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 Hypothesis. However, consider the following:
a. Multiple studies
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 1:00pm-2:00pm Office: VMH 4416
E-Mail: [email protected]
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 fixed future date for a fixed price.
-The fixed future d
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 your investments across different
assets such as stocks, b
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 and
riskfree assets, we need to know how to choose amon
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) explain why certain firms
have certain returns; and (2
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
arrangement.
The borrower issues (sells) a bond to the lender
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 exercise or strike price
On or before the expiration date
Exe
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 economy
Examples: Land, buildings, machines, knowledge use
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
(except problem 4 in homework 2 since it is due
after Monday'
Help Session 1
Quantitative Review
Shuo Wang
[email protected]
Outline
Probability Distributions
Expected Returns
Mean and Variance
Normal Distribution
Multivariate Statistics
Covariance and Correlation
Hypothesis Testing
t-Test
Confidence Interval
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 modern financial
theories.
x
Derived using principles of
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, for example, could not issue stocks or bonds to the
gener
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 (with all
other variables such as variances unchanged), the
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 the exercise or strike price
On or before the expirat
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 economy
Examples: Land, buildings, machines, knowledge u
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: Allocating your investments across different
assets such
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 between risky and
riskfree assets, we need to know how to
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 underlies most modern financial
theories.
x
Derived using pri
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 used to (1) explain why certain firms
have certain ret
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 sell an asset
on a fixed future date for a fixed price.