...MODERN PORTFOLIO THEORY A N D INVESTMENT ANALYSIS EIGHTH EDITION INTERNATIONAL STUDENT VERSION EDWIN J. ELTON Leonard N. Stern School of Business New York University MARTIN J. GRUBER Leonard N. Stern School of Business New York University STEPHEN J. BROWN Leonard N. Stern School of Business New York University WILLIAM N. GOETZMANN Yale University WILEY John Wiley & Sons, Inc. Contents About the Authors Preface Part 1 Chapter 1 ix vii INTRODUCTION INTRODUCTION Outline of the Book 2 The Economic Theory of Choice: An Illustration Under Certainty Conclusion 8 Multiple Assets and Risk 8 Questions and Problems 9 Bibliography 10 4 1 2 Chapter 2 FINANCIAL MARKETS Trading Mechanics 11 Margin 14 Markets 18 Trade Types and Costs 25 Conclusion 27 Bibliography 27 1 1 Chapter 3 FINANCIAL SECURITIES Types of Marketable Financial Securities 2 8 The Return Characteristics of Alternative Security Types Stock Market Indexes 3 8 Bond Market Indexes 3 9 Conclusion 4 0 36 28 Part 2 Section I Chapter 4 P O R T F O L I O ANALYSIS MEAN VARIANCE PORTFOLIO THEORY THE CHARACTERISTICS OF THE OPPORTUNITY SET UNDER RISK Determining the Average Outcome 4 5 A Measure of Dispersion 4 6 Variance of Combinations of Assets 4 9 Characteristics of Portfolios in General 51 Two Concluding Examples 61 Conclusion 6 4 XIII 41 43 44 XIV CONTENTS Questions and Problems Bibliography 6 6 Chapter 5 64 DELINEATING EFFICIENT PORTFOLIOS Combinations...
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...Modern portfolio theory From Wikipedia, the free encyclopedia "Portfolio analysis" redirects here. For theorems about the mean-variance efficient frontier, see Mutual fund separation theorem. For non-mean-variance portfolio analysis, see Marginal conditional stochastic dominance. Modern portfolio theory (MPT) is a theory of finance which attempts to maximize portfolio expected return for a given amount of portfolio risk, or equivalently minimize risk for a given level of expected return, by carefully choosing the proportions of various assets. Although MPT is widely used in practice in the financial industry and several of its creators won a Nobel memorial prize for the theory,[1] in recent years the basic assumptions of MPT have been widely challenged by fields such as behavioral economics. MPT is a mathematical formulation of the concept of diversification in investing, with the aim of selecting a collection of investment assets that has collectively lower risk than any individual asset. That this is possible can be seen intuitively because different types of assets often change in value in opposite ways.[2] For example, to the extent prices in the stock market move differently from prices in the bond market, a collection of both types of assets can in theory face lower overall risk than either individually. But diversification lowers risk even if assets' returns are not negatively correlated—indeed, even if they are positively correlated.[3] More technically, MPT models...
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...Lecture #1: Introduction Portfolio theory Intro to CAPM ©Professor Hans K. Hvide Do not quote without permission. Although considerable effort will be exerted to avoid errors in these notes, I do not guarantee that they are error-free. 1 Central concepts for this week • Risk-return trade-off • Covariance (between individual assets) • Efficient Frontier • Market portfolio (choice of the rational investor) ↓ • Capital Market Line • Security Market Line • Cost of capital - Firm: the returns that are necessary to attract capital - Investor: returns that the capital markets offers for comparable investments Readings this week: Brealey, Myers & Allen (BMA), Corporate Finance 8th edition, chapters 7, 8, 9. 10 1. Portfolio theory • Criteria for choice of optimal portfolio by risk-averse rational agents • Mean/variance analysis • Market portfolio Note: static world with only one point in time. Definitions: - Financial asset = stream of income, typically uncertain, with a given risk/return profile - Portfolio = mix of financial assets 11 1.1 Expected returns for portfolio (2 assets) Let E(Z) be the expectation (expected value) of a random variable Z = probability-weighted midpoint of the distribution of Z. E(RP) = x1E(r1) + (1-x1)E(r2) (1) E(RP) = Expected portfolio return xi = Share of investment in asset i, (i = 1, 2) E(ri) = Expected return asset i, (i=1, 2) Expected portfolio returns is the weighted average ...
