TheCAPMandRiskyArbitrage
ProfessorDavidMcLean
AlbertaSchoolofBusiness
WhatWeWillLearn
This lecture will cover the following:
The CAPM assumptions
The resulting equilibrium conditions
Capital Market Line (CML)
Security Market Line (SML)
Hedging and Risky A
Bodie et al. Ch. 11
TOPIC 9: EMPIRICAL EVIDENCE
Testing the CAPM: motivation
Expected
return-beta relationship
where M is an observable ex-ante efficient market index, and
The most commonly tested implication of the CAPM:
It applies on every asset j, i
Bodie et al. Ch. 5
RISK AVERSION, UTILITY,
AND ASSET ALLOCATION
1
A simple primer on utility theory
Starts from the notion that people prefer more to
less (buy low sell high)
As one gets more of a good, utility always
increases, but it increases at a de
Bodie et al. Ch. 8
FACTOR MODELS
(INDEX MODELS) AND APT
Dimensionality:
Data requirements of mean-variance analysis
Suppose you want to construct an efficient portfolio
from the universe of S&P/TSX Composite members
(n=220).
You must estimate:
220 expect
Bodie et al. Ch. 6 and its appendices
DIVERSIFICATION AND RISKY
PORTFOLIOS
1
Dont put all your eggs in one basket
Examples from the Corporate World
Apples plans for a low-end iPhone
Lack of diversification for U.S. global giants
2
From last topic
Utili
FIN 412
Bodie et al. Chapter 4
RISK AND RETURN
A quick review of
Time Value of Money (TVM)
r: discount rate per period
n: number of periods
FV: value of a cash flow n periods into the
future, known today
PV: present value of the future cash flow
PV FV
5/3/2015
Finance 412
Investment Principles
1
I n s t r u c t o r : P a r i a n e n ( P a r i ) Ve e r e n
R e q ui re d t e x t b ook : I nv e s t m e nt s , 8 th C a na d i a n
E dition by B odie , Kane , M arc us , P e r r ak is , Ryan
General Guideline
5/6/2015
The Investment Decision
32
Top-down process with 3 steps:
1.
Capital allocation between the risky portfolio and risk-free
asset
2.
Asset allocation across broad asset classes
3.
Security selection of individual assets within each asset class
Roa
5/18/2015
Factor Models (a.k.a. Index Models)
41
Dimensionality:
Data requirements of mean-variance analysis
42
Suppose you want to construct an efficient portfolio from
the universe of S&P/TSX Composite members (n = 220).
You must estimate:
220 expected
5/13/2015
The CAPM and Index Models
1
Related Chapters
7 & 8
What do we know so far?
2
Investors will formulate the optimal risky portfolio
Investors will use this optimal risky portfolio in combination
with the risk-free asset to find their own persona
5/9/2015
Problem 2: Diversification
55
Sources of risk of any security
Market risk or systematic risk or non-diversifiable risk
General economic risk or risk due to the economic system
Interest rates, economic growth
Firm-specific risk or nonsystematic
5/20/2015
Market Efficiency & Behavioral
Finance
R E L AT E D C H A P T E R S
9 , 1 0 & 11
Defining the concept of efficiency
2
Informational efficiency
An efficient capital market is one in which the prices fully
and instantaneously reflect all availab
Group Members
Family Name Given Name Student ID #
Grade Tally
Part
Points
a
b
c
d
Question
1
2
3
a
b
c
a
bi
b ii
b iii
4
Total
0
Tally
Available
3
3
2
1
5
2
2
4
3
1
3
1
30
SUMMARY OUTPUT
Regression Statistics
Multiple R
0.956302825
R Square
0.9145150931
A
Bodie et al. Ch. 12
TOPIC 10: BOND BASICS
Quote of the day
The fixed income world dwarfs the equity
world. The equity world is like a [] zit
compared to the bond market.
Steve Eisman, quoted in The Big Short: Inside
the Doomsday Machine, by Michael Lewis
Bodie et al. Ch 9
TOPIC 7: MARKET EFFICIENCY
1
Defining the concept of efficiency
In this context we mean informational efficiency.
An efficient capital market is one in which the prices fully
and instantaneously reflect all available relevant
informati
MarketEfficiency
ProfessorDavidMcLean
AlbertaSchoolofBusiness
Summary
Efficient Market Hypothesis (EMH)
Defining an efficient market
Why should markets be efficient?
If markets are efficient, then are stock
returns predictable?
Some Empirical Evidence wha
OptionValuation
ProfessorDavidMcLean
AlbertaSchoolofBusiness
MainConcepts
Option Valuation Basics
The Binomial Model
The drivers of option prices
2-Stage Model; Generalizing the 2-Stage
Model
The Black-Scholes Model
Calls, Puts, and Dividends
Put-Call Par
OptionMarkets
ProfessorDavidMcLean
AlbertaSchoolof
Business
Outline
Background Some finance history
Option Basics
Payoff Tables and Diagrams
Option Strategies
Other Option-Like Securities
2
TheBlackScholes/MertonFormula
May/June1973
1973:
Began trading Ap
RiskandReturn
ProfessorDavidMcLean
AlbertaSchoolofBusiness
LearningOutcomes
Prerequisites: Recall some basic statistics
Measuring risk and returns for a single asset
Mean and variance
Measuring risk and returns for a portfolio
Mean, variance, standard dev
Equities
ProfessorDavidMcLean
AlbertaSchoolofBusiness
WhatWeWillCover
Defining Common Stocks (Equities)
Corporate Governance
Book Value vs. Market Value
The Dividend Discount Model (DDM)
P/E Ratios
Valuing Growth Opportunities
Free Cash Flow Models
2
What
ProfessorDavidMcLean
AlbertaSchoolofBusiness
PortfolioTheory
LearningOutcomes
Capital allocation decisions
How much to invest in the risky vs. risk
free assets?
Diversification and portfolio risk
Why many assets are better than just a
few
2
The effect of
FuturesandRisk
Management
ProfessorDavidMcLean
AlbertaSchoolof
Business
MajorConcepts
Defining Forward and Futures
Major differences
Terminology
Why use forwards and futures?
Pricing Futures and Forwards
No Arbitrage
Some Applications with Financial Futur
Introduccin
La contabilidad es una prctica esttica, rara vez se instituye un cambio, as que cuando se
realizan cambios en la contabilidad, es una gran cosa. Los cambios en los principios contables,
en las estimaciones contables y en la entidad que informa
INVESTMENT PRINCIPLES
1
Course Information
Instructor:
Efstathios (Stathi) Avdis
PhD Wharton; MS Columbia
Research interests:
market efficiency
financial econometrics
dynamic incentive theory
Office:
3-30B
Office Hours: M 12:00-1:30pm
TAs: to be announced
Bodie et. al Ch. 7
CAPITAL ASSET PRICING MODEL
1
What do we know so far?
Step 1: Investors will formulate the optimal risky
portfolio.
Step 2: Investors will use this optimal risky portfolio
in combination with the risk-free asset to find their
own pers
Syllabus
FIN 412 Investment Principles
Winter Term 2014 Lec B1
Instructor: Akiko Watanabe
Lectures: Tue/Thu 12:30-13:50 at BUS 1-06
Office Hours: Tue 13:50-15:30 at BUS 3-30A
E-Mail: [email protected]
Course Description:
The objective of this cou