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Russell Harmening Englisch 200 Karten

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  1. 14 Reasons for Using Derivatives1. Manage Risk
    2. Speculate
    3. Reduce Transaction Costs
    4. Minimize taxes/avoid regulatory issues
  2. 2Bid PriceThe price at which market-makers will buy and end users will sell
  3. 3Ask/Offer PriceThe price at which market-makers will sell and end-users will buy
  4. 4Bid-ask spreadAsk price - Bid price
  5. 5Round-Trip Transaction CostsDifference between what you pay and what you receive from a sale using the same set of bid/ask prices.
  6. 6PayoffAmount that one party would have if completely cashed out
  7. 7ProfitAccumulated value of cash flows at the risk free rate
  8. 8Long PositionBenefits from an increase in the price of an asset
  9. 9Short PositionA short position in an asset benefits from a decrease in the price of the asset
  10. 103 steps to short selling process1. Borrow an asset from a lender
    2. Immediately sell the borrowed asset and receive the proceeds(usually kept by lender or third party
    3. Buy the asset at a later date in the open market to repay the lender(close/cover the short position).
  11. 11HaircutAdditional collateral placed with lender by short-seller. It belongs to short seller - Interest is given
  12. 12repo rateInterest rate on Haircut for a bond
  13. 13Short rebateInterest rate on haircut in stock market
  14. 143 reasons to short-sell assets1. Speculation - speculate that the price of an asset will decline
    2. Financing - To borrow money for additional financing of a corporation
    3. Hedging - To hedge the risk of a long position on the asset.
  15. 151. In-the-money 2. At-the-money 3. Out-of-the-money1. Produce a positive payoff if the option is exercised immediately
    2. The spot price is approximately equal to the strike price
    3. Produce a negative payoff if the option is exercised immediately
  16. 16European-style-optionCan only be exercised at expiration
  17. 17American-style-optionCan be exercised at any time during the life of the option
  18. 18Bermudan-style-optionCan be exercised during bounded periods(specified periods during option life)
  19. 19Zero-Coupon Bond(ZCB) 1. Buying a risk free ZCB 2. Selling a risk-free ZCB 3. Payoff on a risk free ZCB 4. Profit on a risk free ZCB1. Lending at the risk free rate
    2. Borrowing at the risk free rate
    3. ZCB's maturity value
    4. 0
  20. 20Long Forward: 1. Definition 2. Position 3. Payoff 4. Profit 5. Maximum Loss 6. Maximum Gain 7. StrategyLong Forward: 1. Definition 2. Position 3. Payoff 4. Profit 5. Maximum Loss 6. Maximum Gain 7. Strategy
  21. 21Short Forward: 1. Definition 2. Position 3. Payoff 4. Profit 5. Maximum Loss 6. Maximum Gain 7. StrategyShort Forward: 1. Definition 2. Position 3. Payoff 4. Profit 5. Maximum Loss 6. Maximum Gain 7. Strategy
  22. 22Long Call: 1. Definition 2. Position 3. Payoff 4. Profit 5. Maximum Loss 6. Maximum Gain 7. StrategyLong Call: 1. Definition 2. Position 3. Payoff 4. Profit 5. Maximum Loss 6. Maximum Gain 7. Strategy
  23. 23Short Call: 1. Definition 2. Position 3. Payoff 4. Profit 5. Maximum Loss 6. Maximum Gain 7. StrategyShort Call: 1. Definition 2. Position 3. Payoff 4. Profit 5. Maximum Loss 6. Maximum Gain 7. Strategy
  24. 24Long Put: 1. Definition 2. Position 3. Payoff 4. Profit 5. Maximum Loss 6. Maximum Gain 7. StrategyLong Put: 1. Definition 2. Position 3. Payoff 4. Profit 5. Maximum Loss 6. Maximum Gain 7. Strategy
  25. 25Short Put: 1. Definition 2. Position 3. Payoff 4. Profit 5. Maximum Loss 6. Maximum Gain 7. StrategyShort Put: 1. Definition 2. Position 3. Payoff 4. Profit 5. Maximum Loss 6. Maximum Gain 7. Strategy
  26. 26Payoff Graphs Long ForwardPayoff Graphs Long Forward
  27. 27Long Call Payoff GraphLong Call Payoff Graph
  28. 28Long put payoff graphLong put payoff graph
  29. 29Naked PositionAn option writer with no offsetting position in the underlying asset.
