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FIN320 Final Exam Study Sheet

by: Alexandra Morales

FIN320 Final Exam Study Sheet FIN 320

Marketplace > University of Miami > FIN 320 > FIN320 Final Exam Study Sheet
Alexandra Morales
GPA 3.9
Investment and Securities Market
Stefanos Delikouras

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About this Document

These are all the formulas, graphs and important information you need to know for the final exam.
Investment and Securities Market
Stefanos Delikouras
Study Guide
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This 4 page Study Guide was uploaded by Alexandra Morales on Friday February 13, 2015. The Study Guide belongs to FIN 320 at University of Miami taught by Stefanos Delikouras in Winter2013. Since its upload, it has received 129 views.

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Date Created: 02/13/15
FP Dividends 1 CP expect on average location of the distribution 0392 213101 Erl2 Range of all r stock possible values shows how spread out the distribution is the larger the spread the riskier the asset O39 measures relationship between two random variables if move together or opposite of each other C0vxy 21 Xi EU yi EUy measures how strong the connection between two variables is between 1 and l covx y oxoy InvestedInStock InitialWealth Erp ZwiEO39l 0 w1203912 w o ZwlwszZO39IO392 Systematic risk Cannot be diversified away thus requires compensation rf Idiosyncratic risk Can be diversified away thus does not require compensation A No attainable portfolios in this space Investment Opportunity Set of Attainable Portfolios Expected Portfolio Return Portfolio Risk g x 0P 7 ErP CAL intercepts y axis as rf slope SR Erc Capital Allocation Line 7 Lending at rF ErP A Er r Sharpe Ratio of the shoe SP 0P Optimal Risky of CAL Portfolio rF CAL depicts the risk return combinations available to investors from investing in the optimal risky portfolio and the risk free asset Point P y100 A y75 C125 To the right of P the investor has taken a loan and is over investing in stock Higher y means higher Erc and higher 0396 2 M Expected return per P unit of risk U Er 1402 A represents investor s level of risk aversion Higher utility means the investor is happier max ErP rf WA O39P max WAErA1WAErBrf WA Jin39l WA2039 2wA1 WApABO39AO39B 8Er r 3 f 2 0 Em mo Em rfoA03pAB Em mo Em moi ErAErB2rfOAOBpAB Combining the optimal risky portfolio and risk free assets ErC rf yErP rf ErC rf EUP rf O39C P l 2 2 6C y 0P WAComplete YXWA asset wAC0mpeeInitialWealth WA maxU max 2 7 8U 0 gt ErP rf Aya gt 3y ErP rf A012 2 m1n O39P mm 1 ErC 5140 WE ZWAO W WA A 2WA1 WA OAOBpA 862 P 0 gt 2wA039j 2wA039li 2039 ZGAO39BpAb awA 4WAOAOBpAB 2 OB OAOBpAB WA of 012 20140313141 Erl rf iErM rf Ot Actual r CAPM r 0t of market 0 Systems of equations example wx wy WM 2 l wxocx WyOCy wMaM 001 wx x wy y WM M 1 1 wxwywM 1 2 wx00075 wy 001 wM0 001 3 wx075 wyl5 wM1 1 Subtract eql eq3 and use the new equation to find wX and plug that into equation 2 Use that number to find the remaining weights Mean A SML Security Market Linc DELI 167 Undcrpriccd stocks JMl4 rr 5 Overpriced stocks Beta 8 1 B01111 13 Shows all possible Er and combinations according to CAPM covrl rfrM rf 1 i 2 6r r M f coviM 2 I3 039 M piMOi M 3 i M 1 P sz i s covrrM OM Separate the covariance covrS wSrS wBrB S 2 covr r covr r g 2 WS 5 S W3 2S B 0M 0M CAPM is a single factor model MFR factor amp parameter Erl rf iMarketErM rf hSMB ErSMB rf i ML ErHM rf wMD ErUMD rf fizeltEltrmgt may Positive on average Small capitalization stocks earn higher returns because they re believed to be more risky ivalue ErValue ErGrowth Value stocks high book to market value growth stocks low book to market value If have high book value market hasn39t realized potential of stock mispriced Future expected return is higher assuming market will eventually realize the potential tmom ErWinners ErLosers Winners performed well in prev year Stocks performed well in past expected to do well in future Reverse goes for poorly performing stocks UMD factor has positive mean EOE rf Where m compounding periods per year Only divide r by n when r is given as an annual rate nT PZL 1 1 F 11 rn 1rn 1rn Can be solved forFampC 1 PF nT 1rn Can be solved for F 1 P n r 1 T l n F T logPF nlog 1 1rn p211 rn Can be solved for C r amp n nT nT Pdl dCdR1l d F l d rnd 1rn 1rn Can be solved for F R amp C 1 nT PdF d 1rn Can be solved for F 1 Pd E r l a 1n F lt gt T logPdF l nlog 1rn 1 11 53 rrn F Ca mdR rnd Can be solved for C r R d amp n If R F or C increase price increases if R F or C decrease price decreases If r or d increase price decreases if r or d decrease price increases Don39t know what happens to price when T or n O 3quot SD 5 on CD If T increases price decreases if T decreases price increases Don39t know what happens to price when n O 3quot SD 5 00 D m If n increases price increases if n decreases price decreases IRR of a bond discount rate that makes the discounted cash flows equal to the market price For no default bonds yr t n quotlt H A Q mm V 3 quotlt H 3 6 1rn 1 p n I F Cl da R rnd I 1 d nT Solve for Pd us1ng Pd 2 F gt o 5 CI 2 lt o 5 H w c E 5 on 2 Solve for Pd using Pd 2 Then solve for y using y n2 d the difference between the ytm for a defaultable bond and the ytm for a similar no default bond Credit Spread yd y FP Coupons 1 T bonds have maturities from 3mo to 30yrs T rb md CP bills have maturities from 3mo to lyr New yield curve everyday because T bonds are actively traded and prices and ytm change 1 Yield curve can be upward sloping Yield curve as of Nov 26 2004 and Nov 23 2005 Annual yield l cl 39 9 15 1 Years to maturity Gov borrows cheaply in short and expensively in long 2 Yield curve can be downward sloping INVERTED YIELD CURVE 20quot YIELD l I l I 3 mos 6 mos 1 yr 3 yrs 5 yrs 10 yrs 20 yrs MATURITY When yield curves are inverted there is something wrong with the economy 3Yield curve can be hump shaped Humpud Yiulrl mm 1 Maturity difference between yields to maturity for long maturities and yields to maturity for short maturities Term spread yLT yST Shows the slope of the yield curve If then upward slope If then downward slope


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