Summarised Summary Essay

Submitted By JessiLyon
Words: 1698
Pages: 7

Week 1 – Assets & Investments

Major Asset Classes
Highest risk, highest return
Eg. Australian company stocks, managed funds, foreign stocks & specialty stocks
Low risk, low return
Short term debt instruments
Eg. 90-day treasury notes & bank accepted bills
Fixed Interest
Relatively low risk, relatively low return (higher than cash)
Long term debts
Eg. Government bonds & corporate debentures
High risk, high return
Real estate
Eg. Property trusts & residential property investment

Asset Allocation
The choice of asset class within a portfolio is asset allocation – division of investment capital between the different asset classes
It determines the overall risk & expected return of a portfolio

Three Types of Revenue
Equal-Weighted Return

Value-Weighted Return

Price-Weighted Return

Normal Distribution
Zero skewness & zero excess kurtosis
Can be completely specified by mean & variance
Useful Assumption:
Allows mean to be used to estimate expected returns & variances
Useful for making statistical inferences
A lot of investment analysis’s require the assumption of a normal distribution

Week 2 – Portfolio Theory

Indifference Curves/Utility Curves

Utility Curve: combination of expected profit (return) & risk (measured by ) that yield the same level of expected utility (satisfaction) to the decision maker
Importance: they are important as they identify the portfolio of risky assets an investor prefers

Portfolio Variance – Large Number of Assets

Not that & number of covariance terms = [n – n]
As there are a large number of asset, w = 1/n
Variance of each asset can be approximated by average variance

* When n becomes larger & larger

Variance & covariance terms: n x n = n
Variance terms: n (diagonal cells)
Covariance terms: n – n (off-diagonal cells)

Unique covariance terms: (matrix is symmetric)
Week 3 – Asset Pricing Models

Efficient Frontier

CAPM Assumptions
Investors are risk averse & maximise their utility
Investors have unlimited access to borrowing/lending at risk-free rate
Investors face a one-period investment horizon
Investors are infinitely divisible
No transaction costs or taxes
No inflation or changes in interest rate
Capital markets are in equilibrium

Problem Testing CAPM
Requiring that an ex-ante model be tested using ex-post information
Estimating expected return for the market portfolio, individual risky assets or portfolio of risky assets, & the risk-free asset
Observed breaches of CAPM assumptions
Inclusion of surviving companies & the exclusion of failing ones

CAPM: shows that equilibrium rates of expected return on risky assets are a function of their covariance with the market (systematic risk in relation to broad-based market portfolio)
APT: shoes that expected return on any risky asset is a linear combination of various factors (diversification & arbitrage)
Multi-factor model  doesn’t define factors

Weeks 4 & 5 – Behavioural Finance & Market Anomalies

Efficient Market Hypothesis (EMH)
Security prices immediately & fully reflect all available & relevant information
Reaction to new information is instantaneous & unbiased

EMH & Technical Analysis
Information dissemination process is slow
This view contradict the EMH
EMH suggests rapid dissemination process & therefore, prices reflect all information
Thus, there would be no value to technical analysis

EMH & Fundamental Analysis
At one point in time, there is a basic intrinsic value for individual securities & if this intrinsic value is substantially different from the prevailing market value, the investor should make the appropriate investment decision
EMH – prices already fully reflect all available information
FA will be of little value
Even with an excellent valuation model, if you solely rely on past data, you cannot expect to do better than a buy-&-hold policy

Market Efficiency
A large number of competing profit-maximising participants analyse & value securities, each