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 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
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 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
FINA 5290: Topic 3d Practice Questions
The Black-Scholes-Merton Model
Practice Questions
Problem 14.1.
What does the BlackScholesMerton stock option pricing model assume about the probability
distribution of the stock price in one year? What does it assum
FINA 5290: Topic 3c Practice Questions
Binomial Tree Model
Practice Questions
Problem 12.1.
A stock price is currently $40. It is known that at the end of one month it will be either $42 or
$38. The risk-free interest rate is 8% per annum with continuous
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
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