Investment Alternatives
FIN 261
Lecture Notes Ch. 1, 2, 3
1
Investments
Investors perspective
Maximizing expected welfare
Return is good
Risk is bad
Ex ante risk-return trade-off
Portfolios
Asset classes
Securities
Decision Process
2
Investment Alternativ
THE UNIVERSITY OF AUCKLAND
Department of Accounting and Finance
FINANCE 261 Introduction to Investments
Assignment 2
Semester 2 2016
Due Date: Friday, October 21st, 4pm
0
1.
Suppose that a two-factor model, where the factors are the market return (Factor
261- tutorial 3
Bodie, Kane, and Marcus ( 2010)
Problem 1
Probability
Stock X
Stock Y
Bear
market
0.2
-20%
-15%
Normal
market
0.5
18%
20%
Bull
market
0.3
50%
10%
a.
What are the expected rates of return for
stocks X and Y?
b.
What are the standard deviati
261- tutorial 3
Bodie, Kane, and Marcus ( 2010)
Problem 1
Probability
Stock X
Stock Y
Bear
market
0.2
-20%
-15%
Normal
market
0.5
18%
20%
Bull
market
0.3
50%
10%
What are the expected rates of return for
stocks X and Y?
Answer
a.
What are the standard dev
Finance 261 Tutorial
Week 6
1. You are given the following return probability distribution for Stock X and Y:
Probability
Stock X
Stock Y
Bear market
0.2
-20%
-15%
Normal market
0.5
18%
20%
Bull market
0.3
50%
10%
a. What are the expected rates of return
Finance 261 Tutorial
Week 6
1. You are given the following return probability distribution for Stock X and Y:
Probability
Stock X
Stock Y
Bear market
0.2
-20%
-15%
Normal market
0.5
18%
20%
a. What are the expected rates of return for stocks X and Y?
R
E(
Finance 261 Tutorial
Week 2
1. Assuming an investor is in the 15% tax bracket, what taxable equivalent must be
earned on a security to equal a tax exempt municipal bond yield of 5.5%?
2. (2013SC Test) A 90-day $1000 par Treasury bill was just issued at $9
Index Model and APT
FIN 261
Lecture Notes Ch. 7
1
Single Index (Factor) Model
Index Model: a model of security returns
using an index such as the S&P 500 to
represent common or systematic risk
(factor)
Each stock js return fluctuates with the single
fac
Finance 261 Tutorial
Week 2
Consider the following return distributions for Stock A.
Economic State
Deep Recession
Mild Recession
Mild Expansion
Boom
Probability
0.2
0.3
0.3
0.2
Return on Stock A
-20%
0%
20%
30%
1. What is the expected return on Stock A?
Finance 261 Workshop 2
Questions
1. Assume that the (price-weighted) DJIA closed at 10875 one day
recently and the divisor was 0.12493117.
a. What is the sum of the prices of the 30 stocks in the index,
given this information?
b. Assume that one stock in
Finance 261 Tutorial
Week 5
1.
Assume you purchased a share in Company Z for $5.40 on 1 January 2007 intending
to hold it for 180 days. A dividend of 50 cents per share was paid 10 days later. At the
end of your holding period you sold the share for $6.40
Finance 261 Tutorial
Week 4
1. Assume an initial margin requirement of 50% and a maintenance
margin of 30%. An investor buys 100 shares of stock on margin at
$60 per share. The price of the stock subsequently drops to $50.
a. What is the actual margin at
Returns and Risks
FIN 261
Lecture Notes Ch. 5
1
Two Components of Return
Yield
Periodic cash flow
Interest
Dividend
Capital gain / loss
Appreciation / depreciation in the price
Holding Period Return = Yield + Price Change
Yield Price change CFt (PE PB )
Security Markets
FIN 261
Lecture Notes Ch. 3
Financial Markets
Primary market
New securities are issued
Issuer receives proceeds from sale
Public offerings
Registered with SEC
Sale made to investing public
Private offerings
Not registered
Sold only to
Math and Stats Review
FIN 261
1
Random Variable
Variable whose value is subject to
variations due to chance
Examples:
Return from a risky investment
Payoff from a game in which you
choose one case out of two
containing either nothing or 1 million
dollars
Capital Asset Pricing
Model
FIN 261
Lecture Notes Ch. 6, 7
1
Risk-Return Plane
Risk and return are the only characteristics of the
portfolios that matter
Risk-return combinations on a plane
Two asset example:
Stock Portfolio:
E[R] = 10%
SD = 25%
Bond Port
1.(a) Stock C as a percentage change in return of a high price stock is more
influential than a low priced stock. Since Stock C is the highest price, it will be the
most influential.
