Bond Pricing Chapter 18
The Fundamentals of Bond Valuation
The present-value model
Pp
Ct 2
Pm =
+
t
2n
(1 + i 2)
t =1 (1 + i 2)
2n
Where:
Pm=the current market price of the bond
n = the number of years to maturity
Ci = the annual coupon payment for bond
Portfolio
Performance
Evaluation
18-1
Performance evaluation
Purpose:
Are the returns worth the risk and the fees?
Measures
Average return by itself is an insufficient measure. Why?
Average return may not = expected return
Risk return relationship
Majo
Portfolio
Performance
Evaluation
18-1
Types of management revisited
Passive management
1.
Capital allocation between cash and the risky portfolio
2.
Asset allocation within the risky portfolio.
.
How passive the management actually is varies
Set it and fo
Macroanalysis & Microvaluation
of the stock market
Chapter 12
The Business Cycle
Economic Activity and
Security Markets
Stock Market as a Leading Indicator
l Stock
prices reflect expectations of
earnings, dividends, and interest rates
l Stock market react
Multifactor Models of Risk and
Return
Chapter 9
Arbitrage Pricing Theory
Developed as an alternative to the CAPM
Reasonably intuitive
Required limited assumptions
Allowed for multiple dimensions of
investment risk
Arbitrage Pricing Theory
Based on the Law
Asset Classes and
Financial Instruments
Money Market Instruments
l Treasury
Bills
l Certificates of Deposit
l Commercial Paper
l Bankers Acceptances
l Eurodollars
l Brokers Calls
l Federal Funds
l LIBOR (London Interbank Offer Rate)
2-2
Treasury Bills
l T
Equity Valuation
Fundamental Stock Analysis:
Models of Equity Valuation
l Basic
Types of Models
l Balance
Sheet Models
l Dividend Discount Models
l Price/Earnings Ratios
l Free Cash Flow Models
Valuation Methods
l
Book value
l Value of common equity on th
Chapter 6 Efficient Market Hypothesis
Asset Prices
Definition of Efficient Markets
l
Professor Eugene Fama, who coined the phrase
efficient markets, defined market efficiency as
follows:
l
"In an efficient market, competition among the many
intelligent pa
Asset Allocation Chapter 2
Financial Plan Preliminaries
Insurance
Life
insurance
Term
life insurance - Provides
death benefit only. Premium could
change every renewal period
Universal and variable life
insurance provide cash value
plus death benefit
Finan
Investment Analysis and Portfolio
Management
Introduction Chapter 1
Investments Defined
How
do you measure return?
What is risk?
How do you measure risk?
How do you translate a risk measure into
a risk premium?
Holding Period Return
Dollar
Returns
th
Options
Chapter 22
Call Options
l
A call option gives the buyer of the option the right to buy the
underlying asset at a fixed price (strike price or K) at any time
prior to the expiration date of the option. The buyer pays a price
for this right.
l
At ex
Chapter 21 Forward and
Futures contracts
Characteristics of Derivatives
Underlyings - the rates or prices that relate to the
asset or liability underlying the derivative instrument
Notional amount - the number of units or quantity
that are specified in th
Industry Analysis
Chapter 13
Why Do Industry Analysis?
Help
find profitable investment
opportunities
Part of the three-step, top-down plan for
valuing individual companies and
selecting stocks for a portfolio
What Do We Learn From Industry Analysis?
Is
An Introduction to Asset
Pricing Models
Chapter 8
The Efficient Frontier
E(R)
Efficient
Frontier
Standard Deviation of Return
Adding a risk-free asset
An
asset with zero standard deviation
Zero correlation with all other risky
assets
Provides the risk-
Introduction to Portfolio Management
Chapter 7
What is risk?
Risk, in traditional terms, is viewed as a
negative. Websters dictionary, for instance,
defines risk as exposing to danger or hazard.
The Chinese symbols for risk, reproduced
below, give a much
Chapter 14 Company
Analysis & Stock Valuation
Company Analysis and Stock
Valuation
Good
companies are not necessarily good
investments
Compare the intrinsic value of a stock to its market
value
Stock of a great company may be overpriced
Stock of a gro
Technical Analysis
Chapter 15
Viewing the Trading dynamics versus
pure fundamentals
Methods to forecast prices
Premise
Fundamental
Analysis
Technical
Analysis
Black Box
Focus on
supply and
demand that
drives price
action
The cause of
price action
Study of