  30. 30Covered PositionAn option writer has an offsetting position in the underlying asset
  31. 31Bull Spread Payoff and graphBull Spread Payoff and graph
  32. 32Bear Spread Description and graphBear Spread Description and graph
  33. 33Box Spread Description and graphBox Spread Description and graph
  34. 34Ratio Spread Description and GraphRatio Spread Description and Graph
  35. 35Collar description and graphCollar description and graph
  36. 36Collared Stock description and graphCollared Stock description and graph
  37. 37Straddle Description and graphStraddle Description and graph
  38. 38Strangle Description and GraphStrangle Description and Graph
  39. 39Butterfly Spread Description and GraphSymmetric: equidistant strike prices
    Asymmetric: Non-equidistant strike prices    Butterfly Spread Description and Graph
  40. 40Outright Purchase: 1. Payment time 2. Receive Stock time 3. Payment1. T = 0
    2. T= 0
    3. Spot price at T=0
  41. 41Fully Leveraged Purchase 1. Payment time 2. Receive Stock time 3. Payment1. T = T
    2. T= 0
    3. Spot Price at T = 0 accumulated at risk free rate
  42. 42Prepaid forward contract: 1. Payment time 2. Receive Stock time 3. Payment1. T = 0
    2. T= T
    3. Prepaid forward price
  43. 43Forward contract: 1. Payment time 2. Receive Stock time 3. Payment1. T = T
    2. T= T
    3. Forward Price
  44. 44Prepaid forward price for 1. No Divs 2. Discrete Divs 3. Continuous DivsPrepaid forward price for 1. No Divs 2. Discrete Divs 3. Continuous Divs
  45. 45Forward price 1. No Divs 2. Discrete Divs 3. Continuous DivsForward price 1. No Divs 2. Discrete Divs 3. Continuous Divs
  46. 46Forward PremiumForward Premium
  47. 47Annualized forward premium rateAnnualized forward premium rate
  48. 48Two ways to create a long Synthetic long Forward1. Buying a stock and borrowing money(i.e. selling a bond)
    2. Buying a call and selling a put at the same strike
  49. 49Two ways to create a short Synthetic long Forward1. selling a stock and lending money(i.e. buying a bond)
    2. selling a call and buying a put at the same strike
  50. 50ArbitrageA transaction which generates a positive cash flow either today or in the future by simultaneous buying and selling of related assets with no net investment or risk - buy low/sell high.
  51. 51Cash and carryThe actual forward is overpriced - short actual forward and long synthetic forward
  52. 52Reverse Cash-and-carryThe actual forward is underpriced - Long actual forward and short synthetic forward
  53. 536 aspects of a Future1. Traded on an exchange
    2. Standardized(size, expiration, underlying)
    3. more liquid
    4. Marked to market and often settled daily
    5. minimal credit risk
    6. Price limit is applicable.
  54. 54Notional Value# contracts * Multiplier * Futures price
  55. 55Balance time TBalance time T
  56. 561. Gain_t(Long position) 2. Gain_t(short position) 3. Price change_t1. Gain_t(Long position) 2. Gain_t(short position) 3. Price change_t
  57. 57Maintenance MarginMinimum margin balance that the investor is required to maintain in margin account at all times
  58. 58Margin callIf the margin balance falls below the maintenance margin, then the investor will get a request for an additional margin deposit. The investor has to add more funds to bring the margin balance back to the initial margin.
