2-5 asset management

Question 1

Risk

Answer 1

=possibility that actual realization different from expected
=dispersion
=variance

Question 2

Covariance

Answer 2

Example of negative covariance: interest rate rise leads to stock market index fall

Question 3

The expected return of a security

Answer 3

Portfolios on CML are perfectly diversified - have only systematic risk.
For individual securities and not fully diversified portfolios
risk=systematic+non systematic risk
Only bearing systematic non-diversifiable risk rewarded by market.

Question 4

Beta and the characteristic line

Answer 4

In practice beta of an asset estimated by regression of asset’s returns on market returns. The estimated regression line = characteristic line.

Question 5

Market efficient:

Answer 5

• operationally (runs smoothly)
• informationally = prices fully reflect all available info at all times

Question 6

Efficient market hypothesis (EMH)

Answer 6

1. Weak form efficiency= prices fully reflect the info contained in all historical market data (prices, volumes and similar figures).
2. Semistrong =prices fully reflect all public info.
3. Strong= prices fully reflect all info (public + private)

Question 7

THE PRACTICAL CONSEQUENCES OF THE EMH

Answer 7

1. If weak EMH true: technical analysis (predictions from historical market data) useless
2. If semistrong EMH true: fundamental analysis (using all public info) useless
3. If strong EMH: laws prohibiting use of insider info pointless since all inside info is in prices already

Question 8

Financial intermediaries + scheme

Answer 8

o Financial intermediaries helps get funds from savers to investors
(indirect finance)
o Banks (commercial + central): crucial role in creation of money

📍lenders/savers (households, businesses firms, government, foreigners)
➡️(funds)
1) financial intermediaries (indirect) ➡️(funds) a) fm b)📍borrower/spenders

2) financial markets (direct) ➡️(funds)
📍borrower/spenders (business firms, government, households, foreigners)