Investment Management

24/02/2013 1 25721 investment MANAGEMENT Lecturers Sean Anthonisz Nadima El-Hassan Jianxin Wang Brandon Zhu Subject Coordinator Jianxin Wang Objectives 2 ? ? ? ? Why do you defy this subject? What do you carry to look on? How much(prenominal) did you pay for this subject? Is this a good investment? enthr iodinment Decisions 3 ? ? How much should I invest in forged assets? How much should I invest in different risky assets? ? ? How many risky assets should I hold? When not to diversify? ? How to determine mis wrong? Fair take to be to sidereal day? pass judgment harvest-time next yr? ? How well do asset legal injury models work? ? ? 1 24/02/2013 enthronization Decisions 4 ? passive voice versus active investing ? ? Is market efficient? Why not? What does it take to beat the market? How to hedge and how much to hedge? Derivative pricing trading cost, liquidity, private information ? How should I manage risk? ? ? ? How should I trade? ? ? Sources of my performance? What Do We Learn in This Subject? 5 ? ? ? ? A theoretical framework for portfolio construction. A theoretical framework for the pricing of equities and sequesters. Some practical applications of asset pricing models and portfolio analysis. Issues relating to market efficiency and investor behaviour.Course social organisation 6 Funds Management Information Portfolio Theory Risk and reproduction grocerys and Investing CAPM Factor Models & APT Options Fixed Income Equities Futures 2 24/02/2013 enthronement Electives 7 ? ? ? ? ? ? 25705 pecuniary Modelling and Forecasting 25728 stick by Portfolio Management 25729 apply Portfolio Management 24731 International Finance 25762 Synthetic Financial Products A unhurt range of subjects for Quant Fin majors technical analysis, numerical analysis, fin econometrics, stat methods, differential coefficient pricing, interest appreciate modelling. Prerequisite 8 ? ? 25742 Financial Management elementary math and statisticsBasic calculus and optimi zation Probability and distributions ? Mean, variance, standard deviation, covariance ? Linear turnab emerge by ordinary least squargon (OLS) ? ? ? Read the online Quantitative suss break through ? A very brief review next week What Is Expected in class 9 ? Lectures are primarily aimed at Identifying and explaining linchpin concepts and issues Highlighting the links to practice ? Completing selected problems from text ? ? ? Questions are further and rewarded. ? Discussion is better than lecture Mutual respect and encouragement authorisation problems repeated late arrivals, chatting during lecture, pedantic honesty Code of behavior ? ? 3 24/02/2013 What Is Expected outside class 10 ? Address both(prenominal) details within the caterpillar track reading materials. ? base study is more(prenominal) effective ? ? Workload is about 7-8 hours per week on average (albeit uneven), including course readings, practices, and assignments. Multiple learning channels ? ? Multiple leve ls of learning ? Web-based learning realise Lecture material, textbook, and Excel sheets Approach to Learning 11 ? ? ? Read relevant chapters prior to lectures Attempt to identify and understand the key messages Concepts? Issues? Connections?Ask questions during lecture. ? You gainful $$$ for the opportunity ? ? Think & reflect dont just re-start & memorize. Practice using back-of-chapter questions. Approach to Learning I listen and I forget I see and I remember I do and I understand. Xun Zi Just Do It Nike 12 4 24/02/2013 school text and Readings 13 ? Bodie, Kane, Marcus, Investments, 9th Ed, McGraw-Hill/Irwin, 2011. ? You take full responsibility if using an earlier edition. ? ? ? ? Harvard occupation School faux pas study 9202-024 St posegic Capital Management. R.A. Haugen, neo Investment Theory, 5th Ed, Pearson Higher Education, 2001. J. H. Cochrane, 2006, Investments Notes. Other fun books on monetary markets. Assessments 14 ? Weekly online quizzes 10 marks ? ? ? ? ? 15 MC questions in 1 hour Unlimited tries with the outflank mark kept Monday daybreak to next Wednesday midnight Once closed, quizzes cannot be reopened Best 10 marks for the semester Group-based case report Online group registration Report due 5pm Friday borderland 29 Late submissions carry point deduction ? Case study in lecture 6 10 marks ? ? ? ? Assessments 15 ?Mid-session mental test 40 marks ? ? ? ? C over lectures 1 6, including the case study multiple-choice (20 marks) Short-answer questions (20 marks) No formula sheet Cover lectures 7 13, excluding lecture 8 Multiple-choice (20 marks) Short-answer questions (20 marks) A brusque list of formulas will be identified and provided during the lowest exam. ? Final exam 40 marks ? ? ? ? 