  59. 59Put Call parity: 1. Stocks 2. Futures 3. Bonds 4. Exchange options 5. Currency optionsPut Call parity: 1. Stocks 2. Futures 3. Bonds 4. Exchange options 5. Currency options
  60. 60Bounds 1. Call 2. PutBounds 1. Call 2. Put
  61. 611. European Call Bounds 2. American Call Bounds1. European Call Bounds 2. American Call Bounds
  62. 621. European Put Bounds 2. American Put Bounds1. European Put Bounds 2. American Put Bounds
  63. 63Three Call IdentitiesThree Call Identities
  64. 64Three Put identitiesThree Put identities
  65. 65Time to expiration identitiesTime to expiration identities
  66. 66Replicating Portfolio - DeltaReplicating Portfolio - Delta
  67. 67Replicating Portfolio - BReplicating Portfolio - B
  68. 68Value of OptionValue of Option
  69. 69Replicating Portfolio: 1. Call 2. Put1. Buy Shares and Borrow Money
    2. Sell Shares and lend money
  70. 70Risk neutral probability - binomialRisk neutral probability - binomial
  71. 71Value of an option - binomialValue of an option - binomial
  72. 72General Method: 1. u 2. dGeneral Method: 1. u 2. d
  73. 73Usual Method in Mcdonald 1. u 2. d 3. p of up movementUsual Method in Mcdonald 1. u 2. d 3. p of up movement
  74. 74No-arbitrage condition - binomialNo-arbitrage condition - binomial
  75. 75Options on Future Contracts: 1. u 2. d 3. p upward movement 4. delta 5. BOptions on Future Contracts: 1. u 2. d 3. p upward movement 4. delta 5. B
  76. 76Lognormal Model: 1. Expected Value 2. VarianceLognormal Model: 1. Expected Value 2. Variance
  77. 77Three Properties of Lognormal Distribution1. Cannot be negative
    2. Product of two lognormals is a lognormal
    3. Lognormal Dist is skewed Right
  78. 78Lognormal for Stocks: Ln(S_t/st) ~ N(m,V^2) 1. mean 2. varianceLognormal for Stocks: Ln(S_t/st) ~ N(m,V^2) 1. mean 2. variance
  79. 79T>t Ln(S_T) ~ N[m,v^2) 1. Expected Value of S_T 2. Variance of S_T 3. Covariance of S_t and S_TT>t Ln(S_T) ~ N[m,v^2) 1. Expected Value of S_T 2. Variance of S_T 3. Covariance of S_t and S_T
  80. 80How to find the pth percentile of S_THow to find the pth percentile of S_T
  81. 81Probability that S_T is greater than KProbability that S_T is greater than K
  82. 821. Conditional Expectation of S_T 2. Partial Expectation of S_T1. Conditional Expectation of S_T 2. Partial Expectation of S_T
  83. 83Black Scholes 1. Expected Call Payoff 2. Expected Put PayoffBlack Scholes 1. Expected Call Payoff 2. Expected Put Payoff
  84. 84Difference between true pricing and risk-neutral pricingTrue pricing uses the expected rate of return on the option while risk-neutral pricing uses the expected option payoff at the risk-free rate.
  85. 855 steps to estimate lognormal parameters5 steps to estimate lognormal parameters
  86. 867 Black Schole's Formula Assumption1. Continuously compounded returns on the stock are normally distributed and independent over time. There are no sudden jumps in the stock price
