1 6F:111 Investments Professor Gerry Suchanek PERFORMANCE ATTRIBUTION Superior investment performance depends on being in the right securities at the right time. Investment decisions have three (03) parts: 1) Broad asset market allocation choices. 2) Indu
Fixed-Income Portfolio Management
Corporate Debt Instruments
corporate bonds medium-term notes CP = commercial papers ABS = asset backed securities
They have priority over common stocks in the case of bankruptcy.
Bond Rating
Duff and Phelps Credit Ratin
SECURITIES TRADING
STOCK MARKETS Stocks are traded on organized exchanges and also through networks of brokers and dealers (sometimes called "over-the-counter" markets). There are over a hundred stock markets in the world; some of the largest ones are des
Options
An option contract conveys the right (but not the obligation) to buy or sell an underlying asset at a specified price (known as the exercise price or the strike price) within a specified period of time (the life of the option) A call option convey
Performance Evaluation
Simplifying assumptions
Portfolio composition is constant during evaluation period Stationarity
Asset returns (and hence portfolio returns) have constant means, variances and covariances
1. Sharpe ratio
Useful when the portfolio
6F111 Study Problems Set 1 1. Margin Account. You purchase 100 shares of Stock A using a margin account. The stock price is $60 per share. The Initial Margin is 60% and the maintenance margin is 40%. a. Construct the balance sheet for this transaction for
PROBLEM SET 1B Securities Index Problems 1. Price-Weighted Index Problem.
a. Let I be a price-weighted index where the index portfolio consists of two securities, initially identified as A and B, at time t = 0. The market prices of A and B at t = 0 are P0
Answers to Study Problem Set 1B 6F111 1. a. (1) I1 = (60+40)/2 = 50 (2) I/I = (50-40)/40 = 10/40 = or 25%.
b. (1) The post-split value of the index is the same as the pre-split value of the index, namely 50. (2) To calculate the new divisor, calculate Dne
Solutions to Study Problems, Set 4 Chapter 8 6. a. The standard deviation of each individual stock is given by: i = [ i2 2 + 2 (e i )]1 / 2 M Since A = 0.8, B = 1.2, (eA ) = 30%, (eB ) = 40%, and M = 22%, we get: A = (0.82 222 + 302 )1/2 = 34.78% B = (1.2
Chapter 5, CFA Study Problem Solutions 1. 5. 6. The expected dollar return on the investment in equities is $18,000 compared to the $5,000 expected return for T-bills. Therefore, the expected risk premium is $13,000. E(r) = (0.9 20%) + (0.1 10%) =19% The
Solutions, 6F111 BKM, Investments, 8th Ed. Chapter 11 7. a. That the average rate of return greatly exceeds zero does not contradict the Weak Form Efficiency criteria because markets may well be weak form efficient while still providing significantly high
The Arbitrage Pricing Theory (APT)
A basic principle of financial economics: In efficient markets, prices must be such as to rule out the existence of arbitrage opportunities APT is an asset pricing model which relies on the "no arbitrage" principle to g
The CAPM The
The CAPM: An asset pricing model An
Prescribes a method of determining the Prescribes relationship between risk and equilibrium expected returns expected s An equilibrium model An
s
Assumptions Assumptions
Perfect Capital markets Investors a
1 6F:111 Investments Professor Gerry Suchanek PERFORMANCE EVALUATION: How well do managed funds perform; i.e. How well do fund mgrs. & their mgt. groups perform. How Returns are Measured: 1. Geometric Avg. w/Compounding 2. Arithmetic Avg. Simple Avg, No C
The Multifactor APT
Consider a two factor, two security case Suppose that returns are generated by the following process
~ ~ ~ = E (r ) + F + F + ri i 11 22 i
One can form "factor portfolios" defined as portfolios with a beta (sensitivity) equal to 1 on o
Concepts Checks 2
Portfolio Theory
Definitions & Notation
Notation:
P: A risky portfolio, consisting of 1 or more risky assets f: A risk-free asset C: A complete portfolio, consisting of a percentage investment allocation y in a risky portfolio P and a
Futures
Difference between forward and futures contracts: Futures contracts are standardized Futures contracts are exchange traded Futures contracts are marked to market daily
The spot-futures parity relation
General form (for a t period contract) F0 = S0
An Example
Suppose that a stock is currently priced at $100. The stock is expected to provide a dividend of $3 payable at the end of the year. The one year risk-free rate of interest is 5%. The futures price on a one-year futures contract on the stock is
Market efficiency
Definition
An efficient market is one in which prices reflect all available information
1
Why worry about efficiency?
Prices are signals which determine resource allocation in a market economy Efficient prices are hi-fidelity signals
Lecture Notes 1A Technical Review
Probability, Statistics, and Econometrics
Probabilities
Discrete Distributions & Continuous Densities Countable and Uncountable Sum or Integrate to 1 Non-negative Random Variable: A function that maps uncertain outcomes
Lecture Notes 1B Investment Management
Gerry L. Suchanek
An Investment Choice Problem
Consider the following investment options Option A: Invest $1000 today and receive $1100 after one year with certainty Option B: Invest $1000 today and one year later to
Lecture Notes 2
The Financial Environment
A classification of assets
Real Assets: Tangible, physical assets Financial Assets: Stocks, Bonds etc. claims on cash flow produced by underlying real assets
Markets
Money markets Short term, marketable, liquid
Chapter 2: Financial Markets and Instruments
Chapter 2 objectives Identify different financial instruments Learn preliminaries of their risk-return Learn to read data from the Wall Street Journal Understand the construction of stock indexes
Common Stock
Risk and Return Risk
Measures of Return Measures
s s s s
s s
Holding Period Return (HPR) = [P(1)-P(0)+D]/P(0). This Holding can be generalized. can Riskless Rate of Return = Return on Short-Term US Riskless Treasury Bills. Treasury Expected Return = Proba