cheat sheet.docx

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Department
Economics for Management Studies
Course
MGEC72H3
Professor
Victor Barac
Semester
Fall

Description
Chapter 1 .78 -.54.78-.40  Pay interest Total dollar return = D income + Capital gain (or loss) w = = 0.6281; w = (1 –  Begin life as loan = ($0.84x100) + ($67-$62)100 D 2 2 I  Debt obligations .54 .78 - 2.54 .78-.40 = $584 .6281) = .3719 Investment value = $62 x 100 + $584 E(R P = .6281(.17) + .3719(.15) = 16.26% 1. Money market instruments = $6,784 (I ↑ from 6200 to 6784)  T. bill  2 = .6281 (.54 ) + .3719 (.78 ) + 2(.6281)(.3719)(.54)(.78)(–.40) =  Sold by government or corporation Percentage return = D yield + Capital gain yield P = + = + .12048  Less than a yr σP = 34.71%  Sold on discount basis (PV is less than FV) = 1.35% + 8.06% = 9.41% (= 584/6200)  Risk free and most liquid Note: For each dollar invested will receive 1.35C and for each dollar invested will get 8C in gain Chapter3 2. Fixed income securities  Note, bond, student loan, mortgage, car mortgage Risk premium = E(R) – risk free rate P* =  Fixed PMT Average Return = (12.25 + 23.85 + 51.69 + 25.44 + 0.01)/5 = 22.65 (arithmetic method)  Excess 12 months  r ↑ P↓ Return Variance = [(12.25 – 22.65) + (23.85 – 22.65) + (51.69 – 22.65) + (25.44 – 22.65) + (0.01– 22.65) ]/5 – 1 = = = $29.17 Equities 1. Common stock = 368.32  Own shares of corporation Std = √ (368.32) = 19.19 Any price below this will cause ur margin below 40% subject to  Can vote margin call 1/n  Firm pay cash D Geometric method = [(1+R1) x (1+2 ) x … x (n+R )– 1 = 21.48%  Neither timing nor the amount of any D is guaranteed ShortSales  Stock value rise/fall depending on the prospects for the Chapter 2 ( ) company and market-wide circumstance P* = = = 32.14  receive ur share after debts and other obligation such as wage in event of liquidation E[RA] = .20(.06) + .60(.07) + .20(.11) = 7.60% 2. Preferred stock Any price below this will cause ur margin below 40% subject to E[2B] = .20(–.2) + 260(.13) + .20(.32) = 10.40% 2 margin call  Fixed D must be paid before any D for the common A=.20(.06–.0760) + .60(.07–.0760) + .20(.11–.0760) = .000304; shareholders A= [.000304] 1/= .01744  Has particular FV in event of liquidation 2 2 2 2 Investment strategies and policies  No legal requirement that the D be paid as long as no B=.20(–.2–.1040) + .60(.13–.1040) + .20(.33–.1040) = .029104;  = B 1. Investment management [.029104]1/2= .17060 2. Market timing common D are distributed 3. Asset allocation Derivatives 4. Security selection 1. Primary assets Investor constraints boom: E[Rp] = .30(.3) + .40(.45) + .30(.33) = .3690 1. Resources  Security original sold by govern orbusiness to raise $$ 2. Horizon – investment for ur retirement  Stock or bond good: E[Rp] = .30(.12) + .40(.10) + .30(.15) = .1210 2. Derivative asset poor: E[R ] = .30(.01) + .40(–.15) + .30(–.05) = –.0720 3. Liquidity p 4. Taxes  Derived from an existing traded aster rather than issue bust: E[Rp] = .30(–.06) + .40(–.30) + .30(–.09) = –.1650 5. Special circumstance by govern or business E[R ] = .20(.3690) + .40(.1210) + .30(–.0720) + .10(–.1650) =  Gold p .0841 Terminal price = $70 p2 = .20(.3690 – .0841) + .40(.1210 – .0841) + .30(–.0720 Without margin = ($70 – 60) / $60 = 16.67% 3. Further contract – .0841) + .10(–.1650 – .0841)2 With margin = [($70 × 500) – $12,000 – $18,000] / $18,000 = 27.78%  Made today take place in future 1/2  Obligated to pay p = [.03029] = .1741  Don’t pay today Pretax return = ($71.00 – 63.00 + 1.20) / $63.00 = 14.60% Stock A E(R) =17%, Std =54% Aftertax capital gains = ($71.00 – 63.00)(1 – .20) = $6.40  At maturity, you gain if your contracted price is better Stock B E(R) =15%, Std =78% Aftertax dividend yield = $1.20(1 – .31) = $0.828 than the market price of the underlying asset, and vice Corr btw = -0.40 Aftertax return = ($6.40 + 0.828) / $63.00 = 11.47% versa. Min var inportfolio = ?  If you sell your contract before its maturity, you may E(R) = ? $120,000 × (1.09) 1/– 120,000 = $5,283.68 Std = ? gain or lose depending on the market price for the contract. 4. Option Chapter4 Classification of financial assets:  Give the owner the right but not the obligation to Interest bearing buy/sell an asset at a specific price Beginning value = [($95 × 35,000) + ($54 × 65,000)] / 2 = $3,417,500  call option – has right, not obligated to buy an asset  Ration > 1 then A outperformed B  put option - right, but not the obligated to sell an asset Ending value = [($102 × 35,000) + ($63 × 65,000)] / 2 = $3,832,500  ration of 1.20 means A outperformed b by 20%  option premium – Return = ($3,832,500 – 3,471,500) / $3,417,500 = 12.14%  Strike price (exercise Price) - specified price at which Chapter 9 moving average chart the underlying asset can be bought or sold  calc using fixed no of previous day’s price Technical analysis  Use for interpreting market direction  construct 30 days Chapter6  new days update the average and drop the oldest day Primary market is  Based on history price and volume and investor sentiment • investors purchase newly issued securities. Dow Theory Hi-Lo and Candlestick chart • Initial public offering (IPO) • offers stock for sale to the public for the first time  Analyzing n interpreting stock market movement • investment banking firm  All 3 forces in stock market Point – and – figure chart  head-and-shoulders formation • underwrite – assume risk of new securities from company Primary direction – bullish or bearish reflect long run and reselling them to investors direction  when stock price reach right neckline then time to sell • fixed commitment – investment banker guarantees the firm Secondary reaction on trend – last several weeks or  predict the direction of stock market with 70% accuracy a fixed amount for its securities months • best effort Daily fluctuation – its nose n no use 4 basic reasons why market efficiency is difficult 1.The risk adjustment problem Secondary market Resistance level: Return-risk trade off • investors trade previously issued securities People take risk according to their circumstance • Directly with other investors.  price above which market or stock as whole unlikely to rise Cant always have positive excess return  investor starts selling stock • Indirectly through a broker who arranges transactions  refer to profit taking 2.The relevant information problem for others. Cant possibily know all the inform about underlying behave • Directly with a dealer who buys and sells securities from Support level: There are cases that over 10yrs the price of a stock shot up 100% inventory but suddenly collapsed and no inform available why • bid price - price dealers pay investors  price below is unlikely to fall 3.The dumb luck problem • ask price - price dealers receive from investors.  investor believes that it cant fall below this Monkey eg • bid-ask spread, or simply spread – the difference  pt of bottom up 4.The data supporting problem  buying lots of stock called bargain-hungary investor (bottom feeder) Financial people continually looking the stock pattern so find some Price-Weighted Portfolio
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