FINANCE 511 LECTURE ONE Investment Asset Classes
Financial markets Play a central role in the allocation of capital resources. Investors
who purchase shares of stocks and/or bonds from companies in the primary market are
providing funds for investments. T
FIN 511: Assignment 1
1. Do Chapter 6 Appendix A Problem 1 in BKM. U(W) = ln(W) where ln is
the natural logarithm function. [Hint: The inverse of the natural logarithm
function is the exponential function, f (x) = ex.]
Suppose that your wealth is $250,000
Assignment 6
Part 1 One factor model
Regression results for one-factor market model. We can see from the table below
for the estimated intercepts of the 10 period regression.
e) Except for portfolio 1 and 2, other portfolios all have estimated constants
s
FIN 511: Assignment 2
a)
1 2 0.31 2
2
Ct
C t+1=0.5C2
t 0.15C t +1
2
2
Ct +1=( 1,000,000C t )( 1+ 80 ) =1,800,0001.8 Ct
max U ( C t ) + 0.3U ( C t +1 )=
C t ,C t+ 1
b)
c)
2
2
max 0.5C t 0.15(1,800,0001.8 Ct )
Ct
f.o.c
3
C3
t +0.3( 1,800,0001.8C t ) (1.8 )
Problem Set #2 Solutions
1. Consider a 2-year, risk-free bond with a coupon rate of 6% (annual coupons) and a face
amount of $1,000.
a. What is price of this bond if the YTM is 5%? 6%? 7%?
For each yield the price is
60
1060
+
P=
1 + y (1 + y ) 2
Therefor
Lecture 4: Equity Valuation and
Arbitrage Strategies
Portfolio Management
Prof. Jaewon Choi
Announcement
Problem Set 1 is due Nov 30
Submit electronically to the TA
Meet at the MIL (market information lab) on Nov 30
Warren Buffett
Intrinsic value (or
Lecture 3: The CAPM and
Market Efficiency
Portfolio Management
Prof. Jaewon Choi
The CAPM I: Outline
What is the use of the Capital Asset Pricing Model (CAPM)?
The tangency portfolio
The required returns on individual assets
The Capital Asset Pricing M
1. Consider two bonds, A and B. Both bonds presently are selling at their par value of $1,000.
Each pay coupons of $120 annually. Bond A will mature in 5 years while bond B will mature in
6 years. If the yields to maturity on the two bonds change from 12%
Lecture 5: Fixed Income
Portfolio Management
Prof. Jaewon Choi
Outline
Main features of bonds
Yield to maturity
Realized return
Announcement
Problem Set 1 is due Nov 30
Submit electronically to the TA
Meet at the MIL (market information lab) on Nov
Lecture 2: Portfolio Theory
Principles of Finance
Prof. Jaewon Choi
Some Reviews Before Portfolio Theory
Time Value of Money
Yield/Discount Rate
Investment Horizon
Present Value
To receive $1000 in two years, how much should I invest
today at a rate o
Session 3: Performance Measurement
Investment and Portfolio Management
Prof. Jaewon Choi
Assignments
Problem Set 1
Due Sep 9th Wednesday
Outline
Future/Present Value
Annual percentage rate (APR)
Effective annual rate (EAR)
Single period returns(annualiz
Session 4: Portfolio Theory I
Portfolio Management
FIN 411/511
Prof. Jaewon Choi
Assignments
Assignments
Problem Set 1 due on Wednesday Sep 9
Outline
Portfolio choice with 2 risky assets
Diversification
Investment opportunity set
Efficient frontier
Session 5: Portfolio Theory II
Portfolio Management
FIN 411/511
Prof. Jaewon Choi
Assignments
Assignments
Problem Set 1 due Sep 9th
Outline
Risk-return tradeoff
Indifference curves
[E(rp),p] diagram
Optimal portfolio choice with 2 risky assets
Optimal P
Session 6: Portfolio Theory III
Portfolio Management
FIN 411/511
Prof. Jaewon Choi
Assignments
Homework
Problem Set 2 due on Sep 23 (Wednesday)
Outline
Portfolio selection with a risk-free and many risky securities
Systematic and idiosyncratic risk
The
Session 7: The CAPM I
Portfolio Management
FIN 411/511
Prof. Jaewon Choi
Assignments
Problem Set 2 Due on Sep 23th (Wednesday)
Outline
Assumptions
The tangency portfolio
The required returns on individual assets
CAPM: Introduction
Equilibrium model th
Session 13: Arbitrage and Replicating
Portfolios
Portfolio Management
Prof. Jaewon Choi
Assignments
Reading
Problem Set 4 due Oct 26th (Monday)
Outline
Arbitrage definitions
Arbitrage pricing
Arbitrage pricing with transactions costs
Real-world arbitrag
Session 14: Fixed Income I
Portfolio Management
Prof. Jaewon Choi
Assignments
Reading
Problem set due Oct 26 (Monday)
Outline
Main features of bonds
Yield to maturity
Realized return
Main Features of Bonds
1.
