100% satisfaction guarantee Immediately available after payment Both online and in PDF No strings attached
logo-home
Security Pricing and Portfolio Selection summary KUL $11.26   Add to cart

Summary

Security Pricing and Portfolio Selection summary KUL

1 review
 37 views  3 purchases
  • Course
  • Institution

summary of the slides & notes

Preview 4 out of 72  pages

  • January 4, 2022
  • 72
  • 2021/2022
  • Summary

1  review

review-writer-avatar

By: sannadelbeke1 • 2 year ago

avatar-seller
INVESTMENTS: CAPITAL MARKET AND PRODUCTS ................................................................. 5

Financial markets ............................................................................................................................................. 5

Investment funds ............................................................................................................................................. 6
Investment companies ....................................................................................................................................... 6
Other investment organizations ......................................................................................................................... 7

Mutual funds.................................................................................................................................................... 7
Organization ....................................................................................................................................................... 7
Investment policies ............................................................................................................................................. 8


INVESTMENT CONCEPTS .......................................................................................................10

Characterization of an investment ................................................................................................................. 10
Reward-to-risk .................................................................................................................................................. 10

Portfolios and Indices ..................................................................................................................................... 11
Market indices .................................................................................................................................................. 12

An historic perspective on portfolio returns ................................................................................................... 14


CAPITAL ALLOCATION TO RISKY ASSETS .................................................................................15

Investment opportunity set ........................................................................................................................... 15
Portfolios of one risky and one risk-free asset ................................................................................................. 15

Risk and risk aversion ..................................................................................................................................... 16
Choosing among portfolios ............................................................................................................................... 17

Capital allocation decision.............................................................................................................................. 18


OPTIMAL RISKY PORTFOLIOS .................................................................................................19

Diversification ................................................................................................................................................ 19
Stylized diversification strategy with two risky assets ...................................................................................... 19
A diversification strategy with many risky assets and systematic risks ............................................................ 20

Mean-Variance analysis ................................................................................................................................. 21
Portfolio with two risky assets .......................................................................................................................... 21
Global minimum variance portfolio ............................................................................................................. 22
Portfolio characteristics as a function of portfolio weights ......................................................................... 22
A risk-expected return representation ......................................................................................................... 23
Portfolio with many risky assets ....................................................................................................................... 23
The optimal portfolio ........................................................................................................................................ 24

Mean-variance analysis with a T-bill .............................................................................................................. 24
Portfolio optimization ....................................................................................................................................... 25


1

,Portfolio management in practice .................................................................................................................. 26
Horizon effects of risk ....................................................................................................................................... 27
Life-cycle approach ........................................................................................................................................... 28


INDEX MODELS .....................................................................................................................29

Single index model ......................................................................................................................................... 29
Advantages ....................................................................................................................................................... 30

Portfolio construction in a single-index world ................................................................................................ 31

Portfolio construction in a CAPM world ......................................................................................................... 32

Portfolio construction in a pragmatic way ...................................................................................................... 32

The mean-variance model: a critical note....................................................................................................... 34


MARKET EFFICIENCY .............................................................................................................35

Efficient market hypothesis ............................................................................................................................ 35

Empirical evidence on market efficiency ........................................................................................................ 35
Weak-form efficiency ....................................................................................................................................... 36
Semi-strong-form efficiency ............................................................................................................................. 37

Mutual fund and analyst performance ........................................................................................................... 37
Equity research analysis.................................................................................................................................... 37
Active vs passive funds ..................................................................................................................................... 38
Role of asset management in a EMH world...................................................................................................... 38


BEHAVIOURAL FINANCE AND LIMITS TO ARBITRAGE .............................................................39

Information processing .................................................................................................................................. 39
Representativeness bias ................................................................................................................................... 39
Conjunction fallacy ........................................................................................................................................... 39
Overconfidence ................................................................................................................................................ 39
Anchoring.......................................................................................................................................................... 40

