Final Exam Study Guide 1. Power Point Slides + Written Notes + Textbook Chapter 8: Efficient Market Hypothesis (Textbook: page 227 – page 251) - - What is the Efficient Market Hypothesis (EMH)? What are the implications under EMH? What are different versions of Efficient Market Hypothesis? What are the implications under each version? What is technical analysis? What is fundamental analysis? What are the roles of portfolio manager in the efficient market? How does the efficiency of market impact resource allocation? What are different types of managed investment companies? What are the tests that show the violations of EMH? How do you interpret those anomalies? o Weak-Form Efficiency o Semi-strong Form Efficiency o Strong Form Efficiency How is the performance of active fund manager in the context of EMH as well as in reality? Chapter 9: Behavioral Finance and Technical Analysis (Textbook: page 259 – page 268) - What is Behavioral Finance? What are different sources of behavioral biases? What are the examples under each source of biases? What is prospect theory? What are the implications under the prospect theory? What are limits to arbitrage? What are the examples that violate the law of one price? How do those examples support the arguments of limits to arbitrage? Chapter 2: Asset Classes and Financial Instruments (Textbook: page 29 – page 49) - - What is the money market? What are the types of assets that belong to the money markets? o Treasury Bills o Certificates of Deposits o Commercial Paper Notes: You are expected to know the details of these securities. Since we did not cover Banker’ Acceptances, Eurodollars, Repos and Reverses, so you do not need to review these concepts for the final exam How is the performance of money market securities in general? What is the capital market? - - - What is the fixed income market? What are the types of assets that belong to the fixed income markets? o Treasury Notes and Bonds o Inflation Protected Treasury Bonds o Federal Agency Debt o International Bonds o Municipal Bonds o Corporate Bonds o Mortgage- and Asset-Backed Securities Notes: You are expected to know the details of these securities What is the equity market? What are the types of assets that belong to equity markets? o Common Stocks o Preferred Stocks o American Depository Receipt (ADR) o Stock market indexes Notes: You are expected to know the details of these securities What is the derivatives market? What are the types of assets under the derivative markets? o Options ▪ Call option ▪ Put option o Futures/ Forwards Notes: You are expected to know the details of these securities Chapter 3: Securities Markets (Textbook: page 56 – page 66, page 71 – page 74) - - - What are the differences between primary market versus secondary market? What are the differences between public versus private companies? What are different ways for firms to go from private to public? o Direct Listing o Initial Public Offering (IPO) o Special Purpose Acquisition Company (SPAC) How are securities traded in the secondary markets? o What are the costs of trading? o What are different types of markets? o What are different types orders? o How are the orders fulfilled? What is buying on margin? What are the requirements for buying on margin as well as to maintain the positions? What is short sale? - What are the requirements for shorting on margin as well as to maintain the short positions? Chapter 4: Mutual Funds and Other Investment Companies (Textbook: page 86 – page 103) - - - What are the advantages of investing through investment companies? What is investment policy? What are some examples of investment policies? What is Net Asset Value (NAV)? What is a unit investment trust? What are different types of managed investment companies o Mutual Funds ▪ Open-ended Funds ▪ Closed-ended Funds o Real-estate Investment Trust (REIT) o Hedge Funds o Exchange Traded Funds (ETF) What are some common costs of investing in mutual funds? o Operating expenses o Front-ended load o Back-ended load o 12b-1 charges How is taxation on mutual fund is computed? What is a turnover ratio? How is the performance of mutual fund? Chapter 5: Risk, Return, and the Historical Record (Textbook: page 113 – page 127) - - How are rates of return computed? o Holding period return o Arithmetic return o Geometric return What is expected return? How is it measured? What is standard deviation? How is it measured? What is a normal distribution? What is an Empirical rule? What are different components of rates of return? How does the historical records of portfolios with different types of assets look like? What is risk premium? How is it computed? What is a sharp ratio? Why is it useful? Chapter 6: Efficient Diversification (Textbook: page 147 – page 168) - - What are different sources of risks? What is considered as naïve diversification? What are the principles of diversification? o Asset Allocation with Two Risky Assets o Asset Allocation with Two Risky Assets and A Risk-free Assets o Efficient Diversification with Many Risky Assets How do portfolio managers construct portfolios for clients in practice? What are the possible reasons for different optimal risky portfolios to be constructed by different portfolio managers? Chapter 7: Capital Asset Pricing and Multifactor Models (Textbook: page 194 – page 208) - - What are asset pricing models in general? What are the applications of asset pricing models? What is a Capital Asset Pricing Model? o What is the expected return on the market? o What is the risk premium? o What is Beta? What does it measure? What are the assumptions used to derive CAPM? How is the performance of CAPM? What is a Multi-Factor Model? What is a Fama-French Three Factor Model? o What is the market factor? What does it capture? o What is the high minus growth factor (HML)? What does it capture? o What is the size factor (SMB)? What does it capture? Chapter 13: Equity Valuation (Textbook: page 396 – page 409, page 418 – page 423) - - - What is equity valuation? Why do you do equity valuation? What are the principles of valuation in general? What is the dividend discount model valuation approach? o Different scenarios for dividend ▪ No growth in dividend ▪ Constant growth in dividend ▪ Multi-stage growth in dividend What is the free cash flow valuation approach? o Free cash flow for firm o Free cash flow for equity holder? What is weighted cost of capital (W.A.C.C)? What is the re-levered beta? - What is the relative valuation approach? Why would you use P/E ratio as the multiples in the relative valuation approach? What are the other multiples that can be used in the relative valuation approach? What are the advantages and disadvantages under each valuation approach (DDM, DCF, and relative valuation)? When should you use one over another? 2. Articles - Robinhood Financial to Pay $65 Million to Settle SEC Probe o Why does Robinhood Financial have to pay fine? o What are the issues/ problems with Robinhood? o What are the other parties that were involved in the fine? o What is payment for order flow? How is it related to Robinhood? o How did Robinhood respond to the accusation? o What were the loss for investors when reading through Robinhood? - Why Investors Went Banana over AMC Stock? o What is the SMH? o Why did individual investors do to AMC stocks? o What did AMC do to upset those investors? o What did AMC do to calm down those investors? o What is APE? o What are the issues with APE? - The Best Ways to Jump into Dividend Stocks o Why do dividend stocks attract investors? o What are the key metrics investors should look into before deciding on which dividend stocks to buy? o What are the ways to invest in dividend stocks? o How is income from dividend stocks taxed? o How is income on dividends reinvested? - Dividend Stocks Have New Competition: Cash o Why does government bond yields become the competitors of dividend stocks? o How is the stage of the economy, based on the articles? What are the key metrics investors use to form their opinions about the economy? o How do companies decide on their dividends, based on the article? o How does inflation change investment view about the trade-off between capital yield and dividend yield? - Myths about Valuation o What are the 6 myths about valuation? o What are the correct ways of thinking about valuation? - Thoughts on Intrinsic Value o How does the author define intrinsic value? o Does the intrinsic value of gold exist? o How do people estimate the value of gold? How is that value different from the intrinsic value? o How does the value of gold give signal on where the economy is heading? 3. Other Materials for Exam Review - All Activity sheets at the end of each lecture o We did not have the activity sheets for the materials before the Exam 1 (Chapter 8, 9, 2, and 3). However, I posted additional problem-solving questions for those chapters, so you can use those questions for your additional practice. - All Connect homeworks at the end of each chapters - All critical thinking and conceptual questions for each chapter - Additional problem-solving questions for each chapter