    2. Volatility is known and constant
    3. Future Dividends are known
    4. The risk-free rate is known and constant
    5. There are no taxes or transaction costs
    6. Short-selling is allowed at no cost
    7. Investors can borrow and lend at the risk free rate.
  87. 87Generalized BS FormulaGeneralized BS Formula
  88. 88BS Formula for continuous dividend stockBS Formula for continuous dividend stock
  89. 89Black Scholes Options on Futures ContractUse the generalized BS formula in conjunction with the appropriate prepaid forward prices. The prepaid forward price for a futures contract is just the present value of the futures price: Fe^-rT
  90. 90Black Scholes Options on CurrenciesBlack Scholes Options on Currencies
  91. 91Delta: 1. Definition 2. Long Call Sign 3. Long Put Sign1. Derivative of option value with respect to stock price
    2. Positive
    3. Negative
  92. 92Gamma: 1. Definition 2. Long Call Sign 3. Long Put Sign1. Second derivative of Option Value with respect to stock price
    2. Positive
    3. Positive
  93. 93Theta: 1. Definition 2. Long Call Sign 3. Long Put Sign1. Derivative of option value with respect to time
    2. Usually negative
    3. usually negative
  94. 94Vega: 1. Definition 2. Long Call sign 3. Long Put sign1. Derivative of option value with respect to volatility
    2. positive
    3. positive
  95. 95Row: 1. Definition 2. Long Call Sign 3. Long Put Sign1. Derivative of option value with respect to risk free rate
    2. Positive
    3. Negative
  96. 96Psi: 1. Definition 2. Long Call Sign 3. Long Put Sign1. Derivative of option value with respect to dividend rate
    2. negative
    3. positive
  97. 97Risk Premium: 1. Definition 2. For an option 3. For a stock1. The Risk premium of an asset is defined as the excess of the expected return of the asset over the risk-free return
    2. expected return of option minus risk free rate
    3. Expected return of stock minus risk free rate
  98. 98How is elasticity related to risk premium and volatility1. Risk premium of an option equals elasticity times risk premium of a stock
    2. Volatility of an option is equal to the absolute value of elasticity times the volatility of a stock
  99. 99Sharpe Ratio: 1. For an option 2. For a stock 3. Identity between stock and optionSharpe Ratio: 1. For an option 2. For a stock 3. Identity between stock and option
  100. 100ElasticityElasticity
  101. 101Greeks for a portfolioSum of the Greeks
  102. 102Elasticity of a portfolioElasticity of a portfolio
  103. 103Delta-Gamma-Theta ApproximationDelta-Gamma-Theta Approximation
  104. 104Delta-Gamma ApproximationDelta-Gamma Approximation
  105. 1053 components of a delta-hedged portfolio1. Buy/Sell Options
    2. Buy/Sell Stocks
    3. Borrow/lend money (sell/buy bond)
  106. 106Two ways to calculate Overnight profit1. Sum of profit on options, profit on stocks, and profit on bonds.
    2. Sum of gain on options(ignore interest), gain on stocks(ignore interest), and interest on borrowed/lent money.
  107. 107Profit of Market makers with delta hedge from time t to t+hProfit of Market makers with delta hedge from time t to t+h
  108. 108Two stock prices where the delta-hedged portfolio breaks evenTwo stock prices where the delta-hedged portfolio breaks even
  109. 109Hedging multiple GreeksThe delta of the stock is 1 but all other Greeks of the stock are 0. To hedge multiple Greeks set the sum of the Greeks you are hedging to zero.
  110. 110Guaranteed Minimum Death Benefit(GMDB)Guarantees a minimum amount will be paid to a beneficiary when the policyholder dies
  111. 111Guaranteed Minimum Accumulation Benefit(GMAB)Guarantees a minimum value for the underlying account after some period of time, even if the account value is less also known as a guaranteed minimum maturity benefit.
  112. 112Guaranteed Minimum Withdrawal Benefit(GMWB)Guarantees that upon the policyholder reaching a certain age, a minimum withdrawal amount over a specified period will be provided
  113. 113Guaranteed Minimum Income Benefit(GMIB)Guarantees the purchase price of a traditional annuity at a future time.
  114. 114GMDB with ROP Guarantee: 1. Payoff 2. Option type 3. Option ValueGMDB with ROP Guarantee: 1. Payoff 2. Option type 3. Option Value
  115. 115Earnings-Enhanced Death Benefit cEarnings-Enhanced Death Benefit c
  116. 116GMAB with ROP Guarantee 1. Payoff 2. Option type 3. Option ValueGMAB with ROP Guarantee 1. Payoff 2. Option type 3. Option Value
  117. 117Mortgage Loan 1. Payoff 2. Option typeMortgage Loan 1. Payoff 2. Option type
  118. 118Static HedgingBuy options and hold to expiration
  119. 119Dynamic HedgingFrequently buy/sell assets and/or derivatives with the goal of matching changes in the value of guarantee
  120. 120Variable AnnuityA variable savings product with the option to convert the accumulated amount to an annuity.
