Week 3 Portfolio analysis
Portfolios
Portfolio combination of investments defined by portfolio weights Question: given the expected returns and risks of each individual stock, what is the expected return and risk of a portfolio made up of these stocks? An
Fixed Income: Bond Portfolios
Lecture Set X
Professor John P. Miller
Fixed Income: Bond Portfolios
1 / 19
Bond Portfolio Management Strategies
Set investment objectives
Determined by liabilities
Pension funds: Generate sufficient cash flows from investmen
Fixed Income
Homework #6
1. Assume annual yields in the table below and fill in the missing values.
Year
Time
1
Par Coupon
c1
Zero Rate
z1
Forward Rate
2
4.0%
f01
3
4
c2
c3
c4
z2
z3
z4
f12
8.0%
f23
9.0%
7.35%
f34
PV Factor
Solution:
1
1.04
P V1 =
= 0.9615
Fixed Income
Homework #7
Due: 4/7/2016
10 Points Total
Generating MBS cash flows can be messy so we are going to write some functions in R that
allows us to generate the cash flows to structure and price the asset.
1. Using the MBScf function, generate ca
Fixed Income: ABS
Lecture Set IX
Professor John P. Miller
Fixed Income: ABS
1 / 15
Types of Asset-Backed Securities
Consumer
Auto loan and leases
Credit card receivables
Manufactured housing
Student loans
Mortgage-backed and home equity loans
Other consum
Fixed Income
Homework #9
1. How is the net operating income (NOI) of a commercial property determined?
Solution: NOI of a commercial property is determined by taking the rental income and
reducing it by cash operating expenses (adjusted for a replacement
Fixed Income: MBS Structures
Lecture Set VI
Professor John P. Miller
Professor John P. Miller
Fixed Income: MBS Structures
1 / 37
Interest-Only (IO) & Principal-Only (PO) Strips
The simplest structural form are IO/POs: Each bond type pays a pro
rata share
Fixed Income
Homework #9
1. How is the net operating income (NOI) of a commercial property determined?
2. Explain the underlying principle for a yield maintenance charge.
3. The following statement was made in a special report, Commercial Mortgage Special
Fixed Income
Homework #10
1. An ABS has been structured with 80% in the senior tranche and 20% in the subordinated
tranche. The shifting interest schedule is as follows:
Year after Issuance
1-3
4
5
6
7
8
9
after 9
Shifting Interest Percentage
100
90
80
70
Fixed Income: MBS Mechanics
Lecture Set V
Professor John P. Miller
Professor John P. Miller
Fixed Income: MBS Mechanics
1 / 47
How Important Is the MBS Market?
Size: currently $10.74 trillion mortgage
balance outstanding
Second in size only to U.S. Treasu
Fixed Income
Homework #7
Due: 4/7/2016
10 Points Total
Generating MBS cash flows can be messy so we are going to write some functions in R that
allows us to generate the cash flows to structure and price the asset.
1. Using the MBScf function, generate ca
Fixed Income
Homework #8
Use R to generate the cash flows to answer the following questions.
Assume that a CMO trust has a $100,000,000 original balance with WAC = 4.5%, WAM = 360
and servicing = 0.5%. You will use the function
PACcf(PSA low, PSA high, ba
Fixed Income: Treasury/Fed. Agency
Lecture Set II
Professor John P. Miller
Professor John P. Miller
Fixed Income: Treasury/Fed. Agency
1 / 15
Treasury Securities
Backed by the full faith and credit of the U.S. government
Securities are available in book-e
Fixed Income: CMBS
Lecture Set VIII
Professor John P. Miller
Fixed Income: CMBS
1 / 16
Commercial Mortgage Loans
Loans are for income-generating properties
Multifamily properties
Office buildings
Industrial properties
Shopping centers
Hotels
Health care f
Components of Bonds with Embedded Options
The owner of a callable bond enters into two types of transactions
Purchase a noncallable bond
Sell a call option on the bond
callable price = noncallable price call option price
A similar transactions occur when
Study of Credit: The Repo Market
Study of Credit: The Repo Market
1/9
Base Definitions
Repurchase Agreement (repo): Cash loan collateralized by securities. The
implied interest rate is determined by the difference in the sale price of
securities and the c
Fixed Income
Homework #10
1. An ABS has been structured with 80% in the senior tranche and 20% in the subordinated
tranche. The shifting interest schedule is as follows:
Year after Issuance
1-3
4
5
6
7
8
9
after 9
Shifting Interest Percentage
100
90
80
70
Fixed Income: Term Structure
Lecture Set IV
Professor John P. Miller
Professor John P. Miller
Fixed Income: Term Structure
1 / 44
Price-Yield Relationship of an Option-Free Bond
What is this shape?