5 24/02/2013 Online Group Registration 16 ? ? ? ? ? ? Log in the online course website Click on Groups in the left panel Group names contain 1m, 2m, 3m, 4m, indicating goop members = 1, 2, 3, 4, respectively.The first member is the group leader. Registration closes after 5pm on March 10. Changing group only in the most extreme circumstances. Whats Required? 17 ? ? ? Materials covered in the chapters listed in the lecture program, object certain subsections are explicitly excluded. The midsession and the final exams will focus on materials covered during lectures, with at most 3-4 multiple-choice questions in each exam on materials not covered in lectures. Materials not covered in lectures will be heavily featured in the online quizzes. Administrative Issues 8 ? Name sign Open for the business of learning ? Take it out at the start of every lecture Its good to befuddle the lecturer k instantly your name ? Come to consultation hours ? ? ? Other clock by appointment Email for straight prior questions Complex questions are best answered through interactive discussion ? Emails will be answered before or during the next consultation hours ? 6 24/02/2013 Learning reinforcement grad student ? ? ? ? ? Need help with y our postgraduate studies at UTS Business School? atomic number 18 you new to university / postgraduate education?Not sure to how develop your academic skills in writing, reading, critical thinking etc.? Not sure how to plump out assignments or achieve your best? Ask for help from the Learning Support Coordinator ? ? ? ? ? ? Make appointments for confidential individual help Lots of online study resources to barrack / hardcopy study resources to dole out Attend the Study Skills Workshops all semester / or transfer them / Help by email / phone support / Email emailprotected edu. au wwwhttp//www. business. uts. edu. au/teaching/student/resources/studen t-learning. tml Join us on facebook UTSBlearningsupport ? Asset Classes 20 ? ? ? ? ? ? The money market The bind market The integrity market The real estate market Currency markets Derivative markets ? Financial and commodities ? Others? Trading Platforms 21 ? Organized exchanges Dealership markets Auction markets ? Electronic cr aft ? ? ? ? OTC NASDAQ Alternative trading systems (ATS) ? ECNs, dark pools, internal crossings. ? Algorithm/ juicy frequency trading 7 24/02/2013 High Frequency Trading 22 ? Menkveld (2011) a HFTer on Chi-X Dutch stocks from Jan 2007 to June 2008 Trades 1400 times per stock per day ?Gross profit per trade 0. 88 ? ? ? ? ? 1. 55 profit on the spread net of fees 0. 45 profit on positions 5 seconds 1. 13 loss on positions = 5 seconds Max capital committed ? 2 million per stock ? Implied annualized Sharpe ratio = 9. 35 ? ? Sharpe ratio for S&P500 over the achievement = -0. 16 ? Chi-X is in Australia. Costs of Trading 23 ? kick fee nonrecreational to broker for making the transaction ? Exchange members/subscribers? ? dish out Bid and ask legal injurys Spread ask bid ? P89, 14 ? Market versus limit orders ? ? ? Price impact of large trades wrinkle border Trading 24 ? ? ? ? Borrow (from brokers) to purchase shares Initial bank victuals margin token(prenominal) level the equity margin can be Margin cancel ? Call for more equity funds ? Margin arrangements differ for stocks and derivatives 8 24/02/2013 Margin Trading Initial Conditions 25 ? ? ? ? ? X pot P = $70 Initial Margin = 50% Maintenance Margin = 40% kilobyte Shares Purchased Initial Position Stock $70,000 Borrowed Equity $35,000 $35,000 Maintenance Margin 26 ? ? Stock price falls to $60 per share New Position ? $60,000=$35,000(Borrowed) + 25,000(Equity) ? Margin = $25,000/$60,000 = 41. 67% How far can the price fall before a margin call? ? ? ( kP $35,000) / greenP = 40% P = $58. 33 ? P88, 9 Short deal 27 ? ? Purpose benefit from a price fall Mechanics Borrow stock through a dealer/broker Sell it and deposit comeback and margin in an account ? Any dividend is passed back to the lender ? Closing out the position ? ? ? ? Buy back the stock and return it to the lender clams can be deposited into your own account ? Naked versus covered minuscule sale 9 24/02/2013 Short Sale Initial Condition s 28Z pot Initial Margin Maintenance Margin Initial Price Sale Proceeds Margin Account Balance 100 Shares 50% 30% $100 $10,000 $ 5,000 $15,000 Short Sale Maintenance Margin 29 ? Stock Price Rises to $110 Stock owed Net equity ? Margin % (4000/1 constant of gravitation) ? ? $11,000 $ 4,000 36% ? ? How much can the stock price rise before a margin call? ($15,000 100P) / (100P) = 30% P = $115. 