FIN 4828: 1/18 First 5 chapters are review Go over for 2 weeks.

Chapter 1: Simple Concepts 1) Calculating returns a. Holding period return= ending value of an investment/beginning value of investment b. Holding period yield= HPR-1 c. Ex. You invest $200 at the beginning of the year, and get back $220 at the end, whats the holding period return? d. Ex. Holding periods different from a year. HPR ^ 1/n (n=# of per/ in a year) i. 6 months = ^ 1/2 2) Computing mean historical returns. 3) Geometric/Arithmetic a. AM= sum of all the annual HPYs/N (# of years) b. GM= [(muliples HPY) ^ 1/n ]-1 c. Ex-Holding period years for a bond portfolio i. Exibit 1.1 4) Expected Rate of Return a. E(Ri)= Sum ( Probability of Return) x (possible return) i. (p1)(R1)+(p2)(R2)+. 5) Standard Deviation of Return a. Of risk free asset= 0 b. Take sqared deviations from the mean, multiply each by the probability, and add them all together c. Coefficient of variation- return per unit of risk. i. Want to maximize 6) Types of risk a. Business, financial, liquidity, exchange rate risk, political/environment/country risk 7) Risk Premium a. Premium over return that an investor should earn. b. Balances out risk 8) Security Market Line (SML) a. Trade off between risk and expected return b. Risk adverse- = risk adverse Next Time go through chapters 2-4. 1/23/12 Chapter 2 Individual investor life cycle Figure 2.1 o Guy who turned around the economy of chili- stabilizer central banks o About age 25 people are done w education and going out and working Last till mid 30s accumulation phase Spending money, but accumulating wealth o Consolidation phase- where most of our parents are Getting rasies. Assets are increasing, children going to college and quits o Spending phase/gifting phase o Investment objectives and risk tolerance vary in each phase

Exhibit 2.2: Compound value of money o We already know Investment constraints o Capitals gains or losses: taxed differently from income o Unrealized capital gains: reflect price appreciation of currently held assets that have not yet been sold o Realized capital gains: when te asset has been sold at a profit o Tax concerns Interest of municipal bonds exempt from federal income tax and from state of issue Equivalent Taxable yield= municipal yield/(1-marginal Tax rate) Interest on federal securities exempt from state income tax Contributions to an IRA may qualify as deductible from taxable income Tax deferral considerations Methods of Tax deferral o Regular IRA: tax deductible, tax on returns deferred until withdrawal o Roth IRA: not tax deductible, tax-free withdrawals possible o Cash value life insurance- dont talk about in this class o Tax sheltered annuities o Emplyers 401(k) and 403(b) plans- tax deferred insurance Skipped through asset allocation

Chapter 3 1/25 Finishing up chapters 4 & 5- rest of review. Appendix on correlation Characteristics of a good market Availability of past transaction info (timely and accurate) Liquidity (marketability, price continuity, depth) Exhibit 3.1; the US has become a smaller player in the world financial market o Emerging markets: china growing at 80% The case for global investments o Rates of return on US and foreign securities If youre only investing in US securities, youre missing out on diversification Exhibit 3.2: Japan has had low growth and interest rates, Canada really improving Exhibit 3.4: Exhibit 3.5; Efficient Frontier ; take two risky assets and combine two in diff percentages, and compare with risk, and rate of return US securities/ Agency Securities (fannie/Freddie) Skip over international stuff- except for euro bonds AGRs

Decimal pricing Government bond issues Municipal bond issue Sold by 3 methods o Competitive bids o Negotiation o Private placebment Underwriters sell the bonds to investors

Corporate bonds and stock issues Corp bond issues azre almost always sold through a negotiated arrangement with an investment banking firm

The underwriting function Three times of underwriting issues o Underwriters buys a stock, pays corporation o Best efforts o X Figure 4.1

Secondary bond market for US govt and municipal bonds o banks and investment firms make up municipal bond market corporate bond market o OTC market o Limited trading

Financial Futures Secondary Equity Markets Call vs continuous markets o Call markets trade individual stocks at specified times to gather all orders and determine a single price to satisfy the most orders o Used for opening prices on nyse Primary listing markets o NYSE, AMEX, Toyyo, and LSE regional markets o Chicago, san fran,. Boston, oskaka, Nagoya, Dublin, Cincinnati Third market dealers/brokers o Madoff investment, knight trading group Alternative 4th market

NYSE- new York stock exchange Largest organized securities market in the US Established in 1817 but dates back to the 1792 button wood agreement by 24 brokers At the end of 2007 approx 2,850 companies with securities listed on NYSE Total market value nearly 14 billion

Exhibit 4.5 Volume numbers in diff years

Exchange membership Specialist Commission broker: employees of a member firm who buys or sells for the customers of the firms Floor broker: independent members of an exchange who act as broker for other members Registered traders: use their memberships to buy/sell

Types of orders Market orders o Buy/sell at the best current price

o Provides immediate liquidity limit orders o order specifies the buy or sell price o time specifications for order may vary fill or kill= instantaneous, good until cancelled (GTC) stop loss order o a conditional market order to sell stock if it drops to a given price o does not guarantee price you will get upon sale o market disruptions can cancel such orders stop buy order o a conditional market order to buy stock if it increases to a specified price o investor who sold shirt may want to limit loss is stock increases in price

margin transactions Chpt 7- Risk Adversion A risk adverse investor will choose the lower risk for the same return Dont really deal w individual assets in this class- more the portfolio Expected rates of return > exhibit 7.2 Covariance of a stock with itself is its variance Covariance of a stock with another has some correlation Dont do covariance like exhibit 7.4, theres an easier way well get to R= correlation coefficient; positive and negative, highest diversification = -1; R^2= can only be positive R=0; diversification effect Portfolio variance (p^2)= simation of N i=1, N j=1 Xi Xj stnd dev ij Si= standard dev S^2i= variance Wi- weight