Topic 6: Arbitrage
Professor Itamar Drechsler
1
Outline
! Arbitrage definitions
! Arbitrage pricing
! Arbitrage pricing with transactions costs
! Real-world arbitrage trading
2
Arbitrage Definitions
! In finance theory an arbitrage is defined as:
a zero-i
New York University
School of Continuing and Professional Studies,
Division of Programs in Business
Masters Program
Adjunct Professor G. Scott Segler
gss2@nyu.edu
FINANCIAL MANAGEMENT
FINAL EXAM
THIS EXAM IS BEING ADMINISTERED ON A
TAKE-HOME BASIS AND IS
Foundations of Finance
Key Concepts
Robert Richmond
Principles of Finance
Investors prefer more to less
Investors (usually) prefer something certain to something random: they are risk averse
Investors prefer money today to money in the future
There ar
Topic 8: Fixed-Income Securities
Professor Itamar Drechsler
1
Outline
! Topic 8a: Overview and performance measures
Main features of bonds
Yield to maturity
Realized return
! Topic 8b: Forward rates
! Topic 8c: Term Structure of Interest Rates
! Topic
Topic 3: Portfolio Theory with Two
Risky Assets
Professor Itamar Drechsler
1
Outline
1. Optimal portfolio choice with 2 risky assets
Feasible combinations of the assets: principle of
diversification
!Investment opportunity set
!Efficient frontier
Desira
Topic 5: The Capital Asset Pricing
Model or CAPM
Professor Itamar Drechsler
1
CAPM: Introduction
!
Equilibrium model that
!
!
!
predicts the relationship between risk and expected
return
predicts optimal portfolio choices
underlies much of modern finance
Sample Midterm, COR1-GB.2311
Prof. Itamar Drechsler
1
Multiple Choice Questions
The following are sample questions for the multiple choice section. They are organized by
degree of difficulty (this ranking is a bit subjective).
1.1
Easy
1. Security A has a
Topic 7: Equity Valuation
Professor Itamar Drechsler
1
Outline
1. Balance sheet valuation concepts
2. Fundamental value aka intrinsic value
Dividend Discount Model (DDM)
Zero dividend growth
Constant dividend growth
!= Gordon Growth Model
!Valuation rat
HW1 Q8
a) Best estimate for next month is arithmetic avg of the monthly returns:
0.6936%
b) Annualized HPR can be computed as the geometric mean of (1 + monthly returns) raised to the 12th power,
7.536295%
0.60732%
Or it can be computed using prices as th
Solutions to Homework 1, COR1-GB.2311
Prof. Itamar Drechsler
Topic 1: Financial Markets
1. You are among the OTC marketmakers in the stock of BioEngineering, Inc. and quote
a bid of $102.25 and an ask of $102.50. Suppose that you have a zero inventory.
(a
Solutions to Homework 2, COR1-GB.2311
Topic 3: Portfolio Theory with 2 Risky Assets
1. The expected returns and standard deviation of returns for two securities are as follows:
Security Z
Expected Return
15%
Standard Deviation 20%
Security Y
35%
40%
The c
Foundations of Finance
Fall 2016
Professor Itamar Drechsler
1
Todays Class:
! Practical Information about the class
! Overview of class:
Outline of topics covered
The axioms underlying finance
The main insights of finance
! First topic of the class: fi