Lecture 5 Flashcards
What are investment companies?
Financial intermediaries that collect funds from individual investors and invest those funds in a potentially wide range of securities and other assets. They essentially pool their assets. Each investor has a claim in proportion to the amount invested.
What are 4 services of investment companies?
Administration and record-keeping
Diversification and divisibility
Professional management
Reduced transaction costs
What is the Net Asset Value?
Used as a basis for valuation of investment company shares.
NAV = Market Value of Shares - Liabilities / Shares Outstanding
What types of Investment Companies are there?
Unit trusts
Managed Investment Companies
- Open-end (mutual funds - strictly SEC regulated)
- Closed-end
REITs - similar to closed-end fund, invest in real estate or loans secured by real estate
Hedge funds (almost not regulated)
What is a closed-end mutual fund?
A closed-end fund is a type of mutual fund that issues a fixed number of shares through one initial public offering (IPO) to raise capital for its initial investments. Its shares can then be bought and sold on a stock exchange, but no new shares will be created, and no new money will flow into the fund.
What is an open-end fund?
An open-end fund is a diversified portfolio of pooled investor money that can issue unlimited shares. The fund sponsor sells shares directly to investors and redeems them as well. These shares are priced daily based on their net asset value (NAV). Most mutual and exchange-traded funds (ETFs) are open-end.
What are the costs of investing in mutual funds?
Fee Structure (Front-end load or back-end load)
Operating expenses paid through reduced value of portfolio
12 b-1 charges (alternative to a load)
How to calculate realized return?
Rt+1 = (Pt+1 - Pt + Dt+1) / Pt
Think of the formula for Average Annual Returns and its Volatility.
Average Annual Return = 1/T * (R1 + R2 + R3 … + Rt)
Variance = 1/T-1 * (Rt - Raverage)Squared
Volatility = Square Root Var(R)
What is the Expected Return formula and its variance and StDev?
Expected Return = Sigma (Prob. R * R)
Variance = Sigma (Prob. R * (Return - Expected Return))
St Dev. = Square Root Variance
What is the Risk Premium formula?
Return of the Stock - Risk-free Rate
What is a commensurate gain?
Positive risk premium
