A summary to the entire course Investment Management. This summary contains all the information to let you pass the exam. I should know, as I made it in my first attempt. The document is ordered by weeks, making it easy for you to look something up. Not only that, the document also contains all the...
Hoi Sytze,
Ik zie dat je de samenvatting maar 3 sterren geeft. Dat is jammer. Zou je kunnen uitleggen waarom je de sv maar 3 sterren geeft en hoe deze verbeterd kan worden?
,Week 1: asset allocation and portfolio management
Chapter 5
A few questions to ask when considering an investment in an asset:
- how do you expect index to behave and move? high movement = high risk
- is it worth it? if risk is high, will you have a return?
- how much do you want to invest, if it is worth it?
Holding period of return:
what the return will be
return: how much prices change with respect to some initial price
Not formula sheet!
you look at price change, and possibly dividend over a certain time period
Expected HPR = E[Rit]
what you think return will be
e.g. you expect prices to be either 120 or 90 in time period 1. In period 0 it was 100.
so, investment may gain 20 or lose 10
you also need to know the probability of these price changes. For now, let’s assume both
have equal as big a chance of occurring.
{
1
120→ probability=
2
1
90→ probability=
2
E[R] = ½ x 120 + ½ x 90 = 60 + 45 = 105
Problem: for 2 or 3 price situations this is an easy calculation, but it can occur you have 20+
situations.
Excel solves this: SUMPRODUCT
(random example showing how to operate sum product)
Excess return:
the difference between the return of a risky asset versus the return of a risk-free asset
Not on formula sheet
extra reward for taking risk
Risk premium:
since you do not exactly know what your risky return will be at most points, we need to
calculate it using expected returns
, Not on formula sheet
risk premium is the extra return on top of the risk-free rate you demand for taking the
riskier alternative
RM – RF
Some OIMb reminders:
averages or means are a measurement for the expected return
standard deviation is a measurement for the risk
variance is given on the formula sheet as σ2, std. deviation is just the square root of that
Other statistical measurements:
- skewness characterises the asymmetry of a distribution around its mean
- kurtosis measures the size of a distribution’s tails
important because it matters for significance levels
Sharpe ratio:
looks at the trade-off between risk and return
Formula sheet
risk premium / std. deviation of the excess returns
Std. deviation is not the only measurement of risk:
VaR or Value-at-Risk
quantifies the total risk of a portfolio
Not on formula sheet
way to indicate the probability of a confidence level for which you are sure not to lose
more than X amount of money.
you need a table to calculate the rest, as this is not a mathematical equation
e.g. std. dev. = 20 million, average mean of 0, normally distributed and 99% conf interval.
Excel NORM.INV.N (,99;0;1) = 2,326348
(in which ,99 = 99% conf interval, 0 is average mean and 1 is normal
distribution)
VAR = $20 million x 2.326348 = 46.53
so, with 99% certainty you can say the portfolio is not going to lose more than $46.53
million.
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