Finance 1: Portfolio Theory and Management (eBook)

Title Page 3
Copyright 4
Dedication 5
Table of Contents 9
Preface 13
Section 1: Introduction 15
1. Financial Markets, Players and Instruments 17
1.1 What is Traded on Financial Markets 17
1.2 Where Financial Assets are Traded 24
2. Risk and Return 31
3. Distributional Properties of Returns Series 41
3.1 Some Stylized Facts 41
3.2 Measuring Historical Volatility 48
3.3 GARCH Models 56
4. From Utility to the Indifference Curve 69
Section 2: Portfolio Theory 77
5. The Capital Allocation Line 79
6. Optimal Risky Portfolios: The Markowitz Portfolio Selection Procedure and the Benefits of Diversification 89
6.1 The Benefits of Diversification 91
6.2 The Efficient Frontier 97
6.3 The Capital Allocation Line 99
6.4 Alternatives to the Markovitz Rule 102
7. Factor and Index Models 117
7.1 The Basic Setting 117
7.2 Single Factor Models and Portfolio Construction 120
7.3 Single Factor Models and Active Diversification 123
7.4 Multifactor Models: The Fama-French Model 129
7.5 Is Liquidity a Factor? 132
7.6 Further Multifactor Models 138
Section 3: Equilibrium Models 143
8. The Capital Asset Pricing Model 145
8.1 The Basic Setting 145
8.2 The Security Characteristic Line and the Security Market Line 148
9. Arbitrage Pricing Theory 153
9.1 What Does Arbitrage Mean? 153
9.2 The Arbitrage Pricing Theory 160
9.3 How Can APT Help us in Practice? 167
9.4 CAPM and APT 169
Section 4: Efficient Markets 173
10. The Efficient Market Hypothesis 175
10.1 Origins of the Efficient Market Hypothesis 175
10.2 Event Studies 182
10.3 Price Anomalies on Financial Markets 189
10.3.1 Calendar Anomalies 190
10.3.2 Cross Sectional Anomalies 194
10.3.3 Time Series Return Predictability 196
Section 5: The Valuation of Particular Asset Types 201
11. The Valuation of Bonds 203
11.1 Determinants of Interest Rates 203
11.2 Bond Yield Calculations 207
11.3 The Risk Structure of Bonds 214
11.4 The Term Structure of Bonds: Yield Curves 221
11.5 The Duration and Convexity of Bonds 231
12. The Valuation of Equity 241
12.1 One-Stage Dividend Discount Models 241
12.2 The Dividend Discount Model and the Company’s Investment Policy 247
12.3 Dividend Discount Models and Implicit Dividend Growth Rates 251
12.4 Two- and Three-Stage Dividend Discount Models 254
12.5 P/E Ratios and Other Valuation Measures 259
13. Derivatives: A Brief Introduction 267
13.1 Derivatives: Terminology, Forwards and Swaps 267
13.2 Options 276
Section 6: Portfolio Management 289
14. Asset Allocation 291
14.1 Strategic and Tactical Asset Allocation 291
14.2 Integrated Asset Allocation 300
14.3 Investments Styles 303
15. Performance Measurement 308
15.1 Why Performance Measurement? 308
15.2 Some Performance Measures 309
15.3 Performance Attribution 318
16. International Portfolios and Currency Risk 325
16.1 International Portfolios: Pros and Cons 325
16.2 Currency Risk Management 326
16.3 Application: The Exchange Rate Exposure of Exporting Firms in Central and Eastern Europe 344