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...Efficient portfolio & Stock market efficiency Prepared by: Ahmed Mohamed Ahmed Zaki Nofal Submitted to: Dr.Tarek el Domiaty Modern portfolio theory Modern portfolio theory (MPT) is a theory of finance which attempts to maximize portfolio expected return for a given amount of portfolio risk, or equivalently minimize risk for a given level of expected return, by carefully choosing the proportions of various assets. Although MPT is widely used in practice in the financial industry and several of its creators won a Nobel memorial prize[1] for the theory, in recent years the basic assumptions of MPT have been widely challenged by fields such as behavioral economics. MPT is a mathematical formulation of the concept of diversification in investing, with the aim of selecting a collection of investment assets that has collectively lower risk than any individual asset. That this is possible can be seen intuitively because different types of assets often change in value in opposite ways. For example, to the extent prices in the stock market move differently from prices in the bond market, a collection of both types of assets can in theory face lower overall risk than either individually. But diversification lowers risk even if assets' returns are not negatively correlated—indeed, even if they are positively correlated More technically, MPT models an asset's return as a normally distributed function (or more generally as an elliptically distributed random...
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...MSc Corporate Finance Dr. Kirak Kim Before we start Main branches of finance Corporate Finance How do we value projects and (optimally) finance them? Asset Pricing How do we price securities more precisely? What’s the difference? Is it a Corporate Finance question or an Asset Pricing question? □ You are the manager of Intel Corp. You are reviewing the proposal for the new plant to be built in China. The new plant requires a large onetime investment but will provide significant capacity addition as well as cost savings over the next 10 years. Should you approve the proposal for the new plant? □ “HSBC FTSE 100” is a index fund that replicates FTSE 100 index. The fund offers investors a convenient diversification at a low price. Would you be interested in investing in the fund (or somewhere else)? » What if it was TESCO that was considering HSBC FTSE 100 as an investment vehicle? □ In 2004, Sergey Brin and Larry Page, the founders of Google Inc., were talking to investment bankers from Morgan Stanley. They hope to finance a number of potential opportunities through IPO (initial public offering). One of the most important concerns is of course what the offering price should be. Part 1 Project Valuation Dr. Kirak Kim MSc Corporate Finance EFiMM0017 Project Valuation Investment decision Revisit: Valuing unlevered cash flows Revisit: Uncertainty and the notion of risk Weighted average cost of capital Adjusted present value Two Main...
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...What is Candlestick Trading? Back in the day when Godzilla was still a cute little lizard, the Japanese created their own old school version of technical analysis to trade rice. A westerner by the name of Steve Nison “discovered” this secret technique on how to read charts from a fellow Japanese broker and Japanese candlesticks lived happily ever after. Steve researched, studied, lived, breathed, ate candlesticks, began writing about it and slowly grew in popularity in 90s. To make a long story short, without Steve Nison, candle charts might have remained a buried secret. Steve Nison is Mr. Candlestick. Okay so what the heck are forex candlesticks? The best way to explain is by using a picture: Candlesticks are formed using the open, high, low and close. • If the close is above the open, then a hollow candlestick (usually displayed as white) is drawn. • If the close is below the open, then a filled candlestick (usually displayed as black) is drawn. • The hollow or filled section of the candlestick is called the “real body” or body. • The thin lines poking above and below the body display the high/low range and are called shadows. • The top of the upper shadow is the “high”. • The bottom of the lower shadow is the “low”. Just like humans, candlesticks have different body sizes. And when it comes to forex trading, there’s nothing naughtier than checking out the bodies of candlesticks! Long bodies indicate strong buying or selling. The longer the body is...
