Summary
Complete summary of the course investment analysis
- Course
- Institution
- Book
This is a summary of the course belegginsleer/ investment analysis given by Michael Frommel at the University of Ghent
[Show more]
Connected book
Book Title:
Author(s):
- Edition:
- ISBN:
- Edition:
More summaries for
-
EXAM QUESTIONS JAN 2022 "INVESTMENT ANALYSIS" - GHENT UNIVERSITY
-
Beleggingsleer
1 review
By: leaantolic25 • 10 months ago
This is just a pdf file of the presentations without the graphs. No exercises, not well organised. Do not recommend!
Seller
Follow
HenriDeBolle
Reviews received
Content preview
BeleggingsleerSection 1: Introduction
Chapter 1: Financial markets, players and instruments
1. What is traded on financial markets
- Investment analysis = The study of how an investment is likely to perform and how suitable it is for
a given investor.
- Financial assets: represent claims on real assets (assets used to produce goods and services)
• Split up in asset classes = groups of investments which share common characteristics, suck as
riskiness and return.
1. Traditional investments = long investments and include the three asset classes stocks,
bonds and cash.
2. Alternative investments = cover a wide range of investments and include commodities
and foreign currencies, derivatives, hedge funds and insurance products, but also
venture capital and private equity, and collectibles.
• Liquidity (and homogeneity) decreases in tendency when moving down the following list:
Classical Investments Alternative Investments
• Bonds • Hedge funds
• Stocks • Managed Futures
• Cash • Currencies
• Derivatives
• Commodities (e.g. gold!)
• Private equity
• Gems and stones
• Fine art, wine…
- Assets:
1. Bonds/fixed income = securities that are issued by a firm or government for a specific term (=
maturity). They provide periodic payments (=coupon) from the issuer to the holder of the
security.
• Maturity: +/- 4-10y
• Positive: all cash flows are known in advance + risk is restricted to the default risk
▪ Plain vanilla bond/note: Bond with standard structure
▪ Zero Coupon Bond: Bond without any coupon payment
▪ Floating rate notes (FRN): The interest rate depends on a reference rate,
such as LIBOR or EURIBOR; reverse/inverse floater (as example of a bull FRN)
▪ Inflation-Protected Bonds: have become increasingly popular
▪ Structured note: a bond (note) issued with some unusual clause, often
something option-like. For example the yield will be enhanced if event X
occurs.
▪ Mortgages and Mortgage-Backed Securities
, 2. Money market securities/cash
• Money market securities/cash = securities with a maturity when issued of not more
than one year, sold by governments, financial institutions and corporates.
! It’s a segment of the fixes-income market
o Treasury bills: Short-term US government bonds (up to one year), highly
liquid, more or less riskless, sold with discount
o Commercial Paper: Money market securities issued by banks or companies
o Certificates of deposits: Short-term money market security, issued by a
bank, usually higher interest rate than deposit (as they cannot be withdrawn)
o Bankers Acceptances: A security that is drawn on a bank and – after
acceptance – can be traded on markets
o Eurodollars: deposits in USD, but outside the US
o Repurchase Agreements (RPs): Repos, sale and repurchase agreements
3. Equity
• Equity = represents an ownership claim on the earnings and assets of a firm. It’s a
residual claim, unlimited maturity and limited liability.
• Common/preferred stock.
4. Currencies
5. Derivatives: the value is derives from the underlying asset’s value (ex. Futures and options)
6. Commodities
2. Where financial assets are traded
- Financial assets: mostly traded on financial markets.
• Past: Fairs = provided periodic meeting places for traders, who mainly dealt in real goods, but
also in currencies and money.
• Then: Permanent exchanges or bourses = meetings that took place at the houses of rich
families -> ‘bursa’.
o Private Bourses: Founded by private individuals and entities for the purpose of
security trading. (Private does not mean without regulation!)
o Public Bourses: Origin in Emperor Napoleon I. Public institution with brokers
appointed by government and monopoly over transactions. Most moved to private
bourses.
o Bankers’ Bourses: Banks as the major or only traders in securities. Regulation of the
banks and the markets. Most of them moved to private bourses.
• Now: Private bourses are nowadays dominating.
- Players:
1. Investor: seek to boost their savings on the markets.
2. Broker: act as agent for investors, set prices and perform the deals. They trade on the
account of others and they live from the fees received.
