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 where
_.
Organized exchanges
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
by
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
Aversion
Return =
Ending Price - Beginning Price + Intermediate Income
Beginning Price
Rt +1 =
An Example
You bought IBM stock at $40 last month. The
price of IBM stock is $45 today. IBM paid $1
dividend yester
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 to buy _ securities and sell
_ securities
It is therefo
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 values of the random variable, with
their associated pro
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 is lower the greater the t is.
FV t
PV t =
(1 + r )t
S
Valuation
Equity Analysis II: Relative
Valuation Models
Valuation Models
Absolute valuation models
Relative valuation models
Price to Earnings
P/E ratio = Price per share/Earnings per
share
Two variations
trailing P/E
leading P/E
Valuation is the estimati
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 about the portfolio, what is it?
Sources of Abnormal
Pe
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 $112 per share one year
from today.
The required risk premium for the stock is
7%.
The risk free rat
Portfolio Construction
Capital Allocation
Capital Allocation and Security
Selection
Capital allocation decision is concerned with
Security selection decision is concerned with
Capital Allocation
In making the capital allocation decision, I
assume that you
Market Efficiency
The Efficient Market
Hypothesis
Is Market Efficient?
If not efficient
mispriced securities
arbitrage opportunity
efficient
But information is not always publicly
available
Mispricing may not always be arbitraged
away.
The real question i
Overview of Term Structure
of Interest Rates
Relationship between yield to maturity and
maturity
Information on expected future short term
rates can be implied from yield curve
Three major theories are proposed to explain
the observed yield curve
Bond Val
What is a bond?
Bond Valuation I
Coupon Rate and Current Yield
Bond Valuation
Important characteristics of a bond:
Face Value ($ F)
Coupon ($ C)
Maturity (t periods)
Required rate (r )
Bond is an I.O.U.
Bond is a borrowing agreement
Bond issuers borrow mo
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
markets, including the behavior of individual
and institution