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 where
The primary market for secu
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
E(RP ) = wE(RA ) + (1 w) E (RB )
p 2 = w2 A 2 + (1 w) 2 B 2
Holding Period Return
Return, Risk, and Risk
Ending Price - Beginning Price + Intermediate Income
Rt +1 =
You bought IBM stock at $40 last month. The
price of IBM stock is $45 today. IBM paid $1
Equity Analysis I: Valuation
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 to buy _ securities and sell
It is therefo
Each possible outcome is associated with a
A random variable is represented by its
probability distribution, i.e. the set or list of all
possible values of the random variable, with
their associated pro
Time Value of Money
FV t = PV t (1 + r )
Simple Qualitative Results
FV t = PV t (1 + r )
The future value is higher than the present
value if r > 0.
The present value is lower the greater the t is.
PV t =
(1 + r )t
Equity Analysis II: Relative
Absolute valuation models
Relative valuation models
Price to Earnings
P/E ratio = Price per share/Earnings per
Valuation is the estimati
Why Performance Evaluation?
What is important?
Performance evaluation requires historical
If there is only one piece of information youd
like to know about the portfolio, what is it?
Sources of Abnormal
Capital Asset Pricing
What should be ABCs share
ABC Inc. is expected to pay a liquidating (i.e.,
terminal) dividend of $112 per share one year
The required risk premium for the stock is
The risk free rat
Capital Allocation and Security
Capital allocation decision is concerned with
Security selection decision is concerned with
In making the capital allocation decision, I
assume that you
The Efficient Market
Is Market Efficient?
If not efficient
But information is not always publicly
Mispricing may not always be arbitraged
The real question i
Overview of Term Structure
of Interest Rates
Relationship between yield to maturity and
Information on expected future short term
rates can be implied from yield curve
Three major theories are proposed to explain
the observed yield curve
What is a bond?
Bond Valuation I
Coupon Rate and Current Yield
Important characteristics of a bond:
Face Value ($ F)
Coupon ($ C)
Maturity (t periods)
Required rate (r )
Bond is an I.O.U.
Bond is a borrowing agreement
Bond issuers borrow mo
What is the intrinsic value of a
The Psychology of Finance
Behavioral Finance deals with the influence
of psychology on various aspects of financial
markets, including the behavior of individual