3. Dealers: trade on his own account and seeks to profit from these trades.
4. Agents: banks and other institutional investors, such as pension funds, mutual and hedge
funds.
5. Central banks: act on financial markets, by providing or absorbing liquidity, governing
interest rates and directly intervening mainly on the foreign exchange market.
,- Execution system
1. Price-driven/quote-driven/dealer market: highly liquid + order execution is guaranteed.
2. Order driven market: more transparent.
Chapter 2: Risk and return
- The return = the ratio of money gained or lost on an investment relative to the amount of money
invested.
• The holding period return over the period from t=0 to t=Y: HPRt = PT/Pt-1 or HPRt = 100/Pt-1
o P0 = initial investment/ price at t=0; Pt= final payout/price at t=T.
o Good measure only if the holding period is the same for all assets under
consideration.
• Annual percentage rate/ average percentage rate:
o APR = HPR/T
o Does not consider any reinvestments or payouts.
• Effective annual rate: EAR = (HPR + 1)1/T – 1.
o => relation: APR = [(1+EAR)T -1]/T
- Work with logarithmic instead of percentage returns: rt = ln(Pt/Pt-1) = ln(Pt) – ln(Pt-1).
Advantages:
• We cab easily aggregate returns to lower frequencies just by summarizing the high frequency
returns.
• It gives the initial price after a price increase followed by a decrease.
• The return in price quotation and indirect quotation only differ by sign, but not in magnitude.
- Sample variance:
2= 1 n
n s =1
r(s)−r 2
• R--= mean variance
• standard deviation = sqrt(σ2)
1
- The unconditional return: 𝐸(𝑟) = ∑𝑛𝑠=1 𝑝(𝑠)𝑟(𝑠) = 𝑛 ∑𝑛𝑠=1 𝑟(𝑠)
• = the average of the conditional expectations, weighted by the scenario probabilities.
• p(s) = probability of state s and r(s) = the (conditional) expected return in state s.
- The Sharpe ratio: Risk premium/SD of the excess return.
• Sharpe ratio = the price of risk, or reward to variability
• Negative: only for an investor’s whole portfolio + only considers risk in terms of the standard
deviation.
Chapter 3. Distributional Properties of Financial Market Series
1. Some stylized facts
- Moments of distributions:
1. First moment: the mean
2. Second moment: the variance
, 1
∑ (𝑟 −𝑟̄ )3
𝑁 𝑡 𝑡
3. Third moment: The sample skewness: 𝑆= 3
1 2
( ∑𝑡(𝑟𝑡 −𝑟̄ ) )2
𝑁
• Skewness provides info about a distributions symmetry.
o 0: symmetric distribution
o >0: right-skewed
o <0: left-skewed
1
∑ (𝑟 −𝑟̄ )4
𝑁 𝑡 𝑡
4. Fourth moment: the (excess) kurtosis: 𝐾 = 1 2 2
−3
( ∑𝑡(𝑟𝑡 −𝑟̄ ) )
𝑁
• High kurtosis: means more of the variance is the result of infrequent extreme deviations
o >0: leptokurtic
o <0: platykurtic
2. Measuring historical volatility
- Volatility is important for
1. Investment decisions
2. Performance evaluation
3. Risk management
- There are two ways to get a volatility forecast:
1. Implied volatility = the volatility that is consistent with observed option prices.
2. Historical volatility = use historical price series as a tool to forecast future volatility
- Unfortunately volatility is a latent factor, therefore we need an estimator. But there is no unique
way to estimate it => we have to make decisions:
1. Sample length: How far do we look back?
2. Sample frequency: How frequently do we collect/use data?
3. Measure to use: Which assumptions on the price process?
1. The sampling lenght
- Long sample => rather measures the long term average volatility
Short sample => introduces estimation errors and puts too much weight on the very recent past
- A reasonable choice is to use a sample of the same length as the forecast horizon
-> specifically for share prices: use multiples of three months (=> constant number of
quarterly reporting periods or macro announcements)
2. The sampling frequency
- Daily data: ~5 times as many observations compared to weekly data
Weekly/monthly data: less impact of holidays, particularly if several markets analyzed
-> Rule of thumb: weekly data rather for longer forecasting horizons and several
markets, daily data else
3. The choice of the volatility measure: price ranges
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 HenriDeBolle. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $5.90. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
52510 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy study notes for 14 years now