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...Advanced Modelling in Finance using Excel and VBA Mary Jackson and Mike Staunton JOHN WILEY & SONS, LTD Chichester ž New York ž Weinheim ž Brisbane ž Singapore ž Toronto Copyright 2001 by John Wiley & Sons, Ltd, Baffins Lane, Chichester, West Sussex PO19 1UD, England National 01243 779777 International (C44) 1243 779777 e-mail (for orders and customer service enquiries): cs-books@wiley.co.uk Visit our Home Page on http://www.wiley.co.uk or http://www.wiley.com All Rights Reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, scanning or otherwise, except under the terms of the Copyright, Designs and Patents Act 1988 or under the terms of a licence issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London W1P 9HE, UK, without the permission in writing of the publisher. Other Wiley Editorial Offices John Wiley & Sons, Inc., 605 Third Avenue, New York, NY 10158-0012, USA Wiley-VCH Verlag GmbH, Pappelallee 3, D-69469 Weinheim, Germany John Wiley & Sons Australia Ltd, 42 McDougall Street, Milton, Queensland 4064, Australia John Wiley & Sons (Asia) Pte Ltd, 2 Clementi Loop #02-01, Jin Xing Distripark, Singapore 129809 John Wiley & Sons Canada Ltd, 6045 Freemont Blvd, Mississauga, ONT, L5R 4J3, Canada British Library Cataloguing in Publication Data A catalogue record for this book is available from the British...
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...Stochastic frontier analysis of the efficiency of Nigerian banks Abstract Using the Stochastic Frontier Analysis (SFA) the efficiency of Nigerian banks was analysed. The result of the study proved that there is inefficiency in the Nigerian banking system and that the level of inefficiency ranged from 0 to 19 per cent of total cost. The study was able to derive the individual bank's level of inefficiency. Put differently, the study was able to derive the individual bank's level of efficiency. I. INTRODUCTION In the last three decades, as bank regulators open their financial Industries for competition and liberalisation, many banks operated at a level that is less efficient and profitable leading to unsoundness or distress in the industry; thus generating concerns and worries among the bank stakeholders. There are a large number of studies which employ models to explain inter-bank differences in earnings, bank efficiency and continuous existence (failure) in the United States of America and other developed countries of the world. Similar studies have not been carried out using data from emerging markets like Nigeria especially when viewed against the background of the statement of Barltrop and McNaughton (1992) that financial analysis should be done within the context of the particular country and economic environment as each country has a different economic environment, different regulatory and legal environment, different commercial practices, different accounting...
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...Lecture Notes in Finance 1 (MiQE/F, MSc course at UNISG) Paul Söderlind1 14 December 2011 1 University of St. Gallen. Address: s/bf-HSG, Rosenbergstrasse 52, CH-9000 St. Gallen, Switzerland. E-mail: Paul.Soderlind@unisg.ch. Document name: Fin1MiQEFAll.TeX Contents 1 Mean-Variance Frontier 1.1 Portfolio Return: Mean, Variance, and the Effect of Diversification 1.2 Mean-Variance Frontier of Risky Assets . . . . . . . . . . . . . . 1.3 Mean-Variance Frontier of Riskfree and Risky Assets . . . . . . . 1.4 Examples of Portfolio Weights from MV Calculations . . . . . . . . . . . . . . . 4 4 9 19 22 A A Primer in Matrix Algebra 24 B A Primer in Optimization 27 2 . . . . . . . . 31 31 32 37 39 42 45 46 47 3 Risk Measures 3.1 Symmetric Dispersion Measures . . . . . . . . . . . . . . . . . . . . 3.2 Downside Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 Empirical Return Distributions . . . . . . . . . . . . . . . . . . . . . 54 54 56 67 4 CAPM 4.1 Portfolio Choice with Mean-Variance Utility . . . . . . . . . . . . . . 70 70 Index Models 2.1 The Inputs to a MV Analysis . 2.2 Single-Index Models . . . . . 2.3 Estimating Beta . . . . . . . . 2.4 Multi-Index Models . . . . . . 2.5 Principal Component Analysis 2.6 Estimating Expected Returns . 2.7 Estimation on Subsamples . . 2.8 Robust Estimation . . . . . . . . . . . . . . . .. .. .. . ...