  121. 121Return of Premium GuaranteeGuarantee which returns the greater of the account value and the original amount invested.
  122. 122Guaranteed replacement cost coverageOptional Benefit that can be added to a property insurance policy to cover the cost of replacing a physical piece of property when the cost is more than the amount of insurance in the base policy.
  123. 123Inflation IndexingFeature which adjusts for inflation in defined benefit pension plans. Full vs Partial measured with CPI.
  124. 124Asian Option: 1. Two methods - Calculation 2. Payoffs for 4 option types 3. As N increases what happens to option valueAsian Option: 1. Two methods - Calculation 2. Payoffs for 4 option types 3. As N increases what happens to option value
  125. 125Three Types of Barrier Options and definitions1. Knock-in: Goes into existence if barrier is reached.
    2. Knock-out: Goes out of existence if barrier is reached.
    2. Rebate: Pays fixed amount if barrier is reached.
  126. 126Up and in, up and out, up rebate happen whenStock price is less than barrier
  127. 127Down and in, down and out, down rebate happen whenStock price is greater than the barrier
  128. 1282 identities of barrier optionsIdentities:
    1. Knock-in + knock-out = ordinary option
    2. Barrier Option <= Ordinary Option
  129. 1292 special relationships of barrier options2 special relationships of barrier options
  130. 130Compound Option: 1. Compound Call 2. Compound Put1. Allows the owner to buy another option at the strike price
    2. Allows the owner to sell another option at the strike price
  131. 1311. Value of underlying option at time t_1 2. Value of compound call at time t_1 3. Value of compound put at time t_11. Value of underlying option at time t_1 2. Value of compound call at time t_1 3. Value of compound put at time t_1
  132. 132Put Call Parity for Compound OptionsPut Call Parity for Compound Options
  133. 133Gap Option: 1. K1 and K2 2. Payoff Call/Put 3. ValueGap Option: 1. K1 and K2 2. Payoff Call/Put 3. Value
  134. 134PCP for Gap OptionsPCP for Gap Options
  135. 135Black Scholes for Exchange OptionBlack Scholes for Exchange Option
  136. 1363 maxima and minima identities3 maxima and minima identities
  137. 137Exchange Options: 1. C(A,B) 2. P(A,B)1. C(A,B) = P(B,A) - Allows the owner to receive A and give up B
    2. P(A,B) = C(B,A) allows the owner to give up A and receive B.
  138. 138Forward Start OptionPrepaid forward on an option. Provides the owner with an option at some specified future time. When the forward start option expires the owner will receive an option whose strike price depends on the stock price at that time.
  139. 139Asian OptionHas a payoff depending on the average stock price over a period of time. Path-dependent option
  140. 140Barrier OptionOption that goes into or out of existence if the price of the underlying asset reaches a specified barrier during the life of the option. Path-Dependent
  141. 141Compound OptionAllows the owner to buy or sell another option at a specified strike price
  142. 142Gap OptionAn option in which the price that determines whether or not the option will have a nonzero payoff may be different from the price that determines the amount of the nonzero payoff, thus creating the gap.
  143. 143Exchange OptionAn option that allows its owner to exchange one asset for another
  144. 144Chooser OptionAn option that allows the owner to choose at a specified future time whether the option will be a European Call option or a European put option. Underlying asset, strike price, and expiration date will remain the same regardless of choice.
  145. 145Lookback OptionOption whose payoff at expiration depends on the maximum or minimum of the stock price over the life of the option
  146. 146Shout OptionAn option that gives the owner the right to lock in a minimum payoff exactly once during the life of the option at a time that the owner chooses. When this right is exercises the owner is said to "shout" to the writer.
  147. 147Rainbow OptionAn option whose payoff depends on two or more risky assets. Example: Exchange option that allows the owner exchange a share of stock A for two shares of stock B.
