
the future following a formula.
It can be seen as a combination of two forward contracts. One party agrees
to provide cash flow to the counter
Investment
Analysis
Class 19
Foreign Exchange
Foreign Exchange
Quotations
In a domestic economy, the value of money is determined by supply and
demand. The value of the money compared to other currencies is also
determined by supply and demand.
A domestic
Investment
Analysis
Class 17
Forwards and Futures
Derivatives
A derivative is a financial instrument whose payoff to the investor depends
on values of other more basic underlying financial instruments such as
commodities, stocks or currencies.
The derivat
Questions Market Securities:
1/ What is the required rate of return composed of?
Required Rate of Return, which is the rate of return which compensate for the
time, the rate of inflation, and the uncertainty of the return.
1/ What are the risks associated