FINA2802
Investments and Portfolio Analysis
Spring, 2009
Dragon Tang
Review for Exam I
FINA2802, Spring 09 – Dr Tang Review for Exam I

Functions of Financial Markets:
• Smoothing consumption.
• Better risk-sharing.
• Separation of ownership and control.
FINA2802, Spring 09 – Dr Tang Review for Exam I

2. Financial Securities
• Money market
• Bond
• Stock
• Derivatives
FINA2802, Spring 09 – Dr Tang Review for Exam I

3. Stock Market Indexes
• Price-weighted
• Value-weighted
• Equally weighted
FINA2802, Spring 09 – Dr Tang Review for Exam I

• Role of investment banks
• Different types of markets
• Different types of orders
FINA2802, Spring 09 – Dr Tang Review for Exam I

5. Buying on Margin and Short Sales
• Initial Margin
Initial Margin
0

Initial investor' s equity
0
Market val ue of securities
• Actual Margin
Actual Margin t

Actual investor' s equity t
Market val ue of securities t
• Margin Call
Buying on Margin:
NP min

L
NP min

M

P min

0
L
N ( 1

M )
Short Selling: P max

NP
0
N

M

E
0

1

FINA2802, Spring 09 – Dr Tang Review for Exam I

6. Investment Companies
• Net Asset Value (NAV)
• Closed-end fund: discount/premium
• Mutual Fund Expenses: front-end load, back-end load, operating expenses, 12b-1 fees
FINA2802, Spring 09 – Dr Tang Review for Exam I

7. Risk and Return
Expected Return and Risk of a Single Security:
•
•
•
Expected Return: E
  s p
   
Variance:
Volatility:

2   s p

  
2

2
FINA2802, Spring 09 – Dr Tang Review for Exam I

8. Asset Allocation
Complete Portfolio Expected Return and Risk:
Expected Return: E
 
C
 r f
 y

E r
  risky
 r f


( 1
 y )

E ( r lessrisky
)
 r f

Variance:

C
2  y
2

2 risky


1
 y

2 
2 lessrisky

2 y

1
 y
   risky
 lessrisky
Special Case: if
 lessrisky

0
E
 
C
 r f
 y

E r
  risky
 r f
 and then r lessrisk
 r f
 
C y
 risky
FINA2802, Spring 09 – Dr Tang Review for Exam I

9. Efficient Market Hypothesis
• Three versions of EMH
• Tests of EMH
• Market Anomalies and explanations
FINA2802, Spring 09 – Dr Tang Review for Exam I

10. Market Efficiency
• Dr Dragon Tang’s views
• Evidence
• Behavioral interpretation
FINA2802, Spring 09 – Dr Tang Review for Exam I

• Behavioral biases
• Loss aversion
• Overconfident
• Mental accounting; etc.
• Why TA may be useful
• Slow reaction
• Systematic biases
• Technical indicators
FINA2802, Spring 08 – Dr Tang Review for Exam II

• The ongoing crisis: causes and consequences
• The worldwide bailout: stimulus packages and bank nationalization
• China vs U.S.
• The real investment world (e.g., mini-bond incident)
FINA2802, Spring 09 – Dr Tang Review for Exam I

Comments and Advices
• Never leave a question blank, write down as much
(relevant information) as possible to get partial credits.
• Work on the easier and less time-consuming problems first.
• Always show the formula before you put up the numbers. You will get most of the points in case of calculation errors.
• Current events count 30%.
• Homework questions will be highly relevant
FINA2802, Spring 09 – Dr Tang Review for Exam I