  148. 148Forward Start Option Black Scholes PricingForward Start Option Black Scholes Pricing
  149. 149Chooser Option Value/PricingChooser Option Value/Pricing
  150. 1504 Types of Lookback options and payoffs4 Types of Lookback options and payoffs
  151. 151Shout Option Payoff: 1. Call 2. PutShout Option Payoff: 1. Call 2. Put
  152. 152Expected Return of a Single AssetExpected Return of a Single Asset
  153. 153Variance and stdev of a single assetVariance and stdev of a single asset
  154. 154Realized Return of an asset: 1. Realized 2. Annual RealizedRealized Return of an asset: 1. Realized 2. Annual Realized
  155. 155Annual: 1. Average Return 2. Variance of Return 3. Standard Error of Returns 4. 95% confidence interval of expected returnAnnual: 1. Average Return 2. Variance of Return 3. Standard Error of Returns 4. 95% confidence interval of expected return
  156. 156Expected return of a portfolioExpected return of a portfolio
  157. 157Covariance between two stocksCovariance between two stocks
  158. 158Two stock portfolio: 1. Return of portfolio 2. Variance of portfolioTwo stock portfolio: 1. Return of portfolio 2. Variance of portfolio
  159. 159Three Stock portfolio 1. Return of portfolio 2. Variance of portfolioThree Stock portfolio 1. Return of portfolio 2. Variance of portfolio
  160. 160N Stock Portfolio 1. Return of portfolio 2. Variance of portfolioN Stock Portfolio 1. Return of portfolio 2. Variance of portfolio
  161. 161Systematic RiskKnown as common, market, or non-diversifiable risk. Fluctuations in a stock's return that are due to market-wide news.
  162. 162Nonsystematic riskAlso known as firm-specific, independent, idiosyncratic, unique, or diversifiable risk. Fluctuations in a stock's return that are due to firm-specific news.
  163. 163Total RiskSystematic Risk + Unsystematic Risk
  164. 164DiversificationReduces a portfolio's total risk by averaging out nonsystematic fluctuations
  165. 165Why won't investors pay for nonsystematic fluctuationsInvestors can eliminate nonsystematic risk for free by diversifying their portfolios. Thus the risk premium for no systematic risk is zero.
  166. 166What is risk premium determined by?The risk premium of a security is determined by its systematic risk and does not depend on its nonsystematic risk.
  167. 167The risk premium of a security is determined by its systematic risk and does not depend on its nonsystematic risk.The risk premium of a security is determined by its systematic risk and does not depend on its nonsystematic risk.
  168. 168Volatility# of stocks graph 1. Where is diversification effect most significant 2. Why cannot we no eliminate all riskVolatility# of stocks graph 1. Where is diversification effect most significant 2. Why cannot we no eliminate all risk
  169. 169How much does each security contribute to the portfolio volatility?How much does each security contribute to the portfolio volatility?
  170. 1704 assumptions of mean variance portfolio theory1. All investors are risk averse
    2. The expected returns, variances, and covariances of all assets are known.
    3. To determine optimal portfolios, investors only need to know the expected returns, variances and covariances of returns.
    4. There are no transactions costs or taxes.
  171. 171What makes an efficient portfolio?A portfolio is efficient if the portfolio offers the highest level of expected return for a given level of volatility(or the lowest level of volatility for a given level of return).
  172. 172Efficient FrontierEfficient Frontier
  173. 173The effect of correlation: 1. row = 1 2. row <1 3. row = -1The effect of correlation: 1. row = 1 2. row &lt;1 3. row = -1
  174. 174Capital Allocation LineCapital Allocation Line
  175. 175Expected return on asset + risk free assetExpected return on asset + risk free asset
  176. 1764 aspects of the Tangent Portfolio1. The risky portfolio on the efficient frontier of risky assets that is tangent to the CAL