(b) The index divisor is an arbitrary number that is first defined when
Finance 261 Workshop 5
Answers
1. Assume that a risk-averse investor owning stock in Miller Corporation decides to
add the stock of either Mac or Green Corporation to her portfolio. All three stocks
offer the same expected return and total variability. Th
Finance 261 Workshop 5
Questions
1. Assume that a risk-averse investor owning stock in Miller Corporation decides to
add the stock of either Mac or Green Corporation to her portfolio. All three stocks
offer the same expected return and total variability.
Finance 261 Workshop 1
Questions
1. You have been given the following probability distribution for the
return on ABC stock:
State of Economy
Boom
Normal
Bust
Probability
0.3
0.4
0.3
Return
20%
10%
-10%
What is the expected return on ABC stock?
2. You have
Finance 261 Workshop 1
Answers
1. You have been given the following probability distribution for the
return on ABC stock:
State of Economy
Boom
Normal
Bust
Probability
0.3
0.4
0.3
Return
20%
10%
-10%
What is the expected return on ABC stock?
Expected retu
Finance 261 Workshop 1
Answers
1. You have been given the following probability distribution for the
return on ABC stock:
State of Economy
Boom
Normal
Bust
Probability
0.3
0.4
0.3
Return
20%
10%
-10%
What is the expected return on ABC stock?
Expected retu
1. You just bought a newly issued bond which has a face value of $1,000 and pays
its coupon once annually. Its coupon rate is 5%, maturity is 20 years and the yield
to maturity for the bond is currently 8%.
a. Do you expect the bond price to change in the
Capital Asset Pricing
Model
FIN 261
Lecture Notes Ch. 6, 7
1
Risk-Return Plane
Risk and return are the only characteristics of the
portfolios that matter
Risk-return combinations on a plane
Two asset example:
Stock Portfolio:
E[R] = 10%
SD = 25%
Bond Port
Bonds
FIN 261
Lecture Notes Ch. 10, 11
1
Bond
Bond
Security that obligates issuer to make payments to
holder over time
Face Value, Par Value
Payment to bondholder at maturity of bond
Coupon Rate
Bonds annual interest payment per dollar of par
value
Options
FIN 261
Lecture Notes Ch. 15, 16
1
What Are Options?
Call option is a contract that gives the holder
the right (but NOT the obligation) to buy an
underlying asset at a specified price before a
given expiration date
Put option to sell
Seller (write
Portfolio Theory
FIN 261
Lecture Notes Ch. 6
1
Return as a Random Variable
Returns are a random variable.
Mean or expected return
Central tendency
Probability weighted average return
Variance or standard deviation
Dispersion around the mean
Risk
If a di
Index Model and APT
FIN 261
Lecture Notes Ch. 7
1
Single Index (Factor) Model
Index Model: a model of security returns
using an index such as the S&P 500 to
represent common or systematic risk
(factor)
Each stock js return fluctuates with the single
fac
Security Markets and
Investment Companies
FIN 261
Lecture Notes Ch. 3, 4
Financial Markets
Primary market
New securities are issued
Issuer receives proceeds from sale
Public offerings
Registered with SEC
Sale made to investing public
Private offerings
N
Assignment 1
1
(a)Stock C will have greatest impact
Return for stock A is ($44-$40)/$40=10% stock B -10% stock C 10%
Return on index is 10%* 40/200+(-10%)*60/200+ 10% * 100/200=4%
the return on index will increase 1%*100/200=0.5% if increase 1% in
price.w