Fourth Edition Advantages of the Single Index Model Reduces the number of inputs for diversification. Portfolio of 50 assets 50 expected returns;50 variances 1225 covariance. too difficult a task
INVESTMENTS Fourth Edition Efficient Market Hypothesis (EMHD Do security prices reflect information Why look at market efficiency Implications for business and corporate finance Implications for investment
Consumption-Based Model and Basic Pricing model Basic question to decide for an investor: (1) how much to save; (2)how much to consume; (3)what portfolio of assets to hold. Pricing equation come from the first order condition for this decision
Predictions and applications CAPM: in market equilibrium, investors are only rewarded for bearing the market risk; APT: in the absence of arbitrage, investors are only rewarded for bearing the factor risk Applications: ---professional portfolio managers: evaluating security returns and
Discount model is in terms of conditional moments The first order condition is,u'( BE, [u'(c )x 1] The expectation is conditional expectation on investor's time t information; The basic pricing equation is P, =E, (m +1X1+)
Introduction Overview of investment styles; Empirical evidence on returns of small capitalization firms and value stocks; How to identify investment styles of a mutual fund Characteristic-based style analysis Return-based style analysis Style benchmarks
Arbitrage Pricing Theory Arbitrage-arises if an investor can construct a zero investment portfolio with a sure profit Since no investment is required, an investor can create large positions to secure large levels of profit
Capital allocation The choice of proportion in safe asset and proportion in risky asset; Most institutional investors follows top- down analysis---The first part is asset allocation and the next part is security selection decision
