FIN 327 Final Exam

San Diego State University **We aren't endorsed by this school
RWS 290
Oct 16, 2023
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CAL: E(r c ) = YE(r p )+(1-y)r f capm:E(r i )=r f +Y[E(r m -r f )] complete portfolio E(r) same Req rate of return: r f +Y[r m -r f )] Expected return security excess: [r f +y[E(r m )-r f ]]-Tr Tr=total return of security Real Rate of return: (1+nominal/1+inflation)-1 Std dev: √variance *given capital asset std dev: asset E(r) - r f [E(r)] / asset std dev Variance=probability x (rate-E(r)) 2 +prob y (rate-E(r)) 2 Variance portfolio :weight of risky asset 2 * variance of risky NAV 0 : total assets beg /total shares beg NAV 1 :asset end -(asset end *expense ratio)/shares end Gross return:(NAV 1 -NAV 0 +inc. Distr.+cap gain distr.)/NAV 0 Geometric Avg:[(1+r 1 )(1+r 2 )(1+r 3 )(1+r 4 ) 1/n n=# of periods Holding Period: (income+period end - period beg )/beg CH1: 5 mistakes normal people do - Diversify across stocks (security selection), asset class (asset allocation, more important), currencies, commodities, XAU/XAG - Avg expense ratio for ETF is 30-40% - Mis-calculating Risk ex. Picking up asset that has much higher returns than market but a lot of more risk or different type of risk CH2: Passive vs Active - Value/Growth, momentum vs, book to market where market value is low CH2/3: Bank discount & Bond equivalent yield T-Bill & bonds: - Notes are up to 10yr, bonds are past 10yr maturity - Par value 1,000, quoted as percent of par BD(treasury): 1-price(p)/1 * (360/n) BEY(corporate): 1-(p)/1 * (365/n)n=day to maturity EAY or EAR: (1+BD or BEY) # of compounding periods -1 = % CH3: Margin Market value - liability / MV = ~0.5 if ↓, margin call CH4: investment companies ETF vs Mutual fund (MF) - ETF: Cheaper, smart beta which allows for factor investing, CH5: CAL CAL: E(r c ) = y * r p +(1-y)*r f CAL rewrite: r f +y[r p - r f ] price time & price risk If beta of 2 stocks are the same, return is same CH7: CAPM Alpha >0 buy Alpha = 0 do nothing Alpha <0 short/sell CH8: efficiency weak: use technical analysis semi strong: use fundamental analysis Strong: no insider info - A portfolio manager indexes part of a portfolio and actively manages the rest of the portfolio. This is called passive core - Conservative investors are likely to want to invest in high income mutual funds while risk-tolerant investors are likely to want to invest in high growth -The term efficient frontier refers to the set of portfolios which BOTH yield the greatest return for a given level of risk AND involve the least risk for a given level of return - Hedge fund & REITs employ significant amount of leverage - Mutual funds provide diversification, pro mgmt, record keeping & admin -an official description of a particular mutual fund's planned investment policy can be found in the fund's prospectus -market risk premium is the dif between return on index fund & return on T bill -Arguments supporting passive investment: (1)active trading may not guarantee higher return but higher costs (2)passive can free-ride on the activity of... -Diversification is most effective when security returns are negatively correlated -The risk that can be diversified is firm specific risk beta -A hedge fund is a private investment pool open to wealthy or institution investors -ETF values can diverge from NAV making it not an advantage -the German stock is measured by DAX -Flipping an IPO is selling your IPO shared within a few days after purchase -The prudent man law requires pro investor who manage money for others to constrain their investments -NYSE is a good example of an auction market -Active trading in markets & comp among securities analysts.. (1,2,&3) -real assets generate net income to the economy & financial assets define... -commodity & derivative mrkts allows firm to adjust their exposure to various... -Money mrkt securities are characterized by 1,2,& 3 -major cause of mortgage meltdown in 07 08 was linked to securitization -bid ask exists bc of need for dealers to cover expenses & make profit -if an investor places stop loss order, stock will be sold...investor places stop buy -when matching orders from public, specialist is required to use highest outstanding bid price & lowest outstanding ask price
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