Financial Assets
Financial Markets And
Financial Instruments - Part I
Real assets are _.
Financial assets _.
What is a Securities Market?
Primary and Secondary Markets
A securities market is a place w
Optimal Risky Portfolio
Optimal Risky Portfolios
Portfolio of Two Risky Assets
Suppose you hold a proportion w in asset A
and (1-w) in asset B
The portfolio expected return and risk is given
by
E(RP )
Holding Period Return
Return, Risk, and Risk
Aversion
Return =
Ending Price - Beginning Price + Intermediate Income
Beginning Price
Rt +1 =
An Example
You bought IBM stock at $40 last month. The
price
Valuation
Equity Analysis I: Valuation
Models
Why Is It Important?
Valuation is one of the most important steps
in investments and portfolio management
To get good return on your investment, you
need
Random Variable
Probability Distribution
Each possible outcome is associated with a
probability
A random variable is represented by its
probability distribution, i.e. the set or list of all
possible v
Basic Formulas
Time Value of Money
Basic Formulas
FV t = PV t (1 + r )
t
Simple Qualitative Results
FV t = PV t (1 + r )
t
The future value is higher than the present
value if r > 0.
The present value
Why Performance Evaluation?
Portfolio Performance
Evaluation
What is important?
Performance evaluation requires historical
performance data
If there is only one piece of information youd
like to know
Expected Return
Capital Asset Pricing
Model (CAPM)
What should be ABCs share
price?
ABC Inc. is expected to pay a liquidating (i.e.,
terminal) dividend of $112 per share one year
from today.
The requi
Portfolio Construction
Capital Allocation
Capital Allocation and Security
Selection
Capital allocation decision is concerned with
Security selection decision is concerned with
Capital Allocation
In ma
Market Efficiency
The Efficient Market
Hypothesis
Is Market Efficient?
If not efficient
mispriced securities
arbitrage opportunity
efficient
But information is not always publicly
available
Mispricing
Overview of Term Structure
of Interest Rates
Relationship between yield to maturity and
maturity
Information on expected future short term
rates can be implied from yield curve
Three major theories ar
What is a bond?
Bond Valuation I
Coupon Rate and Current Yield
Bond Valuation
Important characteristics of a bond:
Face Value ($ F)
Coupon ($ C)
Maturity (t periods)
Required rate (r )
Bond is an I.O.
What is the intrinsic value of a
stock?
Behavioral Finance
The Psychology of Finance
Behavioral Finance
Behavioral Finance deals with the influence
of psychology on various aspects of financial
market