Samenvatting
International Investment Management Summary + Lecture Notes
- Instelling
- Universiteit Utrecht (UU)
- Boek
- ISE Investments
This document contains the chapters to study for the midterm plus the notes on the lectures up till then.
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INTERNATIONAL INVESTMENT MANAGEMENT BOOK SUMMARYTable of Contents
Week 1, Introduction to Investing: Investment Environment, Trading Securities, and the
Concepts of Risk and Return ..................................................................................................... 3
Chapter 1.1: Real Assets versus Financial Assets .......................................................................................... 3
Chapter 1.2: Financial Assets ........................................................................................................................ 3
Chapter 1.3: Financial Markets and the Economy ........................................................................................ 3
Chapter 1.4: The investment Process ........................................................................................................... 3
Chapter 1.5: Markets are Competitive .......................................................................................................... 4
Chapter 1.6: The Players ............................................................................................................................... 4
Chapter 3.1: How Firms Issue Securities ....................................................................................................... 6
Chapter 3.2: How Securities are Traded ....................................................................................................... 6
Chapter 3.3: The Rise of Electronic Trading .................................................................................................. 6
Chapter 3.4: U.S. Markets ............................................................................................................................. 7
Chapter 3.5: New Trading Strategies ............................................................................................................ 7
Chapter 3.6: Globalization of Stock Markets ................................................................................................ 7
Chapter 3.7: Trading Costs ............................................................................................................................ 7
Chapter 3.8: Buying on Margin ..................................................................................................................... 7
Chapter 3.9: Short Sales ................................................................................................................................ 7
Chapter 5.1: Measuring Returns over Different Holding Periods ................................................................. 9
Chapter 5.2: Interest Rates and Inflation Rates ............................................................................................ 9
Chapter 5.3: Risk and Risk Premium ........................................................................................................... 10
Chapter 5.4: Learning from Historical Returns............................................................................................ 10
Chapter 5.5: The Normal Distribution ......................................................................................................... 11
Chapter 24.1: The Conventional Theory of Performance Evaluation ......................................................... 11
Week 2, Composing a Portfolio: Capital Allocation, Optimal Portfolio, and Index Model .......... 12
Chapter 2.1: The Money Market ................................................................................................................. 12
Chapter 2.4: Stock and Bond Market Indexes ............................................................................................. 13
Chapter 6.1: Risk and Risk Aversion ............................................................................................................ 14
Chapter 6.2: Capital Allocation across Risky and Risk-Free Portfolios ........................................................ 14
Chapter 6.3: The Risk-Free Asset ................................................................................................................ 14
Chapter 6.4: Portfolios of One Risky Asset and a Risk-Free Asset .............................................................. 15
Chapter 6.5: Risk Tolerance and Asset Allocation ....................................................................................... 15
Chapter 6.6: Passive Strategies: The Capital Market Line ........................................................................... 15
Chapter 7.1: Diversification and Portfolio Risk ........................................................................................... 16
Chapter 7.2: Portfolios of Two Risky Assets ................................................................................................ 16
Chapter 7.3: Asset Allocation with Stocks, Bonds, and Bills ....................................................................... 17
Chapter 7.4: The Markowitz Portfolio Optimization ................................................................................... 17
Chapter 8.1: A Single-Factor Security Market ............................................................................................. 18
Chapter 8.2: The Single-Index Model .......................................................................................................... 18
Chapter 8.3: Estimating the Single-Index Model ........................................................................................ 19
Chapter 8.5: Portfolio Construction Using the Single-Index Model ............................................................ 19
Week 3, Equity Valuation: Macro- & Industry Analysis, Financial Statement Analysis, and CAPM
.............................................................................................................................................. 20
Chapter 2.3: Equity Securities ..................................................................................................................... 20
Chapter 9.1: The Capital Asset Pricing Model ............................................................................................. 21
Chapter 17.1: The Global Economy ............................................................................................................. 25
Chapter 17.2: The Domestic Macroeconomy ............................................................................................. 25
Chapter 17.3: Demand and Supply Shocks ................................................................................................. 25
Chapter 17.4: Federal Government Policy .................................................................................................. 25
Chapter 17.5: Business Cycle ...................................................................................................................... 26
Chapter 17.6: Industry analysis ................................................................................................................... 26
, Chapter 18.1: Equity Valuation Models ...................................................................................................... 29
Chapter 18.2: Intrinsic Value versus Market Price ...................................................................................... 29
Chapter 18.3: Dividend Discount Models ................................................................................................... 29
Chapter 18.4: The Price-Earnings Ratio....................................................................................................... 31
Chapter 18.5: Free Cash Flow Valuation Approaches ................................................................................. 32
Chapter 18.6: The Aggregate Stock Market ................................................................................................ 33
Chapter 19.2: Measuring Firm Performance............................................................................................... 34
Chapter 19.3: Profitability Measures .......................................................................................................... 34
Chapter 19.4: Ratio Analysis ....................................................................................................................... 35
Chapter 19.7: Value Investing: The Graham Technique.............................................................................. 37
Week 4, Bonds I – Valuation: Price, Yield, and the Term Structure of Interest Rate .................. 38
Chapter 1.7: The Financial Crisis of 2008-2009 ........................................................................................... 38
Chapter 2.2: The Bond Market .................................................................................................................... 40
Chapter 14.1: Bond Characteristics ............................................................................................................. 42
Chapter 14.2: Bond Pricing ......................................................................................................................... 43
Chapter 14.3: Bond Yields ........................................................................................................................... 44
Chapter 14.4: Bond Prices over Time .......................................................................................................... 45
Chapter 14.5: Default Risk and Bond Pricing .............................................................................................. 45
Chapter 15.1: The Yield Curve ..................................................................................................................... 47
Chapter 15.2: The Yield Curve and Future Interest Rates ........................................................................... 47
Chapter 15.3: Interest Rate Uncertainty and Forward Rates ...................................................................... 48
Chapter 15.4: Theories of the Term Structure ............................................................................................ 48
Chapter 15.5: Interpreting the Term Structure ........................................................................................... 49
Overview key financial ratios ................................................................................................. 50
Notes on lectures ................................................................................................................... 51
Lecture 1 ..................................................................................................................................................... 51
Lecture 2 ..................................................................................................................................................... 54
Lecture 4 ..................................................................................................................................................... 58
2
,Week 1, Introduction to Investing: Investment Environment, Trading Securities, and
the Concepts of Risk and Return
Chapter 1.1: Real Assets versus Financial Assets
The capacity of the economy is a function of the real assets of the economy (land, buildings,
machines, knowledge). In contrast to this, there are financial assets (bonds, stocks). Financial assets
are the means by which individuals in well-developed economies hold their claims on real assets.
