Answer for Problem Set 2
FIN 411, Spring 2015
Professor Mao Ye
Problem 1:
a.
The standard deviation of each individual stock is given by:
Since A = 0.8, B = 1.2, (eA ) = 30%, (eB ) = 40%, and M = 22%, we get:
A = (0.82 222 + 302 )1/2 = 34.78%
B = (1.22 22
Lecture 10
Empirical Evidence on
Security Returns
1
Two Topics, Two views
Twotopics
TestsofCAPM
FamaFrenchthreefactormodels
Twoviews
Rational
Behavioralview(nextclass)
2
The Index Model and the
Single-Factor APT
ExpectedReturnBetaRelationship
E ri rf
Answer for Problem Set 1
FIN 411, Spring 2015
Professor Mao Ye
Problem 1:
Utility for each investment = E(r) 0.5 4 2
1.
We choose the investment with the highest utility value, Investment 3.
Expected
Investment
return E(r)
1
2
3
4
0.12
0.15
0.21
0.24
Stan
Problem Set 4
Finance 411
Professor Mao Ye
Due on Monday, April 13, 2015 in class
Problem 1
CFA problem 1 at page 715 of BKM
Problem 2
Suppose that the risk free rate is 5% per year. We wish to value a 2-year American call option with a
strike price of $1
FIN 411
Due Date: September 15, 2015 (in class)
Solution to Problem Set 1
1. (7 Points) The following table describes the joint probability distribution of random
variables X and Y . The entries in the table are probabilities of observing a particular
(X,
Fin 411 Midterm Exam
Professor Mao Ye Spring 2013
SHOW YOUR WORK! There are 100 points; the exam should take 80 minutes.
Multiple Choices (40 points, 4 points each)
1. Based on the utility function above, which investment would you select?
Investment
Expe
Lecture 11
The Term Structure of
Interest Rates
1
Announcement
GuestLecture
April20
InputyourtradesafterTuesdayMarch10,3pmandbefore
WednesdayMarch11th,3pm.
2
Bond Pricing in Fin 300
PB
T
C ParValue
(1r ) t (1r )T
t
1
PB=Priceofthebond
Ct=interestorcoupo
Problem Set 1
Finance 411
Professor Mao Ye
Due on Wednesday, February 11, 2015 in class
Note: BKM refers to the Investment written by Bodie, Kane and Marcus, 10th edition
Problem 1 (30 points)
Chapter 6, CFA problems 1, 2 and 3 at page 195 of BKM
Problem
CAPM in Practice
FINANCE 411
Investment and Portfolio
Management
Dana Kiku
Fall 2016
1
CAPM in Practice
Overview
How to measure market risk:
regression analysis
implementation
How to test the CAPM
Empirical Evidence
"Anomalies"
2
CAPM in Practice
Beta
Capital Asset Pricing Model
FINANCE 411
Investment and Portfolio
Management
Dana Kiku
Fall 2016
1
Introduction:
CAPM
Markowitz Analysis vs. Equilibrium Asset Pricing
Mean-Variance Analysis allows us to choose a desired portfolio
given expected returns, va
Arbitrage Pricing Theory
FINANCE 411
Investment and Portfolio
Management
Dana Kiku
Fall 2016
1
APT
Overview
Arbitrage Pricing Theory (APT)
assumptions
arbitrage
implications
APT and multifactor models vs. CAPM
APT in practice
factor selection
2
APT
In
Lecture 17
International Diversification
1
Todays Agenda
Risk of international diversification
Return on international diversification
Evaluate the performance of international
diversification
2
Background
The U.S. accounts for
only about a third of
w
Lecture 14
Option Pricing II
Three Intervals
S+
S+
S+-
S+
S+-
S
S-
S+-S-
S-
Possible Outcomes with Three Intervals
Event
3
2
1
3
Probabilit Final Stock Price
y
up
1/8
100 (1.20)3 =
$172.80
up 1 down 3/8
100 (1.20)2 (.90) =
$129.60
up 2 down 3/8
100 (1.20)
Fin 411 Midterm Exam
Professor Mao Ye Spring 2015
SHOW YOUR WORK! There are 100 points; the exam should take 80 minutes.
Multiple Choices (48 points, 4 points each)
1. Consider the regression equation:
ri- rf= g0+ g1bi+ g2s2(ei) + eit
where: ri- rf = the
Mid-Term Answer Key
Multiple Choices (40 points, 4 points each)
1. Based on the utility function above, which investment would you select?
Investment
Expected Return E(r)
Standard Deviation
1
0.14
0.24
2
0.16
0.40
3
0.19
0.26
4
0.23
0.48
U = E(r) (A/2), w
Portfolio Choice and Diversification
FINANCE 411
Investment and Portfolio
Management
Dana Kiku
Fall 2015
1
Portfolio Choice
Overview
Question:
How to allocate your wealth optimally?
Mean-Variance portfolio analysis (developed by Markowitz in
early 1960's
Rates of Return
FINANCE 411
Investment and Portfolio
Management
Dana Kiku
Fall 2015
1
Rates of Return
Overview
Measuring returns
Components
Nominal and real
Characterizing returns
Population moments
Normal and log-normal distribution
Data
Empirical m
Markets and Transactions
FINANCE 411
Investment and Portfolio
Management
Dana Kiku
Fall 2015
1
Markets and Transactions
Overview
Overview of Markets
Market Indices
Portfolio Construction
Types of Transactions
Investment Companies
2
Markets and Transactio
Statistical Review
FINANCE 411
Investment and Portfolio
Management
Dana Kiku
Fall 2015
1
Statistical Review
Overview
Probability
Random Variables and Probability Distributions
Population Moments
Sample Moments
Sampling Distribution
2
Statistical Review
P
Instructor:
Dana Kiku
FIN 411
Fall 2015
dka@illinois.edu
E-mail:
Oce Hours: Thursday 3:30pm-4:30pm
470E Wohlers Hall
Location:
Course
WebPage:
https:/compass2g.illinois.edu
Investment and Portfolio Management
The course focuses on the fundamental concepts
Problem Set 3
Finance 411
Professor Mao Ye
Due on Wedesday, April 1st, 2015 in class
Problem 1
Problem 9 at BKM 10th edition, page 547
Problem 2
CFA problem 3 at BKM 10th edition, page 510.
Problem 3
CFA problem 9 at BKM 10th edition, page 512
Problem 4
C
Problem Set 2
Finance 411
Professor Mao Ye
Due on Friday, February 20, 2015
You can bring it to the class on February 18 or put it in my mail box in Wohlers 339
Problem 1 (20 points)
Chapter 8, Problem 6 at page 286 of BKM
Problem 2 (20 points)
Chapter 8,
Lecture 3
Optimal Risky Portfolios
.
Big Picture
Investment Decision: Top-down Process
Capital allocation
Between the risky portfolio and risk-free assets
Allocation across broad risky asset classes
e.g.: U.S. stocks, U.S. bonds, international stocks an