Behavioural biases ......................................................................................................................................... 40
Regret avoidance .............................................................................................................................................. 40
Mental accounting ............................................................................................................................................ 40
Risk aversion ..................................................................................................................................................... 41
Loss aversion..................................................................................................................................................... 41
The weakness of behavioural finance............................................................................................................... 41

Limits to arbitrage .......................................................................................................................................... 42
Fundamental risk .............................................................................................................................................. 42
Implementation costs ....................................................................................................................................... 42
Model risk ......................................................................................................................................................... 43
Law of one price ............................................................................................................................................... 43

2

, Impossibility of strong form EMH ..................................................................................................................... 44


FIXED INCOME INSTRUMENTS ..............................................................................................46

Fixed-income basics ....................................................................................................................................... 46

Bond pricing ................................................................................................................................................... 47
Realized return over a single period ................................................................................................................. 49
Yield to call ........................................................................................................................................................ 49

Default risk ..................................................................................................................................................... 50
Credit ratings .................................................................................................................................................... 50
Credit risk determinants ................................................................................................................................... 51
Default rates ..................................................................................................................................................... 51
Bond indentures ............................................................................................................................................... 51
Stated versus expected YTM ............................................................................................................................ 51

Credit derivatives ........................................................................................................................................... 52
Credit default swap (CDS) ................................................................................................................................. 52
Standard CDS ................................................................................................................................................ 52
Digital CDS .................................................................................................................................................... 52
Basket CDS .................................................................................................................................................... 53
Portfolio CDS ................................................................................................................................................ 53
Collateralized debt obligation (CDO) ................................................................................................................ 53
Traditional CDO ............................................................................................................................................ 53
Synthetic CDO............................................................................................................................................... 54


MANAGING FIXED INCOME PORTFOLIOS ..............................................................................55

The yield curve ............................................................................................................................................... 55
The yield curve under certainty ........................................................................................................................ 55
The expectations hypothesis ........................................................................................................................ 56
The liquidity preference theory.................................................................................................................... 57
Forward rates as forward contracts ............................................................................................................. 58

Interest rate risk............................................................................................................................................. 59
Macaulay’s duration ......................................................................................................................................... 60

Passive bond management ............................................................................................................................ 62

Active bond management .............................................................................................................................. 64


APPLIED PORTFOLIO MANAGEMENT .....................................................................................65

Performance evaluation: traditional approach ............................................................................................... 65
Risk correction .................................................................................................................................................. 65
Absolute performance measures ................................................................................................................. 66
Relative performance measures .................................................................................................................. 66
Information ratio...................................................................................................................................... 67


3

, Treynor ratio ............................................................................................................................................ 67
Industry fund rating systems ........................................................................................................................ 68
Morningstar ............................................................................................................................................. 68
Lipper Leaders .......................................................................................................................................... 68

Challenges ...................................................................................................................................................... 68
Which measure is appropriate?........................................................................................................................ 68
Time-varying risk............................................................................................................................................... 69
Changing portfolio composition ................................................................................................................... 69
Market timing ............................................................................................................................................... 70

Drivers of performance .................................................................................................................................. 71
Style analysis ..................................................................................................................................................... 71
Performance attribution ................................................................................................................................... 72




4

The benefits of buying summaries with Stuvia:

Guaranteed quality through customer reviews

Guaranteed quality through customer reviews

Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.

Quick and easy check-out

Quick and easy check-out

You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.

Focus on what matters

Focus on what matters

Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!

Frequently asked questions

What do I get when I buy this document?

You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.

Satisfaction guarantee: how does it work?

Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.

Who am I buying these notes from?

Stuvia is a marketplace, so you are not buying this document from us, but from seller Femke44. Stuvia facilitates payment to the seller.

Will I be stuck with a subscription?

No, you only buy these notes for $11.26. You're not tied to anything after your purchase.

Can Stuvia be trusted?

4.6 stars on Google & Trustpilot (+1000 reviews)

70055 documents were sold in the last 30 days

Founded in 2010, the go-to place to buy study notes for 14 years now

Start selling
$11.26  3x  sold
  • (1)
  Add to cart