They are claims to the income generated by real assets.
Investor’s returns ultimately come from the income produced by the real assets that were financed
by the issuance of those securities.
Chapter 1.2: Financial Assets
We distinguish three broad types of financial assets:
1. Fixed income, they promise either a fixed stream of income or a stream of income
determined by a special formula.
2. Equity, or common stock, represents an ownership share in the corporation. They are not
promised any particular payment. The performance of equity investment is directly tied to
the success of the firm and its real assets.
3. Derivatives, such as options and futures, provide payoffs that are determined by the prices
of other assets such as bond or stock prices.
Chapter 1.3: Financial Markets and the Economy
Stock prices reflect investors’ collective assessment of a firm’s current performance and future
prospects. When the market is more optimistic about the firm, its share price will rise.
In high-earnings periods, you can invest your savings in financial assets such as stocks and bonds. In
low-earnings periods, you can sell these assets to provide funds for your consumption needs. By
doing this, you shift your consumption over the course of your lifetime.
Capital markets allow the risk that is inherent to all investments to be borne by the investors most
willing to bear it.
Stockholders elect a board of directors that in turn hires and supervises the management of the firm,
which will handle the day-to-day business. This is an easy separation of ownership and management.
However, this could result into agency problems. Some ways to solve this are:
Compensation plans tie the income of managers to the success of the firm.
Boards of directors can force out management teams that are underperforming.
Outsiders such as security analysts and large institutional investors such as mutual funds or
pension funds monitor the firm closely.
Bad performers are subject to the treat of takeover.
Market signals will help to allocate capital efficiently only if investors are acting on accurate
information. Markets need to be transparent for investors to make informed decisions.
Chapter 1.4: The investment Process
An investor’s portfolio is simply his collection of investment assets. There are two types of decisions
in constructing this portfolio. The first one is the asset allocation decision is the choice among these
broad asset classes, while the security selection decision is the choice of which particular securities
to hold within each asset class.
3
, Top-down portfolio construction starts with asset allocation. Security analysis involves the valuation
of particular securities that might be included in the portfolio.
Bottom-down portfolio construction starts with securities that seem attractively priced without as
much concern for the resultant asset allocation. However, this could result in unintended bets on
one or another sector of the economy.
Chapter 1.5: Markets are Competitive
There is always risk associated with investments as actual returns will almost always deviate from
the expected returns.
The no-free-lunch rule tells us that all else cannot be held equal with investments. From this we can
conclude that there should be a risk-return trade-off in the securities markets, with higher-risk
assets prices to offer higher expected returns than lower-risk assets.
Diversification means that may assts are held in the portfolio so that the exposure to any particular
asset is limited.
An interesting implication of the efficient market hypothesis is the choice between active and
passive investment-managements strategies. Passive management calls for holding highly diversified
portfolios without spending effort or other resources attempting to improve investment
performance through security analysis. Active management is the attempt to improve performance
either by identifying mispriced securities or by timing the performance of broad asset classes.
If markets are efficient and prices reflect all relevant information, it might be better to follow passive
strategies.
Chapter 1.6: The Players
There would be to appear to be three major players in the financial markets:
1. Firms are net demanders of capital, they raise capital and generate income from it to
provide returns to investors.
2. Households are net suppliers of capital, they purchase the securities of firms.
3. Governments can be borrowers or lenders, depending on the relationship between tax
revenue and government expenditures.
Financial intermediaries are financial institutions that stand between the security issuer (the firm)
and the ultimate owner of the security (the individual investor), i.e., pension funds or mutual funds.
They bring the suppliers of capital together with the demanders of capital. The main difference
between financial intermediaries and other businesses is that their assets and liabilities are both
overwhelmingly financial. There are several advantages from having this role:
1. By pooling the resources of many small investors, they are able to lend considerable sums to
large borrowers.
2. By lending to many borrowers, intermediaries achieve significant diversification, so they can
accept loans that individually might be too risky.
3. Intermediaries build expertise through the volume of business they do and can use
economies of scale and scope to assess and monitor risk.
Investment companies, which pool and manage the money of many investors, also arise out of
economies of scale. Hedge funds are only open to the ‘big’ moneymakers, to pursue complex and
higher-risk strategies.
4
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