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...it more practical to use some of the listed symbols to represent a different concept. In other instances, clarity required making the symbolic representation more precise (e.g., by being more specific as to the time dimension of an interest rate). Roman Alphabet a Amount invested in the risky asset; in Chapter 14, fraction of wealth invested in the risky asset or portfolio AT Transpose of the matrix (or vector)A c Consumption; in Chapter 14 only, consumption is represented by C, while c represents ln C ck Consumption of agent k in state of nature θ θ CE Certainty equivalent CA Price of an American call option CE Price of a European call option d Dividend rate or amount ∆ Number of shares in the replicating portfolio (Chapter xx E The expectations operator ek Endowment of agent k in state of nature θ θ f Futures position (Chapter 16); pf Price of a futures contract (Chapter 16) F, G Cumulative distribution functions associated with densities: f, g Probability density functions K The strike or exercise price of an option K(˜) Kurtosis of the random variable x x ˜ L A lottery L Lagrangian m Pricing kernel M The market portfolio k M Uθ Marginal utility of agent k in state θ p Price of an arbitrary asset P Measure of Absolute Prudence q Arrow-Debreu price qb Price of risk-free discount bond, occasionally denoted prf e q Price of equity rf Rate of return on a risk-free asset Rf Gross rate of return on a risk-free asset r ˜ Rate of return on a risky asset ˜ R Gross...
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...VALUATION AND ACQUSITION VALUATION AND ACQUISITION OF “TARGET COMPANY” LIMITED BY “INVESTOR” LIMITED BY: AKINTOYE AKINDELE DBA PROGRAM INTERNATIONAL SCHOOL OF MANAGEMENT DECEMBER 2011 INTRODUCTION CONTEXT This report reviews the investment/acquisition rationale, valuation (assumptions and methodology), negotiation and post acquisition events of the acquisition of 100 percent of the equity of “Target Company” limited by “Investor” Limited. While the names of acquiring and selling companies have been changed to Investor Limited and Target Company limited respectively for confidential reasons, the information and events here are factual and all the exhibits represent actual financial information of both companies especially Target Limited. BACKGROUND & BUSINESS OVERVIEW OF TARGET Target Limited is an aluminium continuous casting and cold rolling mill located in Ghana. The company was set up to implement the fourth processing leg of the proposed integrated aluminium industry for Ghana which comprised; bauxite mining – First leg, refining bauxite into alumina – Second leg, smelting alumina into raw aluminium ingots – Third leg and processing the ingots into flat rolled product – Fourth leg and Target’s business. The company was incorporated as a private company and granted license to commence business on 24th February, 1978 and 22nd March, 1978 respectively. Target was later converted into a public company on 28th May, 1996 and was listed on the Ghana Stock Exchange...
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...Salvatore fdedi.tex V2 - 11/10/2012 9:37 A.M. Page iv International Economics Eleventh Edition Dominick Salvatore Fordham University VICE PRESIDENT & EXECUTIVE PUBLISHER EXECUTIVE EDITOR OPERATIONS MANAGER CONTENT EDITOR SENIOR EDITORIAL ASSISTANT CONTENT MANAGER SENIOR PRODUCTION EDITOR ASSOCIATE DIRECTOR OF MARKETING MARKETING MANAGER LEAD PRODUCT DESIGNER SENIOR MEDIA SPECIALIST DESIGN DIRECTOR SENIOR DESIGNER COVER PHOTO CREDIT George Hoffman Joel Hollenbeck Yana Mermel Jennifer Manias Erica Horowitz Lucille Buonocore Sujin Hong Amy Scholz Jesse Cruz Allison Morris Elena Santa Maria Harry Nolan Madelyn Lesure ©lightkey/iStockphoto This book was set in 10/12 Times Roman by Laserwords and printed and bound by R. R. Donnelley-JC. The cover was printed by R. R. Donnelley-JC. Copyright © 2013, 2010, 2007, 2004 John Wiley & Sons, Inc. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning or otherwise, except as permitted under Sections 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc. 222 Rosewood Drive, Danvers, MA 01923, website www.copyright.com. Requests to the Publisher for permission should be addressed to...
