Finc 351 Exam 1

1. Define the investment objectives and constraints (max returns, min risk, max risk - adjusted returms)

2. Evaluation and selection of securities

3. Monitor performance relative to initial objectives and constraints

Fixed income - money market

Fixed Income - capital market

Equity

Derivatives

Up to one year to maturity, highly liquid, low default risk

Treasury bulls

Certificates of deposit

Commercial paper

Euro dollars

Repurchase agreements

S - T government borrowing

Considered largely risk free

Issued by depository institutions (commercial savings bank and credit unions)

Issued by corporations

Dollar denominated deposits outside US

Typically overnight borrowing/lending between banks

Over 1 year to maturity, various degrees of default risk

Treasury notes and bonds

Corporate bonds

Municipal bonds

Federal agency debt

Securities assets

Common stock - represent shares of ownership in a firm

Residual claims and limited liability

Preferred stock

No voting rights, fixed dividends that cumulative if not paid, special tax treatment for purchasing corporations,but not for issuing firm

Forward and futures contracts

Options contracts

Parties agree to exchange commodity for cash at a specified date for an agreed upon price.

Trader taking longer going position commits to purchasing the commodity and trader taking short position commits to delivering the commodity

Futures contracts are standardized forward contracts that can be traded on a secondary market

A call option gives holder the right to buy an asset for a prespecified price on or before the expiration date

Up front cost

rt = Dt + (Pt - Pt-1) / Pt-1

Rct = ln(1 + rt) = ln(Pt/Pt-1)

rbefore-tax * (1-Tax Rate)

*more wealthy will want municipal bonds, lower wealth go after government bonds.

general increase in price level over time

Depend on what money can buy over time

1 + rreal = (1 + rnominal) / (1 + i)

rreal = rnominal - i

APR = per period rate* Periods per year

*does not account for compounding

1 + EAR = (1 + (APR/n)^n

1 + EAR = exp(APR)

APR = ln(1+EAR)

with large samples, this measure provides a useful forecast of future returns.

is not always a good measure of actual past performance, especially if volatility is high.

rd = (r1 + r2 + r3 + .... rn) / N

measure equals the single period return that when compounded results in the same cumulative performance as the actual sequence of returns.

rg = [(1+r1) +.....(1+rn)]^(1/n) -1

Track the overall stock/bond market or a segment of the market.

price weighted indexes

value weighted indexes

Equally weighted (value Line Indexes)

Places more weight on the highest priced stocks

replicates the buy and hold return on a portfolio that invests in an equal member of shares of each stock.

places more weight on the largest market capitalization stocks

replicates the buy and hold return on a portfolio that invests in each stock according to its market cap.

Places equal weight on all stocks

Cannot be replicated with a buy and hold investment strategy

Collect funds of individuals and invest them in a wide range of securities

provide record keeping and admin services, diversification and divisibility benefits, and professional managment and reduced transaction costs.

Net asset Value

underlying value of the fund

(MV of assets - liabilities) / Shares Outstanding

Closed end funds

open end funds

exchange traded funds

hedge funds

private equity/venture captial

fixed number of shares traded on a secondary market

prices can differ from NAV (generally trade at discount from NAV which has been a puzzle)

Time when you can take money out; can be actively managed

sell once a day, can get out any day you want.

shares are issued and redeemed directly from the investment company at NAV (but may include sales commissions)

Do not trade on exchanges - bought directly from company.

traded like stocks, passively managed portfolios

usually to match an index.

Sophisticated investors (wealth and income)

(technically not investment companies)

invest in firms that are not publicly traded

smaller startups, deep pocket individuals that finance ideas for stake in companies.

phenomenon where winners keep winning and losers keep losing.

some momentum crashes -> there still is risk

Front End Load

Back End Load

Operating expenses

12 b - 1 Charges (distribution costs paid by the fund, alternative to load)

indirect tax costs

security that's performance relies on how well those that owes pays back. Repackage asset in a way that investors can buy

mortgages

credit card debt

if they default, owners of security lose debt, not company.

can keep customer funds longer than mutual funds so they can invest in more illiquid assets and earn higher returns

charge higher management fees than MFs