38 P89, 12 compact 30 ? Course introduction and requirements ? Think, reflect, and com comparisonisonticipate ? ? Financial markets and assets Trading of fiscal assets Trading platforms Transaction costs ? Margin trading and short swaping ? ? 10Investment ManagementUNIVERSITY OF TEXAS AT DALLAS SCHOOL OF MANAGEMENT FIN6310 INVESTMENT MANAGEMENT SOLUTIONS TO PROBLEM SET 1 PROF. ARZU OZOGUZ SPRING 2013 1. elaborate the look on of the pursuance two confederations. develop that verifier payments are made semi-annually and that par look on is $1,000 for both amazes. Coupon rate Time to maturity Yield-to-maturity beat A 5% 5 yrs 7. 2% Bond B 5% 25 yrs 7. 2% Recalculate the stick tos mensurates if the birth to maturity changes to 9. 4%. Which attach is more sensitive to the changes in the yield? Will this forever be the case? When the yield-to-maturity is 7. %, the bond prices are, respectively, 1 1 1. 036 0. 036 1 1. 036 0. 036 1 1. 047 0. 047 1 1. 047 0. 047 25 grand piano 1. 036 1000 1. 036 908. 98 1 25 746. 58 When the yield-to-maturity is 9. 4%, the bond prices are, respectively, 1 25 1000 1. 036 1000 1. 047 827. 62 1 25 579. 01 Price of bond A decreases by 8. 95%, while price of bond B drops by 22. 45%. The longer term bond is more sensitive to a addicted change in the force out rate. This will always be the case. Mathematically, thither are more terms in the equation for the longer-term bond that are influenced by the discount rate.Practically speaking, your money is tied up longer with a longer term bond and so you will experience greater capital losses and gains when interest judge change. 2. A bond with a coupon rate of 4. 7% is priced to yield 6. 30%. Coupon is paid is semi-annually the par pry is $1,000. The bond has 5 course of studys remaining until maturity. presumptuous that market judge stay the identical over the next tailfin familys, calculate the value of the bond at the findning of each social class and the amount of change in the bonds value from year to year. Describe the behavior of the bonds value over time.At t = 0, at issue the price will be 1 1 1. 0315 0. 0315 1 1. 0315 0. 0315 1 1. 0315 0. 0315 1 1. 0315 0. 0315 1 1. 0315 0. 0315 23. 5 1000 1. 0315 932. 28 At the end of year 1, the price becomes 1 23. 5 1000 1. 0315 1000 1. 0315 1000 1. 0315 1000 1. 0315 944. 20 1 23. 5 956. 88 1 23. 5 970. 37 1 23. 5 1000 984. 73 The price change from year to year is ? ? ? ? ? 11. 92 12. 68 13. 49 14. 36 15. 27 The bond is selling at a discount today its price will rise to move toward par value at maturity. The change in price increases as it gets closer to maturity. 3.Suppose that you purchased a 20-year bond that pays an annual coupon of $40 and is selling at par. Calculate the one year holding period return for each of these leash cases. a. The yield-to-maturity is 5. 5% one year from now. If the yield-to-maturity is 5. 5% one year from now, the bond will be selling for 1 1 1000 1. 055 40 825. 89 1. 055 0. 055 Hence, the holding-period-return (HPR) is 825. 89 40 1000 13. 41% 1000 b. The yield-to-maturity is the same one year from today as it is today. In this case, the bond price will remain at par and therefore the holding period return equals to coupon rate 4% c.The yield-to-maturity is 2. 5% one year from now. 1 1000 1. 025 40 1224. 68 1. 025 0. 025 Hence, the holding-period-return (HPR) is 1224. 68 40 1000 26. 47% 1000 1 4. Plot the yield twist implied by the data in the following tabularise. Time to maturity 3 months 6 months 1 year 2 age 5 years 10 years 15 years 20 years Yi eld-tomaturity 2. 40% 2. 60% 3. 00% 4. 30% 4. 80% 5. 70% 6. 40% 5. 20% Based on the Expectations Hypothesis, what does the yield curve tell us about short-term rates 5 years from now? What does it tell us about short rates 15 years from now and 20 years from now?Since the yield curve is upward sloping through the fifth year, investors expect that short term rates will be higher during that period than they are today. That is, they expect the 3-month rate to be higher than 2. 4% when 5 years have passed. They also expect short term rates to be higher than current rates in 15 years. This is reflected in the slope of the yield curve which is positive through year 15. However, the view is that after 15 years, short term rates will begin to fall again. The downward slope in the yield curve is a sign of that mind-set.That is, the 3-month rate that prevails 20 years from now is expected to be lower than the 3-month rate that prevails 15 years from now. 5. The current yield curve for def ault free zero-coupon bonds is as follows Maturity (years) 1 2 3 Yield-tomaturity 10% 11% 12% a. What are the implied one year forward rates? The yearly forward rate for time 2 solves the following equation 1. 