FINS2624 PORTFOLIO MANAGEMENT
A SUMMARY
STAFF CONSULTATION HOURS FOR FINAL EXAMINATION
FINS2624 PORTFOLIO MANAGEMENT Henry
Mon
27 Oc t
12:00 – 14.00
ASB340
Wed
29 Oc t
9:00 – 11.00
ASB340
Angus
Mon
27 Oct
10:00 – 12:00
TBA
Michael
Tue
28 Oc t
9:00 – 11:00
TBA
Andrew
Tue
28 Oc t
11:00 – 12:00
TBA
Milos
Tue
28 Oc t
12:00 – 14:00
TBA
Linda
Wed
29 Oc t
12:00 – 14:00
TBA
INFORMATION FOR FINAL EXAMINATION Date, Venue, Allowed Materials, Exam Rules & Regulations, and Important information regarding final exams at UNSW: https://my.unsw.edu.au/portal/dt https://my.unsw.edu.au/student/academiclife/assessment/examinations/examinations.html
Syllabus:
Lecture topics covered from week 7 and onwards
Format:
75 Multiple-Choice questions
Equations: The equations for d1 and d 2, and the values of d1, d 2, N(d 1), and N(d2) will be provided
Preparation: revise all •
lec tures notes
•
tutorial & revision questions
•
spreadsheet applications
•
presc ribed rea dings - prescribed textbook, journal and newspaper artic les
Other Exam Preparation Resources: •
EDU Exam Preparation Workshop
•
Bodie, Kane and Marc us and solution manual to the book
Approach to learning and teaching – A reflection 1.
Life-long learning via understanding and critical thinking
2.
A vigorous program to engage student participation and equip students with fundamental knowledge in portfolio mana gement
3.
Career-minded via practical knowledge and applications gained from newspapers and practitioners’ journals, and spreadsheet ap plications
Student Learning Outcomes 1.
course outline and introduction/motivation presented at the beginning of each lec ture
2.
Why do we study
bond pricing, term structure of interest rates, and duration?
the Markowitz portfolio theory?
the C APM?
the SIM?
performanc e evaluation?
the EMH?
option pricing and strategies involving options?
A Summary of FINS2624 Alloc ation Among Va rious Asset C lasses EMH – Anamolies
Shares
Fixed Interests
Listed Properties
Cash
Asset Pricing Model Expected return
Risk
Portfolio optimisation Recommended portfolio composition and “expected” risk return combination Performance evaluation on “realised” risk return combination
CAPM The Capital Market Line as the New Frontier of Efficient Portf olios: E (r P ) = r f + E (r P )
CML EF
E (r M )
M
r f
σ M
σ P
The Security Market Li ne as the Benchmark o f Expected Security Retur ns: E (r CBA ) = r f + β CBA × E (r M ) − r f E (r i )
SML +ve stock alpha -ve stock alpha
E (r M )
E (r M ) − r f = slope of SML
E (r CBA ) r f
β CBA
β M = 1
β i
E (r M ) − r f
σ M
×σ P
SIM - The Components of Stock Return: r it − r f = α i + β i r mt − r f + ε it
observed excess return in a given period
r i – r f
positive residual in one period
ε
* excess return suggested by the characteristic line
*
characteristic lin e: r it − r f = α i + β i r mt − r f
obtained by regressing excess stock return on excess market return
negative residual in another period
α r m - r f
Performance Evaluation
Methods to Compute Returns ⎛ V ⎞ V − V t −1 V (i) CCRt = ln⎜⎜ t ⎟⎟ (ii) DRt = t = t − 1. V t −1 V t −1 ⎝ V t −1 ⎠ Methods to Measure Expected Returns: n
1
∑ n =
(i) AAR =
r t
t 1
n (1 + r t ) ⎞⎟ (ii) GAR = ⎛ ⎜ t Π ⎝ =1 ⎠
1
n
− 1, i.e., GAR = n (1 + r 1 )(1 + r 2 )...(1 + r n ) − 1 .
Risk Adjusted Performance Measures - The Sharpe (Reward to Variability) Index (i) S P =
(ii) T P =
r P − r f
σ P r P − r f
β P
(iii) r P − r f = α P + β P r M − r f + ε P . (iv) AR P =
α P σ ε
P
Bond Pricing Add CPP on the time line if and only if the bond is cum-interest cash flows beyond the next coupon payment date P0 PCPD
$CPP
$CPP
$ CPP
$ CPP
NCPD
CPD
CPD
CPD
……. …….
$ CPP
$ CPP
$ CPP + $FV
CPD
CPD
maturity date
next coupon payment date
settlement date previous coupon payment date •
P ′= PV of cash flows beyond the NCPD as at that date: = CPP PVA(r %, t) + 100 PVF(r %, t)
•
If cum interest, otherwise,
P0 = ($CPP + P ′) / (1 + r %) f P0 = P ′ / (1 + r %)
•
If cum interest,
Padj = P0 − CPP × (1− f )
otherwise,
Padj = P0 + CPP × f
f
Term Structure P0 (1 +
HPR Expectations hypothesis • •
•
Bonds with different times to maturity offer the same expected HPR, hence perfect substitutes investors are risk neutral f (n,t) = E[r (n,t)] + E[LP(n,t)]
investors are risk averse Higher HPR is expected from bonds with longer maturity
Zero-coupon b onds • •
m
) t = CI t + Pt
f (n, t ) = E [r (n, t )]
Liquidity Premium hypothesis •
HPR
certain or risk free HPR if held to maturity may help defer capital gains tax
Macaulay dur ation for coupon bonds ⎤ FV n⎥ + × × t n t n = 1⎢ ( ) ( ) r r 1 + 1 + ⎥ ⎣ ⎦ MacDur = t
⎡ CPP
∑⎢
P0
1
CPP1 / (1 + r )
2
CPP2 / (1 + r )
⇒
MacDur =
⇒
MacDur = w1t 1 + w2 t 2 + ..... + wn t n =
P0
×1 +
P0
× 2 + ... +
(CPPt + FV ) / (1 + r )t P0
× t
n
∑ wi t i .
i =1
•
a function of interest rate level, bond maturity and coupon rate
•
interest rate risk immunization
•
bond portfolio mgt
Options Payoff & P/L
Initial Payoff or Value t=0 (i) Long a call C0 (ii) Short a call -C0 (iii) Long a put P0 (iv) Short a put -P0 (v) Long a share S0 (vi) Short a -S0 share
Payoff on Expiry Date t=T Max{(S* - X), 0} -Max{(S* - X), 0} Max{(X – S*), 0} -Max{(X – S*), 0} S*
Profit/Loss on Expiry Date t=T Max{(S* - X), 0} - C0 -Max{(S* - X), 0} + C0 Max{(X – S*), 0} - P0 -Max{(X – S*), 0} + P0 S* - S0
-S*
-S* + S0
Theoretical value of an option = intrinsic value + time value of the option Intrinsic value i) C all =max{St – X, 0 }where t = 0 (inception) up to T (expiration) ii) Put = max{X - St, 0 } Option time value = f ( time to maturity and underlying asset volatility ) Black Scholes equation for a call option: -rt C =SN(d ) ) 1 - Xe N (d 2
Put-call parity theorem: P +S = C +X e -rt
Factors affecting the value of an option: S, X, T, σ, rf No arbitrage equilibrium and perfectly hedged portfolios
EMH Forms of market efficiency & information c aptured by stoc k prices What are the investment strategies carried out the (i) believers & (ii) non-believers in EMH? Value Investing vs Growth Investing
The End
