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Lecture Notes in Investment: Investment Fundamentals
by Eliezer Prisman (Author)
About this Book
This is an introduction to an investment course that focuses on basic models used in the financial industry for investment and decision making. The course begins with an overview of the investment environment in developed markets, followed by a more in-depth analysis of key investment topics. These topics include modern portfolio theory, asset pricing models, term structure of interest rates, stock and bond portfolio management and evaluation of portfolio performance. Modern finance extensively uses the conceptof arbitrage, or rather the lack of it in financial markets, and the course highlights such uses in different circumstances. The course takes a hands-on approach with the aid of a software package, Maple™, the details of which willbe explained during the first lecture. Consequently, most lectures will be divided between a theoretical lecture and a lab — a practical implementation ofthe theoretical material of the lecture. The use of the Maple™ software in this course simulates, to a certain extent, a professional environment. It allows visualizations of different concepts, minimizes tedious algebraic calculations and the use of calculus while equipping students with intuitive understanding. This is facilitated by the symbolic power of Maple™ and its excellent graphic and animation capabilities. Institutional material is surveyed very concisely, so the reader gets an appreciation of the investment 'lay of the land'. It is enhanced by an eLearning unit, self-administrated quizzes as well as a stock market game, utilizing StockTrack™. StockTrack™ introduces students to trading in the real world by practicing different types of orders as well as introducing conventions common in the investment community.
Brief Contents
Chapter 1. Introduction 1
Preface 1
Investment: The Lay of the Land 2
The Maple Software: A Preliminary 3
Introduction and Review of Simple Concepts 4
Examples 9
Revisiting an Arbitrage Example 12
Chapter 2. A Basic Model of Bond Markets 15
Introduction 15
Setting the Framework 15
Arbitrage in Bond Markets: Introduction 19
Chapter 3. No Arbitrage Condition and the Term Structure, its Estimation and Smoothing 29
Introduction 29
The Term Structureof Interest Rates and NA 29
Zero-Coupon, Spot and Yield Curves 38
Smoothing of the Term Structure 47
Smoothing and Continuous Compounding 58
Forward Rate: A Classical Approach 60
Chapter 4. Duration and Immunization 67
Introduction 67
Duration: A Sensitivity Measure of Bonds’ Prices to Changes in Interest Rates 67
Immunization 77
Chapter 5. Portfolio Choice Under Uncertainty: The Mean–Variance Framework 81
Introduction 81
Risk and Return in an Uncertain Environment: A First Look 83
Expected Value, Variance, and the Mean–Variance Framework 86
The Feasible Setwith Two Assets: A Specific Case 90
The Feasible Setwith Two Assets: The Generic Case 97
A Useful Variance Property 98
A Useful Covariance Property and Generalization of the Variance Formula for N Securities 100
Appendix: Estimation of Expected Values Variances, Covariances and Regressions 111
Estimation with Maple 113
Regression with Maple 115
Chapter 6. The Feasible Set: A General Formulation 121
Introduction 121
The Efficient Frontier Without a Risk-Free Asset 122
An Example 125
Solving Numerically for the Efficient Frontier 133
The Efficient Frontier with a Risk-Free Asset 138
Hints for Solving the Maximization of the Slope 144
Chapter 7. The Capital Asset Pricing Model: CAPM 147
Introduction 147
Mean–Variance and Utility Representation 148
Choosing the Optimal Portfolio 151
Solving for the Optimal Portfolio 155
The CAPM as an Equilibrium Model and the Security Market Line (SML) 158
Another Way of Proving the SML 162
Properties of the SML 166
Concluding Remarks 169
Appendix A: Utility and Uncertainty 170
Appendix B: Safety First Models 174
Roy’s Criterion 176
Kataoka’s Criterion 182
Tesler’s Criterion 189
Chapter 8. The Security Market Line, Estimations and Single Index Models 193
Introduction 193
Estimation of the SML and β 193
Solving the Regression Algebraically 195
The use of β in Corporate Finance 197
The Single Index Model 198
Explanation for the Covariance Formula 202
Explanation for the Variance Formula 203
Example: Implementing the SIM 204
Practitioners’ Form of the CAPM 220
A Visualized Example 221
Appendix: SIM, Constant Correlation, and the Efficient Frontier 227
Constant Correlation Coefficient 238
Chapter 9. Multi-Index Models and Arbitrage Pricing Theory 241
Introduction 241
The APT Model 242
Why is sum(xiei) = 0, i = [1, N] not a Binding Constraint? 245
The Intuition Behind the APT 246
Examples 249
APT and CAPM 252
WLG the APT Factors can be Assumed to be Orthogonal 254
Appendix: Linear Programming and Arbitrage 257
The Lagrangian and the APT main result 260
Index 263
Series : World Scientific Lecture Notes in Finance Book 5
ASIN : B08QG9NGVW
Publisher : World Scientific Publishing Company (November 24, 2020)
Language : English
Pages : 279
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