Summary
Summary on lectures of investments
- Course
- Institution
These are my lecture notes written out properly and in a summary for the exam of investments.
[Show more]
Seller
Follow
juttabelliu
Content preview
2022Investments
KUL
JUTTA BELLIU
,Master in Business Economics KUL
Table of contents
Capital Markets and Products ............................................................................................................................ 2
Investment Concepts .......................................................................................................................................... 7
Allocation to risky assets .................................................................................................................................. 10
Optimal risky portfolios .................................................................................................................................... 14
Index models .................................................................................................................................................... 21
Market Efficiency.............................................................................................................................................. 25
Behavioural finance and limits to arbitrage ..................................................................................................... 29
Fixed income instruments ................................................................................................................................ 35
Managing fixed income portfolios ................................................................................................................... 42
Applied portfolio management ........................................................................................................................ 50
1
,Master in Business Economics KUL
Capital Markets and Products
F Financial markets
o Financial markets allow to share or transfer risk –> willingness to take on risk.
§ As investor you take on risk, BUT: ALWAYS want to be compensated for it.
o Financial markets allow to separate the timing of income and consumption à store
wealth to transfer it to the future.
§ Savings accounts are made possible through the storage of wealth.
o Financial markets allow to separate ownership and management in support of large-
scale businesses, BUT: be careful with associated agency problems.
§ When you are connected to a specific founder à there is less opportunity to
grow –> will use external funding.
o Financial markets allow to allocate resources efficiently –> to most productive real
investment.
§ This is the informational role of financial markets à market efficiency >>>
money flows to productive opportunities.
o The traditional asset classes:
§ Money market instruments à these are short term, low risk debt securities
–> “cash”.
• They allow us to save.
• Are relatively risk-free assets.
§ Capital market instruments à these are long term, riskier and more diverse
assets –> “stocks and bonds”.
• These usually have a longer maturity –> are also riskier assets.
• They have a wide range of instruments.
§ Each instrument is unique in terms of uncertainty of payments and timing of
payments and has a distinct contribution to investment portfolio –> each has
unique risk return profile + different role to play in portfolio.
o Money market instruments:
§ Treasury bill = Government debt obligation with a maturity of less than a
year.
§ Certificate of deposit (CD) = Time deposit at a bank.
§ Commercial paper (CP) = Short term unsecured debt issued by a large
corporation.
§ Bankers’ acceptance = A bank promise to pay a prespecified amount.
§ Repurchase agreement (repo or RP) = A short term loan (usually overnight)
using other securities (usually government securities) as collateral.
§ Interbank loans = These are short term loans among banks (from which
reference rates are being calculated à ESTR, EURIBOR).
• ESTR = cost of borrowing from a bank overnight
§ Central bank deposits and loans = Short term deposit/ loan of a bank by its
central bank à federal funds, MRO, deposit facilities, lending facilities, MRR.
• Central bank acts as a bank to other banks à where the other banks
become the consumers.
§ Call loans = Loans that need to be repaid, on demand at any time à is often
made by banks to brokerage firms to fund individuals that buy on margin.
• Buy on margin = You borrow money & with that money you make
risky investment –> fundamentally. Banks sponsor the risky
investment.
2
, Master in Business Economics KUL
ð Most money market instruments are low risk, BUT: they are NOT risk free.
• T-bills have the lowest risk, BOTH in terms of credit risk, as well as in
liquidity risk
• When the economy is stable à ALL rates are relatively similar, BUT:
in unstable economy à they can vary a lot.
§ Rates spiked during the credit crisis >>> banks were in trouble
and a credit risk.
• Central Banks use the base rates in the economy as a policy tool.
o Capital market instruments
§ Bonds = These are debt issues by government or corporations.
• Longer term debt instrument with wide range of maturities >>> can
be bond from 1 year and onwards.
• Have various credit qualities à from high credit-quality instruments
to (very) low credit-quality (junk) instruments.
o High risk = high compensation.
• Liquidity can vary from very high to almost 0.
o If bond does NOT trade on regular basis à price might be
reduced >>> is NOT accurate anymore –> depends on
liquidity.
• Often in smaller denominations such that they can be held by retail
investors.
• Often NOT traded on the exchange, BUT: rather traded over the
counter (OTC) via dealers.
• Expressed as a % of the par value.
• Typically pay coupon interest.
• Performance measurement à hpr or yield which includes a risk.
Premium for credit risk.
è Currently we’re in an uncertain period with inverse relationship of bonds
and interest rates –> right now it is better to have short run bonds >>>
interest rates are increasing.
§ Types of bonds
• Treasury notes = Government debt with a maturity that is more than
1 year and less than 10.
• Treasury bonds = Government debt with a maturity larger than 10
years.
• Treasury inflation-protected securities (TIPS) = These are
government debt with principal and interest adjusted for inflation.
• Federal agency/ municipal bonds = Debt issued or guaranteed by,
respectively, a federal agency, state, or local government/
• Corporate bonds = Debt issued by a large corporation; typically,
larger default risk as compared to government debt; options
included (callable, convertible).
• Asset backed debt = Proportional ownership claims in an asset pool
à securitisation.
3
The benefits of buying summaries with Stuvia:
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
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
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 juttabelliu. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $6.96. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
67474 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy study notes for 14 years now