Suggested Solution to Homework 4, part 1 and part 2
Chapter 11
7.(20 points) The following effects seem to suggest predictability within equity markets and
thus disprove the Efficient Market Hypothesi
Robert H. Smith School of Business
BUFN 740: Capital Markets
Fall 2012
Thursdays Aug 27, 2012-Oct 15, 2012, 2:00pm-5:35pm, DC C1
Instructor: Yajun Wang
Office Hours: Mondays 3:00pm-4:00pm and Fridays
BUFN 740: Capital Markets
Topic 6
Forwards, Futures and Swaps
(BKM 22, 23)
BUFN 740: Capital Markets Topic 6
1
Forwards Contract
A forward contract is an agreement today to buy or sell an asset
on a f
BUFN 740: Capital Markets
Topic 2: Part I
Risk Aversion and Capital Allocation
to Risky Assets
(BKM 6)
BUFN 740: Capital Markets Topic 2: Part I
1
Capital Allocation
Capital Allocation: Allocating you
BUFN 740: Capital Markets
Topic 2: Part II
Optimal Risky Portfolios
(BKM 7)
BUFN 740: Capital Markets Topic 2: Part II
1
Optimal Risky Portfolio
We have examined how to allocate capital between risky
BUFN 740: Capital Markets
Topic 4
Multifactor Models and Market Efficiency
(BKM 11, 12, 13)
BUFN 740: Capital Markets Topic 4
1
Multifactor Asset Pricing Models
CAPM is a model that can be used to (1)
BUFN 740: Capital Markets
Topic 5
Fixed Income Securities
(BKM 14, 15, 16)
BUFN 740: Capital Markets Topic 5
1
What is a Bond?
A bond is a security that is issued in connection with a borrowing
arrang
BUFN 740: Capital Markets
Topic 7
Options
(BKM 20, 21)
BUFN 740: Capital Markets Topic 7
1
The Option Contract: Calls and Puts
A call option gives its holder the right to buy an asset:
At the exercis
BUFN 740: Capital Markets
Topic 1
The Investment Environment and
Historical Record
BKM 1-5
Real Assets Versus Financial Assets
Real Assets
Determine the productive capacity and net income of
the econ
Example 1
Current Stock Stock Price in Probability Distribution
Price
One Year
Return
Probability Probability
100
Q1
140
0.4
25%
Exp
110
0.1
50%
Variance
80
-0.2
25%
Std Dev
Q2
0.1
Q3
Q4
1
2
110.1
160
HelpSessionIII
Chichi(Qi)Xu
[email protected]
Agenda
1.
2.
3.
Go through several concepts and examples to
explain t-statics, p-value and confidence
interval, etc.
Go though homework 1 and 2
(excep
Help Session 1
Quantitative Review
Shuo Wang
[email protected]
Outline
Probability Distributions
Expected Returns
Mean and Variance
Normal Distribution
Multivariate Statistics
Covariance and Cor
BUFN 740: Capital Markets
Topic 3
The Capital Asset Pricing Model
(BKM 9, 13)
BUFN 740: Capital Markets Topic 3
1
Capital Asset Pricing Model (CAPM)
x
It is the equilibrium model that underlies most m
Suggested Solutions to Homework 1
1. Chapter 1, Question 4 (3 points)
Financial assets make it easy for large firms to raise the capital needed to finance their
investments in real assets. If Ford, fo
Homework 3 part 1
PROBLEM SETS
1(3 points).
E (rP ) rf P [ E (rM ) rf ]
.18 .06 P [.14 .06] P
.12
1.5
.08
2(7 points).
If the securitys correlation coefficient with the market portfolio doubles (wit
BUFN 740: Capital Markets
Topic 7
Options
(BKM 20, 21)
2012 Fall
BUFN 740: Capital Markets Topic 7
1
The Option Contract: Calls and Puts
x
A call option gives its holder the right to buy an asset:
At
BUFN 740: Capital Markets
Topic 1
The Investment Environment and
Historical Record
BKM 1-5
Real Assets Versus Financial Assets
x
Real Assets
Determine the productive capacity and net income of
the ec
BUFN 740: Capital Markets
Topic 2: Part I
Risk Aversion and Capital Allocation
to Risky Assets
(BKM 6)
2012 Fall
BUFN 740: Capital Markets Topic 2: Part I
1
Capital Allocation
x
Capital Allocation: Al
BUFN 740: Capital Markets
Topic 2: Part II
Optimal Risky Portfolios
(BKM 7)
2012 Fall
BUFN 740: Capital Markets Topic 2: Part II
1
Optimal Risky Portfolio
x
We have examined how to allocate capital be
BUFN 740: Capital Markets
Topic 3
The Capital Asset Pricing Model
(BKM 9, 13)
2012 Fall
BUFN 740: Capital Markets Topic 3
1
Capital Asset Pricing Model (CAPM)
x
It is the equilibrium model that underl
BUFN 740: Capital Markets
Topic 4
Multifactor Models and Market Efficiency
(BKM 11, 12, 13)
2012 Fall
BUFN 740: Capital Markets Topic 4
1
Multifactor Asset Pricing Models
x
CAPM is a model that can be
BUFN 740: Capital Markets
Topic 6
Forwards, Futures and Swaps
(BKM 22, 23)
2012 Fall
BUFN 740: Capital Markets Topic 6
1
Forwards Contract
x
x
x
x
x
A forward contract is an agreement today to buy or