11 1. 10 1 12. 009%. Similarly, the one-year forward rate for time 3 solves That is, the equation 1. 12 That is, 14. 0271% 1. 11 1 b. Assume that the expectations hypothesis of the term structure is correct.If market expectations are accurate, what will the yields to maturity on one year and two year zero coupon bonds be next year? We have already computed the forecast for the one year rate next year. We must now compute the expectation for the 2-years to maturity. This must equate the strategy that consists of investing for 3 years at the current 3-year spot rate with the strategy of investing at the one-year spot rate and then rolling over the profits into a two-year bond one year from now 1. 10 1 1. 12 13. 0136%. Hence, the forecast for the one-year yield is This implies th at 12. 09%, and forecast for the two-year yield is 13. 0136%. c. If you purchase a two year zero coupon bond now, what is the expected total rate of return over the next year? What if you purchase a three year zero coupon bond? You can assume that the par value is $100. We need to compute the forecasted price of the two-year zero-coupon bond at the end of the first year. Notice that by that time this has become a one-year bond. Hence its price is 1000 1. 12009 892. 79 Today the price of this bond is simply 892. 79 811. 62 does not pay any coupons, its return is given by 1 1 10% . 11. 62. Since this bond Similarly, if you purchase a three-year zero coupon bond today, the forecasted price a year later is 1000 1. 130136 Today, this bonds price is simply expected holding period return is 78. 295 71. 178 1 78. 295 . 71. 178. Therefore, the 10% 6. Consider the following three bonds. You are analyse how the bonds would react to changes in interest rates. Bond A Face value Years to maturit y Coupon rate Yield-to-maturity $1,000 3 5. 5% 4. 80% Zero-coupon bond $1,000 2. 85 0 4. 80% Bond B $1,000 3 8. 75% 4. 80% Assume that coupons are paid once a year. . Find the continuance of each bond. Bond A Time 1 2 3 Price ZCB Time 2. 85 Price Bond B Time 1 2 3 Price specie conflate 87. 5 87. 5 1087. 5 Present value 83. 49 79. 67 944. 81 1107. 97 Weight 0. 075 0. 072 0. 853 Cash Flow 1000 Present value 874. 92 874. 92 Weight 1. 000 Cash Flow 55 55 1055 Present value 52. 48 50. 08 916. 58 1019. 13 Weight 0. 051 0. 049 0. 899 Hence, the durations are 0. 051 0. 075 1 1 0. 049 0. 072 2 2 0. 899 0. 853 3 3 2. 85 2. 78 2. 85 b. Calculate the modified duration of each bond. The modified durations are ? ? 2. 85 2. 72 1. 048 2. 78 2. 5 1. 048 c. Calculate the estimated piece change in price of each bond due to a 0. 50% change in yield to maturity. The share change in the price of each bond due to a change in the yield? ? ? to-maturity is ? ? ? 2. 72 2. 65 0. 5% 1. 36% 1. 33% 0. 5% d. What can you conclude about the reactions of the bonds? Specifically, compare the percentage price changes of the bonds with similar durations and the bonds with similar maturities. Bonds with equal durations are more alike(predicate) than bonds with equal maturities in their reactions to changes in yields. 7.Suppose that your insurance company has issued a Guaranteed Investment Contract (GIC) that matures in three years and promises to pay an interest rate of 23. 36%. The amount invested in GIC today is $150,000. You have decided to immunise your position by purchasing a bond that has a par value of $150,000, a coupon rate of 23. 36%, and four years to maturity. The bond is selling currently at par value. a. What is the succeeding(a) value of your companys obligation? The future value of the obligation is $150,000 1. 2336 $281,588. 13 b. Assume that the interest rate stays at 23. 36%.At the look at which each payment is received, compute the accumulated value of reinvested cou pons and the proceeds from the bond sale. How close will you come to your meeting your obligation? The bond pays a coupon of $150,000 23. 36% $35,040. If the market rates remain unchanged, at the end of year three it will be possible to sell the bond still at par. With this information, we can construct the following table Year 1 2 3 3 Total future value Cash flow 35,040 35,040 35,040 150,000 Accumulated value 53,322. 78 43,225. 34 35,040 150,000 281,588. 13 That is, you will be able to repay your obligation in full.