Chapter 03 - Securities Markets
CHAPTER 03
Chapter 03 - Securities Markets
SECURITIES MARKETS
1. An IPO is the first time a formerly privately-owned company sells stock to the general
public. A seasoned issue is the issuance of stock by a company that has
Chapter 07 - Capital Asset Pricing and Arbitrage Pricing Theory
CHAPTER 07
Chapter 07 - Capital Asset Pricing and Arbitrage Pricing Theory
CAPITAL ASSET PRICING AND ARBITRAGE PRICING THEORY
1. The required rate of return on a stock is related to the requi
Chapter 01 - Investments: Background and Issues
CHAPTER 01
Chapter 01 - Investments: Background and Issues
INVESTMENTS: BACKGROUND AND ISSUES
1. Equity is a lower-priority claim and represents an ownership share in a corporation, whereas
fixed-income (deb
Portfolio Performance Evaluation
Chapter 18
Abnormal Performance
Big Question: What is abnormal?
Abnormal performance is measured:
* Benchmark portfolio
* Market adjusted
* Market model / index model adjusted
Generally, we can gauge abnormal performance w
Chapter 8-9
Stock Price Behavior and Market Efficiency
Market Efficiency
*
The Efficient market hypothesis (EMH) is a theory that asserts: the prices of
financial assets accurately reflect all relevant information at a given time.
*
Market efficiency rese
Chapter 2
Asset Classes and Instruments
Classifying Securities
Interest-Bearing Assets
Money market instruments are short-term debt obligations of large
corporations and governments.
These securities promise to make one future payment.
When they are issue
Chapter 02 - Asset Classes and Financial Instruments
CHAPTER 02
ASSET CLASSES AND FINANCIAL INSTRUMENTS
1. Common stock is an ownership share in a publicly held corporation. Common shareholders
have voting rights and may receive dividends. Preferred stock
Chapter 04 - Mutual Funds and Other Investment Companies
CHAPTER 04
Chapter 04 - Mutual Funds and Other Investment Companies
MUTUAL FUNDS AND OTHER INVESTMENT COMPANIES
1. Mutual funds offer many benefits. Some of those benefits include: the ability to in
Chapter 05 - Risk and Return: Past and Prologue
CHAPTER 05
RISK AND RETURN: PAST AND PROLOGUE
1. The 1% VaR will be less than 30%. As percentile or probability of a return declines so does
the magnitude of that return. Thus, a 1 percentile probability wil
Chapter 06 - Efficient Diversification
CHAPTER 06
Chapter 06 - Efficient Diversification
EFFICIENT DIVERSIFICATION
1. So long as the correlation coefficient is below 1.0, the portfolio will benefit from
diversification because returns on component securit
Chapter 08 - The Efficient Market Hypothesis
CHAPTER 08
Chapter 08 - The Efficient Market Hypothesis
THE EFFICIENT MARKET HYPOTHESIS
1. The correlation coefficient should be zero. If it were not zero, then one could use returns
from one period to predict
Chapter 09 - Behavioral Finance and Technical Analysis
CHAPTER 09
Chapter 09 - Behavioral Finance and Technical Analysis
BEHAVIORAL FINANCE AND TECHNICAL ANALYSIS
1.
Note the following matches:
a. Investors are slow to update their beliefs when given new
Questions for review, Chapters 6-7
1. To build an indifference curve we can first find the utility of a portfolio with 100% in the risk-free asset, then
A. find the utility of a portfolio with 0% in the risk-free asset.
B. change the expected return of th
Practice Questions for Final Exam, FIN 623
1. Security A has an expected rate of return of 0.10 and a beta of 1.1. The market expected
rate of return is 0.08 and the risk-free rate is 0.05. The alpha of the stock is
A) 1.7%.
B) -1.7%.
C) 8.3%.
D) 5.5%.
E)
Practice Questions for Midterm, FIN 623
1.
Consider the following probability distribution for some stock:
State
Good
Bad
E(r)
10
4
prob.
0.40
0.60
If you are risk averse, what would a reasonable certainty equivalent be?
a. 14.0 %
b. 10.0
c. 8.0
d. 6.4
e.