2.
3.
Issuer
US Treasury/Government
States, m
Assignment 4
1. a.
y ' =
E [ R p ] Rf
A
2
p
=
15 7
=55.1
422
E [ Rc ] =0. 55115 + 0.4497 =11.4
c =0.55122 =12.1
b.
let
E [ R p ]Rf
A ' 2p
=1
we can get A = 1.65
When A<1.65 and there is no borrowing rate, the utility curve is
shown as U1. And the optimal
1a) The regression result is as follows:
b) The coefficient is 0.2395. The standard deviation of AC is 0.094673, the
market expected return for next period will increase by 0.0227 if AC increase by
one standard deviation.
c) Yes, the t value is statistica
Assignment 7
1.
For bond portfolio:
0.6
=15
4
For equity fund:
0.6
=5
12
Because bond portfolios have lower expected return, thus fees are higher fraction in bonds
compared to equity funds, leading management fees a bigger factor in investment decisions.
LECTURE THREE: COMPANY ANALYSIS
I.
MEASURES OF VALUE
A.
B.
C.
D.
Book Value original cost
Liquidation Value sum of pieces
Replacement Cost
Market Value MV of debt + equity +
Tobins Q: Market ValueReplacement Value
Although the balance sheet can give some
LECTURE TWO: EIC ANALYSIS
To value a firms equity (common stock) we must be able to forecast future earnings and the dividends that
will be paid from these earnings. This is the heart of fundamental analysis. Because a firms earnings are
tied to events in
FINANCE 511
MIDTERM EXAMINATION
SUMMER 2010
INSTRUCTIONS: This exam is comprised of one discussion question, two work
problems, 10 True/False questions and 10 multiple choice questions. You must answer
the discussion question, all multiple choice question
Finance 511
Investments/Portfolio Analysis
Summer 2011
Instructor: Dr. Mark Krueger
Office: 70C Wohler Hall
Hours: 8-10 Friday
Summary: This course will provide students with an overview of investment theory and
risk management. We begin with a discussion
Problem1:
S0=100
Su=115 Priceifstockpriceincreases
Sd=90 Priceifstockpricefalls
rf=5.26%
UsingBinomialModelwithtwoperiods:t=0andt=1:
a.
Priceput(x=110)
b.
Pricecall(x=110)
c.
Provethatthepricescalculatedareorarenotconsistent
withputcallparity
Problem2:
ri
Diversification Index CAPM
FIN 511: Investments
Joshua M. Pollet
Lecture 11
Pollet
FIN 511
Diversification Index CAPM
Administration
I
Assignment 4 is due next class
I
Read BKM Chapter 8
Pollet
FIN 511
Diversification Index CAPM
Risk over time
I
Have Indi
Insurance Saving Measurement History
FIN 511: Investments
Joshua M. Pollet
Lecture 4
Pollet
FIN 511
Insurance Saving Measurement History
Administration
I
Assignment 1 is due in one week
I
BKM Chapter 11 (Section 1 and Section 2)
Pollet
FIN 511
Insurance S
Gordon FCF Regression Predictability
FIN 511: Investments
Joshua M. Pollet
Lecture 8
Joshua M. Pollet
FIN 511: Investments
Gordon FCF Regression Predictability
Administration
I
Assignment 2 is due today
I
Assignment 3 is due in one week
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BKM Chapter 7
Jo
Administration Expectations Overview
FIN 511: Investments
Joshua M. Pollet
Lecture 1
Pollet
FIN 511
Administration Expectations Overview
Syllabus
I
Who am I?
I
I
I
I
contact information on syllabus
faculty for more than a decade
extensive research in lead