FINA2320/FINA2802 Investments and Portfolio Analysis
Tutorial 3
Chapter 4 Mutual Funds and Other Investment Companies
1. Investment Companies
1.1 Definition
-Financial intermediaries
-Pooling of assets (benefits of large-scale investing)
-Invest in a wide
Solutions to Tutorial 10
Question 1
For the A=4 investor the utility of the risky portfolio is
U=0.2-0.5*4*0.32=0.02
while the utility of the bills is
U=0.07-0.5*4*0=0.07
The investor will prefer bills to the risky portfolio.
For the A=2 investor the util
Supplementary Exercises
1. An investor is in a 30% tax bracket. If corporate bonds offer 9% yield, what must
municipals offer for the investor to prefer them to corporate bonds?
2. Given the table below, find the percentage change in the price-weighted in
FINA2320/FINA2802 Investments and Portfolio Analysis
Tutorial 8
Chapter 8 Index Models
1. Single-Factor Security Market
1.1 The Input List of the Markowitz Model (Full-Covariance Model)
Suppose there are n securities in the portfolio. To find the efficien
FINA2320/FINA2802 Investments and Portfolio Analysis
Tutorial 10
Revision Questions for Chapter 6 Chapter 11
Question 1
A portfolio has an expected rate of return of 20% and standard deviation of 30%.
T-
bills
FINA2320/FINA2802 Investments and Portfolio Analysis
Tutorial 6
Chapter 6 Risk Aversion and Capital Allocation to Risky Assets
1. Concepts
1.1 Types of People in Terms of Risk Tolerance
(I) Risk-averse people: reject the fair game (a risky investment with
FINA2320/FINA2802 Investments and Portfolio Analysis
Tutorial 9
Chapter 9 The Capital Asset Pricing Model
Chapter 10 Arbitrage Pricing Theory and Multifactor Models of Risk and
Return
1. The Capital Asset Pricing Model (CAPM)
The capital asset pricing mo
FINA2320/FINA2802 Investments and Portfolio Analysis
Tutorial 4
Chapter 5 Introduction to Risk, Return, and the Historical Record
Chapter 6 Risk Aversion and Capital Allocation to Risky Assets
1. Interest rates
1.1 Determinants of the Level of Interest Ra
FINA2320/FINA2802 Investments and Portfolio Analysis
Tutorial 7
Chapter 7 Optimal Risky Portfolio
1. Diversification and Portfolio Risk
1.1 Two Sources of Risk
-Systematic risk/Market risk: risk that comes from macroeconomic factors (business
cycle, infla
Solutions to Tutorial 9
Question 1
The portfolio beta is =0.25*1.10+0.75*1.25=1.2125
The portfolio risk premium will be
E(rp)-rf=[E(rM)-rf]=1.2125*8%=9.7%
Question 2
The CAPM tells us that an acceptable expected rate of return for the project is
[E(rM)-rf
1
Asset allocation
Security selection
- introduce you to the important
features of broad classes of securities
Financial markets - segmented into
money markets and capital markets
2
Money Market (short-term, low-risk debt )
Debt Market
Equity Market
Deriv
BE103/512
THE UNIVERSITY OF HONG KONG
FACULTY OF BUSINESS AND ECONOMICS
Course Template for the Learning Outcomes System
School of Economics and Finance
FINA2320/FINA2802 Investments and Portfolio Analysis
GENERAL INFORMATION
FINA2320A/FINA2802A, FINA2320
Formula sheet
1. Expected return:
2. Variance (VAR):
3. Standard deviation:
4.
5.
6.
7.
rate.
, R is the nominal interest rate. R is the real rate of return, i is the inflation
8. Margin Trading:
9. Short Sale:
10.
11.
Solutions to Supplementary Exercises
1. The after-tax yield on the corporate bonds is: 0.09 (1 0.30) = 0.0630 = 6.30%
Therefore, municipals must offer at least 6.30% yields.
2. Price-weighted Index:
Initial index value=(25+100)/2=62.5
Final index value=(3
Solutions to Tutorial 1
Question 1
There are 2 ways to solve the problem.
First, we could compare the after-tax returns of the 2 bonds.
Tax-exempt bonds: 7%
Taxable bonds: 9%*(1-30%)=6.3%<7%
So choose municipal bonds (tax-exempt bonds).
We can also comput
Solutions to Tutorial 3
Question 1
We have 42.13=NAV=(279,000,000-43,000,000)/shares outstanding
Therefore, the number of shares outstanding should be
(279,000,000-43,000,000)/42.13=5,601,709
Question 2
NAV0=$17.50, NAV1=$19.47
Rate of return=(19.47-17.5+
Solutions to Tutorial 2
Question 1
a. The stock is purchased for: 300 $40 = $12,000
The amount borrowed is $4,000.
Therefore, the investor needs to put up equity, or margin, of $8,000.
Percentage margin is 8000/12000=66.67%
b. If the share price falls to
Solutions to Tutorial 4
Question 1
Real interest rate r=3%, inflation rate i=8%.
1+R=(1+r)(1+i),
Nominal interest rate R=(1+r)(1+i)-1=1.03*1.08-1=11.24%
Question 2
Rate of return over the 2 months in 10000/9800-1=2.0408%
There are 6 compounding periods in
1
Security markets
Primary market
Secondary market
How securities are traded
Type of orders
Trading systems
Buy on margin, short sale
Regulations for securities trading
2
Primary Market
Firms issue new securities through underwriter to
the public
I
Solutions to Tutorial 6
Question 1
a. Utility for each investment = E(r) 0.5 4 2
We choose the investment with the highest utility value, Investment 3.
Investment Expected
Standard
Utility
return
deviation
U
1
0.12
0.30
0.12-2*0.09=-0.06
2
0.15
0.50
0.15-
Sep. 2, 2013
1
Why study investments?
Be a smart investor!
Equity
Analysis
Debt
Securities
Option
derivatives
Portfolio
Theory
2
An investment is the commitment of current
money or other resources in the expectation
of reaping future benefits.
3
If you ha