CHAPTER 2
MARKETS AND FINANCIAL INSTRUMENTS
2.1 THE MONEY MARKET
The money market is a sub-sector of the fixed-income market. It consists of very
short-term debt securities that usually are highly marketable. Many of these
securities trade in large denomi
CHAPTER 7
OPTIMAL RISKY PORTOFLIOS
7.1 DIVERSIFICATION AND PORTFOLIO RISK
Suppose you have in your risky portfolio only one stock, say Dell Computer
Corporation. What would be the sources of risk affecting this portfolio?
You might think of two broad sour
CHAPTER 17
OPTIONS MARKETS: INTRODUCTION
20.1 THE OPTION CONTRACT
Derivative instruments, or simply derivatives, play a large and increasingly
important role in financial markets. These are securities, whose prices are
determined by, or derive from, the p
CHAPTER 18
OPTIONS VALUATION
18.1 OPTION VALUATION: INTRODUCTION
In the previous chapter, we examined option markets and strategies. We ended
by noting that many securities contain embedded options that affect both their
values and their risk-return chara
CHAPTER 4
MUTUAL FUNDS AND OTHER INVESTMENT
COMPANIES
4.1 INVESTMENT COMPANIES
Investment companies are financial intermediaries that collect funds from
individual investors and invest those funds in a potentially wide range of
securities or other assets.
CHAPTER 6
RISK AVERSION AND CAPITAL ALLOCATION TO RISKY
ASSETS
6.1 RISK AND RISK AVERSION
In Chapter 5 we introduced the concepts of holding period return (HPR) and the
excess return over the risk-free rate. We measured the reward` as the difference
betwe
PORTFOLIO RISK (SEE ALSO CHAPTER 6)
1. Asset Risk vs. Portfolio Risk
Investor portfolios are composed of diverse types of assets. In addition to direct
investment in financial markets, investors have stakes in pension funds, life
insurance companies with
BUS 431a: Investment and Portfolio Management
SPRING 2013
PROBLEM SET 7 (Team work)
1. (8 points) Consider stock XYZ whose prices evolve according to a binomial process. The
stock is currently trading at $50 and it is known that at the end of one year, th
CHAPTER 5
INTRODUCTION TO RISK, RETURN AND THE
HISTORICAL RECORD
5.1 DETERMINANTS OF THE LEVEL OF INTEREST RATES
The distinction between the real and the nominal rate of return is crucial in
making investment choices when investors are interested in the f
Portfolio and Capital Market Theory
Portfolio Theory Selection of optimal portfolios
Efficient Portfolio That portfolio that maximizes expected return at any given level of expected
risk.
Assumptions:
n
1) E R Ri Pi
i
1
i.e., the expected return is the me