Does it hit the axes?
30
40
50
60
70
80
90
100
120
140
16
Week 5 Asset pricing models (2)
Testing CAPM
CAPM relates expected returns to betas, i.e. It is a theory about what determines returns on average CAPM says:
Linear relationship between average returns and beta Relationship has intercept = rf and slope = e
Week 6 Stock market efficiency
Market efficiency
In an informationally efficient stock market, the price of a stock fully and correctly incorporates all relevant information Logical argument for why stock market should be efficient
Forms of efficiency
Sto
THE JOURNAL OF FINANCE VOL. LVI, NO. 1 FEBRUARY 2001
Have Individual Stocks Become More Volatile?
An Empirical Exploration of Idiosyncratic Risk
JOHN Y. CAMPBELL, MARTIN LETTAU, BURTON G. MALKIEL,
and YEXIAO XU*
ABSTRACT
This paper uses a disaggregated ap
Fixed Income
Homework #2
1. Answer the following questions.
(a) A portfolio manager of a tax-exempt fund considers a $500,000 zero-coupon bond investment that pays an annual interest rate of 5.7% for four years. At the end of year four, the
manager expect
Fixed Income
Homework #2
1. Answer the following questions.
(a) A portfolio manager of a tax-exempt fund considers a $500,000 zero-coupon bond investment that pays an annual interest rate of 5.7% for four years. At the end of year four, the
manager expect
Fixed Income
Homework #3
1. A portfolio manager (PM) purchases $500,000 face amount of a 10-year corporate bond with
a 5% coupon priced at a required yield of 4.8%. She assumes her reinvestment interest rate at
3.5% until the end of year three and then 4%
Fixed Income
Homework #4
1. The bid and ask yields for a Treasury bill are quoted as 5.91% and 5.89%, respectively. Should
the bid yield be less than the ask yield because the bid yield indicates where the dealer is
willing to sell the Treasury bill?
Solu
Fixed Income
Homework #4
1. The bid and ask yields for a Treasury bill are quoted as 5.91% and 5.89%, respectively. Should
the bid yield be less than the ask yield because the bid yield indicates where the dealer is
willing to sell the Treasury bill?
Solu
Fixed Income
Homework #6
1. Assume annual yields in the table below and fill in the missing values.
Year
Time
1
Par Coupon
c1
Zero Rate
z1
Forward Rate
PV Factor
f01
2
4.0%
3
4
c2
c3
c4
z2
z3
z4
f12
8.0%
f23
9.0%
f34
7.35%
2. A bond portfolio managers vie
Fixed Income
Homework #1
1. What is the cash flow of a bullet 10-year bond that pays a semiannual coupon of 5%
and has a par value of $1,000,000?
2. A bond pays a 5% quarterly on a 30/360 basis.
(a) What yield on an actual/360 basis is equivalent to the 5
Fixed Income
Homework #3
1. A portfolio manager (PM) purchases $500,000 face amount of a 10-year corporate bond with
a 5% coupon priced at a required yield of 4.8%. She assumes her reinvestment interest rate at
3.5% until the end of year three and then 4%
Fixed Income
Homework #1
1. What is the cash flow of a bullet 10-year bond that pays a semiannual coupon of 5%
and has a par value of $1,000,000?
Solution: This bond will have 20 payment periods. In period 1-19, the investor
receives 0.05/2 1,000,000 = 25