FINM4020 Portfolio
Selection Theory
Professor Ng Kah Hwa
subtitle
Security Analysis
Equity Valuation
Model
Valuation: Fundamental
Analysis
Fundamental analysis models a companys value
by assessing its current and future profitability.
The purpose of fun
FINM4020 Portfolio
Selection Theory
Professor Ng Kah Hwa
subtitle
Portfolio Theory
Optimal Risky Portfolio
Overview
The investment decision:
Capital allocation (risky vs. risk-free)
Asset allocation (construction of the risky portfolio)
Security selectio
FINM4020 Portfolio
Selection Theory
Professor Ng Kah Hwa
subtitle
Derivative Markets
Futures and Swaps
Futures Markets
Basics of Futures Contracts
A futures contract is the obligation to make or
take delivery of the underlying asset at a
predetermined pr
FINM4020 Portfolio
Selection Theory
Professor Ng Kah Hwa
subtitle
Course Objective and
Textbook
This course covers the theory and practice of
investment analysis.
Course Textbook
Edwin J. Elton, Martin J. Gruber, Stephen J. Brown,
William N. Goetzmann, Mo
FINM4020 Portfolio
Selection Theory
Professor Ng Kah Hwa
subtitle
Equilibrium Models in the
Capital Markets
Capital Asset Pricing Model
(CAPM)
Capital Asset Pricing Model
(CAPM)
It is the equilibrium model that underlies all
modern financial theory
Deri
FINM4020 Portfolio
Selection Theory
Professor Ng Kah Hwa
subtitle
Debt Securities
Bond Prices and
Yields
Debt (Fixed-Income) securities characteristics
Types of bonds
Bond pricing
Prices and yield
Prices over time
Bond Characteristics
Bonds are debt ob
FINM4020 Portfolio
Selection Theory
Professor Ng Kah Hwa
subtitle
Portfolio Theory
Risk Aversion
Risk Aversion is related to the behavior of individual under
uncertainty.
Risk Tolerance is negatively related to risk aversion. Risk
tolerance refers to the
FINM4020 Portfolio
Selection Theory
Professor Ng Kah Hwa
subtitle
Portfolio Management Process
The following steps in the investment process are critical in
the establishment and management of a investment portfolio.
The Planning Step
- Understanding the
FINM4020 Portfolio
Selection Theory
Professor Ng Kah Hwa
subtitle
Efficient Markets and Efficient
Market Hypothesis (EMH)
Efficient Market Hypothesis
(EMH)
Maurice Kendall (1953) found no predictable
pattern in stock price changes.
Prices are as likely
FINM4020 Portfolio
Selection Theory
Professor Ng Kah Hwa
subtitle
Portfolio Performance
Evaluation
Risk Adjusted Performance
Measures
Evaluating the performance of a portfolio is of interest to all
investors.
We consider the following three risk adjusted
FINM4020 Portfolio
Selection Theory
Professor Ng Kah Hwa
subtitle
Equilibrium Models in the
Capital Markets
Arbitrage Pricing Model
(APT)
APT What Is It?
APT assumes that security returns are governed
by a linear return-generating process similar to
multi
FINM4020 Portfolio
Selection Theory
Professor Ng Kah Hwa
subtitle
Derivative Markets
Derivative Markets
Options Markets
Options
Derivatives are securities that get their value
from the price of other securities.
Can be powerful tools for hedging and
spe
BNU-HKBU United International College
Division of Science and Technology
FINM3093 Investments
Assignment 1
Deadline: Before 5pm of 18th, Sep, 2015
Problem 1:
Consider the following limit-order book of a specialist. The last trade in the stock
occurred at
Solution to Assignment 1
Q1.
a. The buy order will be filled at the best limit-sell order price: $50.25
b. The next market buy order will be filled at the next-best limit-sell order price:
$51.50
c.
You would want to increase your inventory. There is cons
BNU-HKBU United International College
Division of Science and Technology
FINM3093 Investments
Assignment 2
Deadline: Before 5pm of 25th, Sep, 2015
Problem 1
Derive the probability distribution of the 1-year HPR on a 30-year U.S. Treasure bond with an
8% c
Solution to Assignment 2
Problem 1
Probability distribution of price and one-year holding period return for a 30-year U.S.
Treasury bond (which will have 29 years to maturity at years end):
Coupon
Economy
Probability
YTM
Price
Capital Gain
HPR
Interest
Bo
BNU-HKBU United International College
Division of Science and Technology
FINM3093 Investments
Assignment 3
Deadline: Before 5pm of 12th, Oct, 2015
Problem 1
Utility Formula Data
Investment
Standard Deviation,
Expected Return, E(r)
1
0.12
0.30
2
0.15
0.50
Solution to Assignment 3
Problem 1
Utility for each investment = E(r) 0.5 4 2
We choose the investment with the highest utility value, Investment 3.
Expected
Investment return
E(r)
1
0.12
2
0.15
3
0.21
4
0.24
Standard
deviation
0.30
0.50
0.16
0.21
Utility
BNU-HKBU United International College
Division of Science and Technology
FINM3093 Investments
Assignment 4
Deadline: Before 5pm of 19th, Oct, 2015
Question 1
A pension fund manager is considering three mutual funds. The first is a stock fund, the
second i
Solution to Assignment 4
Question 1
a) The parameters of the opportunity set are:
E(rS) = 20%, E(rB) = 12%, S = 30%, B = 15%, = 0.10
From the standard deviations and the correlation coefficient we generate the
covariance matrix [note that Cov(rS , rB ) S
BNU-HKBU United International College
Division of Science and Technology
FINM3093 Investments
Assignment 5
Deadline: Before 5pm of 26th, Oct, 2015
Problem 1
Assume that the risk-free rate of interest is 6% and the expected rate of return on
the market is
Solution to Assignment 5
Problem1
a) Since the stocks beta is equal to 1.2, its expected rate of return is:
.06 + [1.2 (.16 .06)] = 18%
E(r)
D1 P P
P $50 $6
1
0
0.18 1
P $53
1
P
$50
0
b) The series of $1,000 payments is a perpetuity.
should be discount