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Summary Capital Markets and Investment Management (TIAS MScBA)
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Samenvatting van het vak Capital Markets and Investment Management van de TIAS MscBA opleiding.
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Samenvatting / SummaryCourse: CMIM
Investments
Principles of portfolio
and equity analysis
First Edition
Micheal G. McMillan et all.
,Table of Contents
CHAPTER 1: Market Organization and Structure..........................3
1. Introduction.................................................................................3
2. The Functions of the Financial System...........................................3
3. Assets and Contracts....................................................................4
4. Financial Intermediaries...............................................................6
5. Positions.....................................................................................7
6. Orders.........................................................................................8
7. Primary Security Markets.............................................................9
8. Secondary Security Market and Contract Market Structures...........9
9. Well-Functioning Financial Systems.............................................10
10. Market Regulation....................................................................11
CHAPTER 2: Security Market Indices.........................................12
1. Introduction...............................................................................12
2. Index Definition and Calculations of Value and Returns................12
3. Index Construction and Management..........................................12
4. Uses of Market Indices................................................................13
5. Equity Indices............................................................................14
6. Fixed-Income Indices..................................................................15
7. Indices for Alternative Investments.............................................15
CHAPTER 3 Market Efficiency....................................................16
1. Introduction...............................................................................16
2. The Concept of Market Efficiency.................................................16
3. Forms of Market Efficiency..........................................................17
4. Market Pricing Anomalies...........................................................18
5. Behavioral Finance.....................................................................19
CHAPTER 4: Portfolio Management:..........................................21
1. Introduction...............................................................................21
2. A Portfolio Perspective on Investing............................................21
3. Investment Clients.....................................................................21
4. Steps in the Portfolio Management Process.................................22
5. Pooled Investments....................................................................22
CHAPTER 5: Portfolio Risk and Return: Part I.............................24
2. Investment Characteristics of Assets...........................................24
3. Risk Aversion and Portfolio Selection..........................................25
4. Portfolio Risk.............................................................................26
5. Efficient Frontier and Investor’s Optimal Portfolio........................26
CHAPTER 6: Portfolio Risk and Return: Part II............................28
1. Introduction...............................................................................28
2. Capital Market Theory................................................................28
3. Pricing of Risk and Computation of Expected Return....................31
4. The Capital Asset Pricing Model..................................................32
5. Beyond the Capital Asset Pricing Model.......................................36
CHAPTER 7: Basics of Portfolio Planning and Construction.........38
1. Introduction...............................................................................38
2. Portfolio Planning......................................................................38
3. Portfolio Construction................................................................41
2
,CHAPTER 1: Market Organization and Structure
1. Introduction
Financial analysts gather and process information to make investment
decisions, including those related to buying and selling assets. Generally,
the decisions involve trading securities, currencies, contracts,
commodities, and real assets such as real estate. Financial analysts must
understand the characteristics of the markets in which their decisions will
be executed.
2. The Functions of the Financial System
People use the financial system for six main purposes:
1. To save money for the future.
2. To borrow money for current use.
3. To raise equity capital.
4. To manage risks.
5. To exchange assets for immediate and future deliveries.
6. To trade on information.
The main functions of the financial system are to facilitate:
1. The achievement of the purposes for which people use the financial
system.
2. The discovery of the rates of return that equate aggregate savings
with aggregate borrowings.
3. The allocation of capital to the best uses.
These functions are extremely important to economic welfare. In a well-
functioning financial system, transaction costs are low, analysts can value
savings and investments, and scarce capital resources are used well.
2.1. Helping People Achieve Their Purposes in Using the Financial
System
People use the financial system for many purposes, the most important of
which are:
Saving: People often have money that they choose not to spend
now and that they want available in the future. To move money from
the present to the future, savers buy notes, certificates of deposit,
bonds, stocks, mutual funds, or real assets such as real estate.
These alternatives generally provide a better expected rate of return
than simply storing money. Savers then sell these assets in the
future to fund their future expenditures.
Borrowing: People, companies, and governments often want to
spend money now that they do not have. They can obtain money to
fund projects that they wish to undertake now by borrowing it.
Raising equity capital: Companies often raise money for projects
by selling (issuing) ownership interests (e.g., corporate common
stock or partnership interests). The financial system facilitates
raising equity capital. Investment banks help companies issue
equities, analysts value the securities that companies sell, and
regulatory reporting requirements and accounting standards attempt
3
, to ensure the production of meaningful financial disclosures.
Managing risk: Many people, companies, and governments face
financial risks that concern them. These risks include default risk and
the risk of changes in interest rates, exchange rates, raw material
prices, and sale prices, among many other risks. These risks are
often managed by trading contracts that serve as hedges for the
risks.
Exchanging assets in spot markets: People and companies often
trade one asset for another that they rate more highly or,
equivalently, that is more useful to them. They may trade one
currency for another currency, or money for a needed commodity or
right.
Information-motivated trading: Information-motivated traders
trade to profit from information that they believe allows them to
predict future prices. Like all other traders, they hope to buy at low
prices and sell at higher prices. Unlike pure investors, however, they
expect to earn a return on their information in addition to the normal
return expected for bearing risk through time.
The financial system best facilitates these uses when people can trade
instruments that interest them in liquid markets, when institutions provide
financial services at low cost, when information about assets and about
credit risks is readily available, and when regulation helps ensure that
everyone faithfully honors their contracts.
2.2. Determining Rates of Return
Saving, borrowing, and selling equity are all means of moving money
through time. Savers move money from the present to the future whereas
borrowers and equity issuers move money from the future to the present.
The aggregate amount of money that savers will move from the present to
the future is related to the expected rate of return on their investments. If
the expected return is high, they will forgo current consumption and move
more money to the future. Because the total money saved must equal the
total money borrowed and received in exchange for equity, the expected
rate of return depends on the aggregate supply of funds through savings
and the aggregate demand for funds. If the rate is too high, savers will
want to move more money to the future than borrowers, and equity
issuers will want to move to the present.
2.3. Capital Allocation Efficiency
Primary capital markets (primary markets) are the markets in which
companies and governments raise capital (funds). Companies may raise
funds by borrowing money or by issuing equity. Governments may raise
funds by borrowing money. Economies are said to be allocationally
efficient when their financial systems allocate capital (funds) to those uses
that are most productive. Although companies may be interested in
getting funding for many potential projects, not all projects are worth
funding. One of the most important functions of the financial system is to
ensure that only the best projects obtain scarce capital funds; the funds
available from savers should be allocated to the most productive uses.
4
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