Chapter 2: Asset Classes and Financial Instruments
2.1 The Money Market
Money market is a subsector of the fixed income market, consists of short term
debt securities that are highly marketable
Treasury Bills- most marketable of all money market instrumen
Chapter 5: Introduction to Risk, Return, and the Historical Record
5.1 Determinants of the Level of Interest Rates
Fundamental Factors that determine the level of interest rates:
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The demand for funds from businesses to be used to finance investments i
Chapter 1: The Investment Environment
1. Real Assets versus Financial Assets
Real assets- land, buildings, machines, and knowledge that can be used to produce
goods and services
Financial assets- stocks and bonds; do not contribute directly to the product
The Focus of this Work
This work has some attributes of an investments text, but it is by no means a
traditional one in either form or substance. The difference in the former is obvious.
The difference in the latter is reflected in the title, which is, at
Efficient Portfolios
An Investor must choose between two portfolios. The end-of-period value of each one
is normally distributed. Portfolio A has an expected value of $10,000 and a standard
deviation of $15,000. Portfolio B has an expected return of $14,0
Portfolio Expected Return
Thus far we have dealt with portfolios of at most two assets, with only one involving
any risk. It is time to turn to the general relationship between the characteristics of a
portfolio and the characteristics of its components.
Expanding the World
The Apple economy has served us well, but it is time to consider more complex
worlds. We begin with situations in which there are other commodities and, most
importantly, money. We then consider circumstances in which more than two sta
Models
In this work, we develop models designed to enable the Analyst to better counsel an
Investor. Before embarking on this task, it is useful to consider the role of theory in
practical affairs.
This work is concerned with theory. To understand a compl
Matrix Multiplication
A key matrix operation is that of multiplication.
The product of two vectors
Consider the task of portfolio valuation. This requires the multiplication of the
number of shares of each security by the corresponding price per share, th
Matrix Algebra
Finance lends itself well to calculations that use matrix algebra To oversimplify, this
term refers to computations that involve vectors (rows or columns of numbers)
and matrices (tables of numbers), as wells as scalars(single numbers). In
Multi-period Discount Factors
A nominal discount factor is the present value of one unit of currency to be paid with
certainty at a stated future time. This definition suffices, whatever the time period. In
a multi-period setting there is one discount fac
Forward Prices
We have used the term price to refer to an amount to be paid at the present time for a
time-state claim or bundle of such claims. Not surprisingly, the magnitude of such a
value is specified at the present time. Thus party A might agree to
Compounded Returns
While one-period returns may be normally distributed, this will generally not be the
case for the value of a portfolio many periods hence, due to the effects
of compounding. If $1 is invested initially, the value will be (1+r1) at the e
Characteristics of a Two-asset Portfolio
The formulas and MATLAB functions discussed previously are sufficient to compute
the characteristics of any portfolio. However, to better understand the economics of
portfolio construction it is useful to consider
Chapter 4: Mutual Funds and Other Investment Companies
4.1 Investment Companies
Investment companies- financial intermediaries that collect funds from individual
investors and invest in those funds in a potentially wide range of securities or
other assets
Chapter 3: How Securities are Traded
Two types of primary market issues of common stock
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Initial public offering- stocks issued by a formerly privately owned company
that is going public
Seasoned equity offerings- offered by companies that already have
The Mean-variance Paradigm
The world is, unhappily, very complex. Before one can analyze, one must abstract.
The time-state paradigm provides a procedure for doing so. Its power lies in the
straightforward way that it accommodates time, risk,and options.