504 group project
Team Members:
Di Wang
Xiaotong Li
Youning Huang
Jing Liu
504 Project Report
-LKEQX & VEIPX
Part 1 Style Analysis
The purpose of this part is to define the preference of our portfolios in
four benchmarks.
I. Process of Style Analysis.
Fir

MSF 504 Spring-2015
In class exercise 1 solutions, 1-21-2015
Part I. International diversification
1. Discuss why international diversification reduces portfolio risk. Specifically, why would you
expect low correlation in the rates of return for domestic

MSF 504 Assignment 1
Edited by Chao Wang
Problems from Chapter 8 (Reilly & Brown 10th),
Questions 1, 4. (P235)
1. Draw a graph that shows what happens to the Markowitz efficient frontier when you combine a
risk-free asset with alternative risky asset port

The Institutional Investment Process
Asset/ Liability Study
Client with Money
(consultant)
- Pension funds
How Much Return Must I have with
current assets and projected cash flows
to meet projected demands
- Endowments
- High Net worth Individuals
Report

504 Project Part II
This part of the project is bigger. It consists of two main parts.
1)
You must estimate the risk premiums present in the economy for the variables
Sectors (10 of them), beta, and log of mktcap.
-You must comment on whether the beta, bp

Fall 2014
504 Project Part #1.
This part of the project is mainly a style analysis.
You will need to use Yahoo Finance to do this assignment.
1. You will open the example style analysis spreadsheet. Figure out how it works.
2. Go to Yahoo Finance Download

Analytic models of equity portfolios
Objectives
(1) Style analysis for the portfolio
(2) Assess historical performance and risk
adjusted performance
(3) Are my portfolios filled with systematic risk
or unsystematic risk?
(4) How to identify and remove the

Performance evaluation of equity
portfolio
How to assess a portfolio manager?
Two Desirable Attributes
The ability to derive above-average returns for a
given risk class. The superior risk-adjusted returns
can be derived from either
Superior timing
Superi

CAPM
Topics
More about Portfolio Theory
The Capital Market Theory
Diversification with many assets
Capital market theory extends portfolio
theory and develops a model for pricing
all risky assets
CAPM
Capital Asset Pricing Model
Combining two risky assets

Equity portfolio management
Todays outline
Passive versus Active fund management
Fund style analysis
Analysis of asset allocation for fund
managemnet
Total Portfolio Return
Total Portfolio Return
The total actual return on any equity portfolio can
be deco

Bond Valuation
Bond Characteristics
Intrinsic Features
Coupon: Determine the periodic interest income
Term to maturity: short term, long term
Principal value: Different from market value, also
called common principal or par value, usually is
$1,000
Yield:

Illinois Institute of Technology
Mid-Term Exam
MSF-504
Dr. Cooper
1.
Fall 2014
(10 points)
A portfolio has the following time-series regression to explain its return (p-values
in parentheses).
(Ri(t)-Rf(t)=-.02 + .2(Rm(t)-Rf(t)+.3(Rm(t)-Rf(t)2+e(t)
(.25)

MSF 504
Fall 2014
Dr. Cooper
Problem Set #2
1.
Assume two assets with correlation=.5.Assume return and std. deviation of A = .1;
return and std. deviation of B=.05 (as in the notes). Assume no constraints on the
weights. What is the weight in A, the portf

Original Attribution Model
Extant performance attribution modeling is based on allocating every
dollar of return to a specific bin based on the decision that generated it.
The purpose is both descriptive, for a risk manger or consultants purposes,
and pre

Manager Behavior
So far we have learned about style analysis. Style analysis allows us to answer
several questions:
1) What set of indexes most highly correlates with a portfolio
managers behavior?
2) Is this similar to the set of Indexes that most closel

Property IIQuick Review
Ix
Jx
E[R]
Z
E[RJ]=z+E[RI-Z]I,J
Where, I,J=I,J/I2
This is what you need to
remember about the
proofthe rest is detail.
Key to the Proof:
dE[ R p ]
d p
E[ RI Z ]
w j 0
Constrained
derivative
MSF 504 - Lecture #3
I
Slope of Line
1
Pr

First Basic Concept: Absolute vs. Active Returns
Your portfolio Returns
The S&P500 Returns
12%
10%
Assuming your benchmark is the S&P500 then
Absolute Return = 12% $100 becomes $112 (112/100-1)
Active Return = 2%
for bench $100 becomes $110, $2 less
Acti

504 Project Part II
This part of the project is bigger. It consists of two main parts.
1)
You must estimate the risk premiums present in the economy for the variables
Sectors (10 of them), beta, and log of mktcap.
-You must comment on whether the beta, bp

Property IIQuick Review
Ix
Jx
E[R]
Z
E[RJ]=z+E[RI-Z]I,J
Where, I,J=I,J/I2
This is what you need to
remember about the
proofthe rest is detail.
Key to the Proof:
dE[ R p ]
d p
E[ RI Z ]
wj
0
Constrained
derivative
MSF 504 - Lecture #3
I
Slope of Line
1
Pr

MSF-504
Problem Set #4
1.
The APT assumption equation looks like a time series regression equation, but it
is not, what is different about it?
2.
If the sensitivity due to Factor 4 is .3, and the risk premium to this factor is 1.1%,
and the actual ex-post

Equity Valuation (I)
Topics
Gorden Growth Model
Dividend Model
FCFE Model
Gordon growth model
Gorden growth model can be used to
roughly estimate the price of a stock with
the assumption that the firm grows at a
constant rate:
Stock Price Today: P = D / (

Equity Valuation (II)
Topics
FCFF model for firm valuation
Case study Disneys firm valuation
FCFF (Free cash flow to firm)
Residual cash flow after meeting taxes
but prior to debt payment
Models to use
(1) FCFF=Net income +Net noncash charges
-Capital exp

Market efficiency
Outline for today
Efficient Market Hypothesis
Tests of Return Predictability
Announcement and Price Return
Event Studies
Market efficiency
Market efficiency is concerned about how
good the capital market and share prices
react to info

DiscountedDividendValuation
Presenter
Venue
Date
Discounted Cash Flow Models
Choice of Discounted Cash Flow Models
Valuing Common Stock Using
a Multiperiod DDM
V0 =
n
Dt
(1 + r )t
t =1
+
Pn
(1 + r )
n
Example: Valuing Common Stock Using
a Multperiod DDM