Microsoft PowerPoint - PoF.ppt

Varianceƒ 81 Total variance of the return on a security ƒ Portfolio variance () 2 1 2 2 (^21) 2 2 2 0 , cov J J P P N J K J J ...

SFM variance vs. Markowitz varianceƒ 82 Markowitz formula is perfectly accurate, given the accuracy of the covariance estimates. ...

Examples ƒ 83 Given the following info and the a ssumption of a SFM, what is the covariance between stocks A and B? ƒ Consider a ...

Example ƒ 84 Consider a portfolio of stock A and B, where the weight of stock A is 1/2 and assume the following: ƒ What is the b ...

Example ƒ 85 Consider a portfolio of stock A and B, where the weight of stock A is 0,4 and assume the following: ƒ What are the ...

Assumptionƒ 86 Security returns are not longer correlated for only one reason, i.p. each security is assumed to respond to the p ...

Varianceƒ 87 Total variance of the return on a security ƒ Portfolio variance () 2 1 2 2 , 1 , 2 2 1 2 1 , 2 1 2 1 , 2 * 0 , cov ...

Example ƒ 88 A 2-factor model is being employed, on e a market factor (M) and the other a factor of unexpected changes in the gr ...

Motivationƒ 89 Problems associated with the CAPM Ä growing interest in alternative valuation models! ƒ Most important alternativ ...

Assumptions ƒ 90 Securities’ returns can be described through an index or factor model The implicit assumption that the co varia ...

Expected return and risk relationshipƒ 91 Given these assumptions we “derive” the approximate relationship between expected retu ...

Expected return and risk relationship 92 ƒ There are an unlimited number of secu rities along the curved line; six of these secu ...

Expected return and risk relationship 93 ƒ We’ll all be trying to take advantage of this arbitrage opportunity, selling short st ...

Important factsƒ 94 Given factor prices s.t. there exis t a linear relationship between the betas with reference to the market p ...

Exampleƒ 95 Assume that a 3-factor APT model is ap propriate. The expected return on a portfolio with zero beta values is 5%. Yo ...

Exampleƒ 96 Assume a 1-factor APT model having the expected return-beta relationship as graphed. Find a portfolio of A and C tha ...

Overviewƒ 97 Fixed income (FI) securities ƒ Floating rate notes (FRNs) ƒ Additional literature ƒ Haugen, R. A., Modern Investmen ...

Overviewƒ 98 Introduction ƒ Equity vs. debt instruments ƒ Definition ƒ Characteristics ƒ Bond Markets ƒ Valuation ƒ Credit risk ...

Equity vs. debt instrumentsƒ 99 Equity instruments ƒ Residual claim (on the earnings of the firm) ƒ Control in non-default state ...

Definitionƒ 100 Bonds are called fixed income securities, because ƒ a fixed amount, “face value” (FV) / “principal” / “par value ...