    2. It is the optimal risky portfolio that will be selected by a rational investor regardless of risk preference
    3. The Sharpe Ratio for a tangent portfolio will always be the highest, so the tangent portfolio is efficient
    4. All combinations of the risk free asset and the tangent portfolio are efficient portfolios.
  177. 177When it is optimal to add an investment to a portfolioWhen it is optimal to add an investment to a portfolio
  178. 1783 steps to creating Capital Market Line3 steps to creating Capital Market Line
  179. 1793 aspects of homogeneous expectations3 aspects of homogeneous expectations
  180. 180Rank the 5 asset classes by expected return1. Small-Cap(market cap in bottom 20% of NYSE) 12.83%
    2. Large-cap stocks(S&P 500 Index) 9.99%
    3. World-Portfolio(International) stocks 8.83%
    4. Corporate Bonds(AAA-Rated, avg. 20 yr. term) 3.45%
    5. Treasury bills (one-month return) 2.93%
  181. 181Rank the 5 asset classes by Volatility1. International Stocks 12.83%
    2. Small-cap stocks 9.99%
    3. Large-cap stocks 8.83%
    4. Treasury bills 3.45%
    5. AAA-rated corporate bonds 2.93%
  182. 182Cov(x+y,z+w)cov(x,z)+cov(x,w)+cov(y,z)+cov(y,w)
  183. 183What do Perfectly Correlated Portfolios have in commonHave the same sharpe ratio. There y-intercept is the risk free rate
  184. 184Beta: DefinitionThe expected percent change in an asset's return given a 1% change in the market return.
  185. 1854 Key facts about Beta1. Measures the sensitivity of the asset's return to the market return
    2. The beta for a stock on average is around 1
    3. Cylical industries(tech, luxury, goods) tend to have higher betas.
    4. Non-cyclical industries (utility, pharmaceutical) tend to have lower betas.
  186. 186Cyclical IndustryTypes of industries which are more sensitive to economic shocks for example technology and luxury goods. Thus cyclical industries tend to have higher betas
  187. 187Non-cyclical industriesexample: utility and pharmaceutical industries tend to have lower betas. These industries are more stable and highly regulated and thus are less sensitive to fluctuations in the overall market.
  188. 188Interpreting Beta: 1. Beta = 1 2. Beta > 1 3. Beta < 1 4. Beta = 01. The asset has the same systematic risk as the market. The asset will tend to go up and down the same percentage as the market.
    3. The asset has more systematic risk than the market. The asset will tend to go up and down more than the market on a percentage basis
    4. The asset has less systematic risk than the market. The asset will tend to go up and down less than the market on a percentage basis.
    5. The asset's return is uncorrelated with the market return.
  189. 189Equation for Beta for an asset and beta for a portfolio and beta estimationEquation for Beta for an asset and beta for a portfolio and beta estimation
  190. 190CAPM EquationCAPM Equation
  191. 1913 Assumption of CAPM1. Investors can buy and sell all securities at competitive market prices. There are no taxes or transaction costs. Investors can borrow and lend at the risk-free rate
    2. Investors hold only efficient portfolios of traded securities
    3. Investors have homogeneous expectations regarding the volatilities, correlations, and expected returns of securities.
    These assumptions lead to the fact that the market portfolio is the efficient portfolio.
  192. 192Security Market Line(SML): DefinitionSecurity Market Line(SML): Definition
  193. 193CML vs SML 1. Type of Risk 2. Securities HeldCML vs SML 1. Type of Risk 2. Securities Held
  194. 194AlphaThe difference between a security's expected return and the required return(as predicted by the CAPM)
  195. 195Alpha EquationAlpha Equation
  196. 196SML Key factor about efficiencyIf the market portfolio is efficient than all securities are on the SML: the expected return equals the retired return and alpha is 0.
    If the market portfolio is not efficient than all securities will not all lie on the SML and the expected return does not equal the required return and alpha is not equal to 0.
  197. 197How to improve the market portfolio1. Buy stocks whose expected return is above the required return.
    2. Sell stocks whose expected return is less than the required return.
  198. 198Two methods to estimate the market risk premium1. Historical Risk Premium - Uses the historical average excess return of the market over the risk-free interest rate
    2. Fundamental Approach - Uses the constant expected growth model to estimate the market portfolio's expected return
  199. 199Fundamental Approach EquationFundamental Approach Equation
  200. 200Two methods to estimated debt cost of capitalTwo methods to estimated debt cost of capital

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Karteikarten am Ohne Titel, erstellt von Russell Harmening am 21/09/2018.
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