The Capital Asset Pricing Model
Chapter 7
E(r)
A
B
C
Up until Markowitz (1950s), view was that best way of handling portfolio
analysis was to find A and buy a lot of it.
B and C bought and held by ignorant investors.
General Thought: B & C exist because
Equity Valuation
Chapter13
Objective: How to determine the value of a financial asset
Question: How do we determine the value of the company? We first need to ask the question,
what represents the value of a company? We use the balance sheet to get an ide
CHAPTER 3: HOW SECURITIES ARE TRADED
CHAPTER 3: HOW SECURITIES ARE TRADED
PROBLEM SETS
Answers to this problem will vary.
1.
2.
The dealer sets the bid and asked price. Spreads should be higher on inactively traded stocks and
lower on actively traded stoc
CHAPTER 5: INTRODUCTION TO RISK, RETURN, AND
THE HISTORICAL RECORD
CHAPTER 5: INTRODUCTION TO RISK, RETURN, AND
THE HISTORICAL RECORD
PROBLEM SETS
1.
The Fisher equation predicts that the nominal rate will equal the equilibrium real rate plus the
expected
CHAPTER 6: RISK AVERSION AND
CAPITAL ALLOCATION TO RISKY ASSETS
CHAPTER 6: RISK AVERSION AND
CAPITAL ALLOCATION TO RISKY ASSETS
PROBLEM SETS
1.
(e)
2.
(b) A higher borrowing rate is a consequence of the risk of the borrowers default. In perfect
markets wi
CHAPTER 7: OPTIMAL RISKY PORTFOLIOS
CHAPTER 7: OPTIMAL RISKY PORTFOLIOS
PROBLEM SETS
1.
(a) and (e).
2.
(a) and (c). After real estate is added to the portfolio, there are four asset classes in the
portfolio: stocks, bonds, cash and real estate. Portfolio
CHAPTER 15: THE TERM STRUCTURE OF INTEREST RATES
CHAPTER 15: THE TERM STRUCTURE OF INTEREST RATES
PROBLEM SETS.
1.
In general, the forward rate can be viewed as the sum of the markets expectation of
the future short rate plus a potential risk (or liquidit
Questions for review, Chapters 6-7
1. To build an indifference curve we can first find the utility of a portfolio with 100% in the risk-free asset, then
A. find the utility of a portfolio with 0% in the risk-free asset.
B. change the expected return of th
Practice Questions for Final Exam, FIN 623
1. Security A has an expected rate of return of 0.10 and a beta of 1.1. The market expected
rate of return is 0.08 and the risk-free rate is 0.05. The alpha of the stock is
A) 1.7%.
B) -1.7%.
C) 8.3%.
D) 5.5%.
E)
1. e
3. a
4. b
5. a
6. a and d are both correct
7. b
8. e
9. c
10. c
11. d
12. d
13. a
14. c
15. a
16. d
17. c
18. a
19. d
20. c
21. c
22. d
23. c
24. c
25. c
Practice Questions for Midterm, FIN 623
1.
Consider the following probability distribution for some stock:
State
Good
Bad
E(r)
10
4
prob.
0.40
0.60
If you are risk averse, what would a reasonable certainty equivalent be?
a. 14.0 %
b. 10.0
c. 8.0
d. 6.4
e.
Background and Issues
Chapter 1
Real Assets (left side of financial balance sheet)
Financial Assets (right side of financial balance sheet)
Claims on real assets vs. derivatives
Contribution of financial assets - how do they provide to the productive
capa
Chapter 5: Risk and Return
Rates of Return
One-period return = HPR =
Cumulative (compounded) rate of return: Assumes that dividends / cash flows
are immediately reinvested
Ex: You earn 5% in year 1 and 10% in year 2. What is your two-year return?
(1+.05)
Chapter 3: Securities Markets
(1)
Primary Market
1* Primary (IPO market)
Key factor: issuer receives the proceeds from the sale
Investment Banking Arrangements
1* Underwritten vs. Best Efforts
1* Underwritten: firm commitment on proceeds to the issuing f