FINA2802
Investments and Portfolio Analysis
Spring, 2009
Dragon Tang
Review for Exam I
FINA2802, Spring 09 – Dr Tang
Review for Exam I
1. Importance of Financial Markets
Functions of Financial Markets:
• Smoothing consumption.
• Better risk-sharing.
• Separation of ownership and control.
FINA2802, Spring 09 – Dr Tang
Review for Exam I
2. Financial Securities
•
•
•
•
Money market
Bond
Stock
Derivatives
FINA2802, Spring 09 – Dr Tang
Review for Exam I
3. Stock Market Indexes
• Price-weighted
• Value-weighted
• Equally weighted
FINA2802, Spring 09 – Dr Tang
Review for Exam I
4. Securities Issuance and Trading
• Role of investment banks
• Different types of markets
• Different types of orders
FINA2802, Spring 09 – Dr Tang
Review for Exam I
5. Buying on Margin and Short Sales
• Initial Margin
Initial investor' s equity 0
Initial Margin 0 
Market val ue of securities
0
• Actual Margin
Actual investor' s equity t
Actual Margin t 
Market val ue of securities
t
• Margin Call
Buying on Margin:
NPmin  L
L
 M  Pmin 
NPmin
N (1  M )
Short Selling:
Pmax 
FINA2802, Spring 09 – Dr Tang
NP0  E0
N M  1
Review for Exam I
6. Investment Companies
• Net Asset Value (NAV)
• Closed-end fund: discount/premium
• Mutual Fund Expenses: front-end load, back-end
load, operating expenses, 12b-1 fees
FINA2802, Spring 09 – Dr Tang
Review for Exam I
7. Risk and Return
Expected Return and Risk of a Single Security:
• Expected Return:
E r    ps r s 
s
• Variance:
 2   ps r s   E r 
2
s
• Volatility:
FINA2802, Spring 09 – Dr Tang
 
2
Review for Exam I
8. Asset Allocation
Complete Portfolio Expected Return and Risk:



Expected Return: E rC   rf  y E rrisky   rf  (1  y ) E (rlessrisky)  rf

2
2
2
Variance:  C2  y 2 risky
 1  y   lessrisky
 2 y 1  y   risky lessrisky
Special Case:
if  lessrisky  0

E rC   rf  y E rrisky   rf
FINA2802, Spring 09 – Dr Tang

then rlessrisk  rf
and
Review for Exam I
 C  y  risky
9. Efficient Market Hypothesis
• Three versions of EMH
• Tests of EMH
• Market Anomalies and explanations
FINA2802, Spring 09 – Dr Tang
Review for Exam I
10. Market Efficiency
• Dr Dragon Tang’s views
• Evidence
• Behavioral interpretation
FINA2802, Spring 09 – Dr Tang
Review for Exam I
11. Behavioral Finance and
Technical Analysis
• Behavioral biases
• Loss aversion
• Overconfident
• Mental accounting; etc.
• Why TA may be useful
• Slow reaction
• Systematic biases
• Technical indicators
FINA2802, Spring 08 – Dr Tang
Review for Exam II
12. Current Events
• The ongoing crisis: causes and consequences
• The worldwide bailout: stimulus packages and
bank nationalization
• China vs U.S.
• The real investment world (e.g., mini-bond
incident)
FINA2802, Spring 09 – Dr Tang
Review for Exam I
Comments and Advices
• Never leave a question blank, write down as much
(relevant information) as possible to get partial credits.
• Work on the easier and less time-consuming problems
first.
• Always show the formula before you put up the
numbers. You will get most of the points in case of
calculation errors.
• Current events count 30%.
• Homework questions will be highly relevant
FINA2802, Spring 09 – Dr Tang
Review for Exam I