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...without influencing market prices. In reality, most markets are less than perfectly liquid and many securities cannot be traded with ease in markets. This is especially true for emerging market economies where the process of financial sector reform and deepening is currently taking place. Despite episodic evidences of liquidity crisis in the Indian financial markets, risks associated with market illiquidity have not been effectively incorporated into the VaR models. In the face of sudden and persisting off-market prices of some of the securities in their portfolio, the Indian financial organizations often find it difficult to offload these securities without booking significant trading losses. As a consequence, several securities exhibit very low levels of turnover in the secondary segment of the debt market. Also, in most cases, measures of market risk fail to capture the costs of carrying illiquid assets in their portfolio. This becomes a constraining factor for market growth. In this context, the paper attempts to construct a Liquidity adjusted VaR model (L-VaR model) that incorporates liquidity risk in Value at Risk models. The paper tests the performance of L-VaR model vis-a-vis existing VaR models and finds that in the Indian context, the liquidity risk is an important component of the aggregate risks absorbed by the financial institutions....
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...with JSTOR to digitize, preserve and extend access to Financial Analysts Journal. http://www.jstor.org This content downloaded from 134.117.10.200 on Mon, 24 Feb 2014 01:32:09 AM All use subject to JSTOR Terms and Conditions FinancialAnalysts Journal Volume 61 . Number 2 ?2005, CFAInstitute X Fundamental Indexation Robert D. Arnott,Jason Hsu, and PhilipMoore to A trillion-dollar industryis basedon investingin or benchmarking capitalization-weighted the This literature indexes, eventhough thefinance rejects mean-variance efficiency suchindexes. of measures whether stockmarket indexesbasedon an arrayof cap-indifferent study investigates of than based market These on "Fundamental" size mean-variance company aremore efficient those cap. indexeswerefound to deliverconsistent,significantbenefitsrelativeto standard cap-weighted The Graham: the In indexes. trueimportance thedifference havebeenbestnotedbyBenjamin of may but shortrun,themarket a votingmachine, in thelongrun,it is a weighing is machine. T he capital asset pricing model...
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...оновчтой хувьцааны багц бүрдүүлдэг программ бүтээхийг зорилоо. Багц сонголтын онол болон Зан төлвийн санхүүгийн ухагдахуунууд үндэслэж оновчтой багц бүрдүүэх программыг зохиосон болно. Тус программ нь нийт 7 алхамтыг гүйцэтгэсний эцэст оновчтой багц бүрүүлэх ба ижил өгөөжийн түвшинд эрсдлийг дунджаар 50%-иар бууруулж байхад ижил эрсдлийн түвшинд өгөөжийг 50%-иар өсгөж байна. Энэхүү программыг Монголын брокер, дилерийн компаниуд хөрөнгө оруулагчдадаа санал болгосноор хөрөнгө оруулагчдын эрсдэл буурах, өгөөж нэмэгдэх, хөрөнгө оруулагчдын сэтгэл зүй тогтвортой байх, ханшийн хэт хэлбэлзэл буурах, цаашлаад хөрөнгийн зах зээлд хөрөнгө оруулагчид нэмэгдэх улмаар хөрвөх чадвар сайжирч, зах зээл идэвхжих чухал ач холбогдолтой. Түлхүүр үгс: Modern Portfolio Theory, Behavioral Finance, C programming language, Visual Studio Хөрөнгө Оруулагчийн Санхүүгийн Хэрэгцээ, Чадамж, Хувийн Зан Төлөвт Нийцсэн Оновчтой Багц Бүрдүүлэх “MB 1.0” Программ ГАРЧИГ I. СУДЛАГДСАН БАЙДАЛ ................................................................................................ 1 1.1. Багц сонголтгэж юу вэ?...
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