investment analysis
textbook readings
portfolio choice assignment
formula sheet
big exam hint - essay questions probably from bond management / fixed income /
derivatives and efficient market hypothesis / behavioural finance
lecture 1.1
just introductions
lecture 1.2
expected return, excess return and risk premium
expected return
investment analysis 1
, excess return R = r − rf
risk premium = expected excess return
measures of risk
variance
standard deviation
risk
standard deviation of the excess return
estimation of return and risk
estimate of expected return = arithmetic average
estimate of variance
estimate of standard deviation
investment analysis 2
, what is the utility function?
where
U = utility
E(r) = expected return on the asset or portfolio
A = coefficient of risk aversion
σ 2 = variance of returns
1⁄2 = a scaling factor
what are the levels of risk aversion?
Risk averse: A > 0
Risk is “penalised”
Risk-neutral: A = 0
No penalty for risk
Risk lover: A < 0
Adjust the expected return upward
example
mean-variance criterion
trade-off between risk and return
investment analysis 3
, the mean-variance (M-V) criterion:
portfolio A dominated portfolio B if
indifference curve
investment analysis 4
textbook readings
portfolio choice assignment
formula sheet
big exam hint - essay questions probably from bond management / fixed income /
derivatives and efficient market hypothesis / behavioural finance
lecture 1.1
just introductions
lecture 1.2
expected return, excess return and risk premium
expected return
investment analysis 1
, excess return R = r − rf
risk premium = expected excess return
measures of risk
variance
standard deviation
risk
standard deviation of the excess return
estimation of return and risk
estimate of expected return = arithmetic average
estimate of variance
estimate of standard deviation
investment analysis 2
, what is the utility function?
where
U = utility
E(r) = expected return on the asset or portfolio
A = coefficient of risk aversion
σ 2 = variance of returns
1⁄2 = a scaling factor
what are the levels of risk aversion?
Risk averse: A > 0
Risk is “penalised”
Risk-neutral: A = 0
No penalty for risk
Risk lover: A < 0
Adjust the expected return upward
example
mean-variance criterion
trade-off between risk and return
investment analysis 3
, the mean-variance (M-V) criterion:
portfolio A dominated portfolio B if
indifference curve
investment analysis 4
