Investment Management

Should provide no significant returns because it relies on publicly available information.

EMH advocates passive investing; Build a well diversified portfolio because prices are fair.

EMH ignores the risk return tradeoff; Modern definition of EMH: profits are seen as economic rent control for risk premium.

Trading in an efficient market may lead to profits as a reward for taking the risk of holding risky assets.; Normal returns are admissable abnormal returns are not. Admissable = acceptable

Weak-form: the information set includes only the past history of prices; Semistrong: Includes all information known to all market participants Strong: Includes all information known to any market participants.

Geometric average is the time weighted average return.

It is the internal rate of return when we consider investment over a period during which cash was added to or withdrawn from the portfolio.

Because returns have to be adjusted for risk, some managers concentrate on agressive stocks and therefore outperform more conservative managers.

Incremental return and volatility of the portfolio relative to the risk-free alternative investment as a measure of the reward-to-variability ratio.

Average excess return perunit of systematic risk similar to the Sharpe ratio, but replaces volatility with the beta of the portfolio in the denominator.

Jensen's alpha measures the average return on the portfolio over and above that predicted by the CAPM.

IR divides the alpha of the portfolio by the nonsystematic risk of the portfolio. It measures abnormal return per unit of risk, that in theory could be diversified away by holding a market index portfolio.

Measures an adjusted portfolio with the same SD as the benchmark portfolio.

Hypothetical portfolio that combines the portfolio with a position in T-Bills so as to match the beta of the market index.

Different risk adjusted procedures can yield distinct implications for performance evaluation, hence one must choose the most appropriate measure for the risk; P is the entire portfolio then use sharpe; P is diversified, non-systemmatic risk is negligible and the appropriate metric is Treynors, it weighs excess returns aginst systematic risk.

They assume that the risk is constant; Sharpe ratio does not account for a change in beta of the portfolio

Market timing invoves shifting fully funds between a market index portfolio and a safe asset. In practice only beta will be increased.

Idea is to regress fund returns on indexes representing a range of asset classes, result will implicit the fund's style. R^2 measures the variability due to the style.

Decomposing overall performacne into discrete components that relate to particular levels of the portfolio selection process.

If the coupon rate is equal to the YTM and the bond price is equal to the face value.

A zero coupon Bond makes no periodic interest payments.

Bonds that pay a coupont into perpetuity (use perpetuity formula)

The YTM is the discounts rate that equates the Price of the bond to ist Present value.

Bond price = face value (sold at par); bond price < face value (discounte bodn); bond price > face value (premium bond)

A Common stock is a security that represents ownership in a corporation, which gives to Shareholders cash flow rights and voting rights.

Preferred stocks ususally carry no voting rights, but carry a dividend and may have priority over common stocks in the payment of dividends.

Primary markets: Firms sell new shares; Secondary market: Second hand shares from each other (Exchange); OTC: By a network of dealers

Ratio of the earnings of the company which are re-invested.

The minimum value for the stock price under which the marekt price can never fall.

Under the LPS, the stock becomes attractive as a takeover target.

Income earned per dolar deployed in the firm

Income earned per dollar of long-term capital invested in the firm

Net income realized by shareholders per dollar invested in the firm. Key determinant of earnings growth and profitability.

Measures the likelihood of bankruptcy.

Ability of the firm to pay off current liabilities by liquidating ist current assets (and avoid insolvency in the sjort run)

Better than current ratios as it has not inventories which is nor readiy convertible into cash.

Is better than quick ratio as receivables are less liquid than cash.

The opportunit cost of capital is the rate of return on investments in the same class of risk.

Sum of the returns in each state multiplied by the proibability of the state occuring.