Test 2 Review

1
Test 2 Review

• Chapters 14, 5, 6, 7, 8 in Investments
• Chapters 5-10 in A Random Walk Down Wall Street

2
Chapter 14

• Bond Characteristics
• Face and Par Value
• Coupon Rates
• Types of Bonds
• Government
• Corp.
• Municipal
• Different bond features
• Formula to price a bond (formula and how to do it
  on the calculator)
• Relationship of Bond Price and Coupon Payments
• Bond discount rate, bond equivalent yield,
  effective annual yield, current yield
• Holding Period Return (HPR)
• How to calculate a Compound Annual Growth Rate
  (CAGR)
• Default risk and Rating agencies
• Bond Ratings (risk premium, Risk spreads)

3
Chapter 5

• Chapter 5
• What moves interest rates (SD, government
  impacts)
• Real vs. Nominal (Fisher Effect) know
  approximation and Exact formula
• Impact of inflation on interest rates
• Geometric vs. arithmetic means
• Risk vs return
• Expected return
• Variance formula

4
Chapter 6 7

• Chapter 6 7
• Risky vs risk free investments
• Mean, variance and SD (formulas)
• Utility function (formulas)
• Understand the relationship of the slope of an
  Ind. Curve for a more vs less risky investor
• Understand the implications of the different
  levels of A (1-5)
• Dominance principal (highest return and lowest
  risk)
• Expected Return
• Variance of Return and SD
• Return on a portfolio
• RULES 1,2,3,4
• Combinations of risky and risk free investments
• Covariance
• Correlation (formula)
• CAL Capital Allocation Line (Slope and shape of
  that line)
• Using Leverage with CAL (change it shape WHY?)
• Efficient Frontier what is it will not make
  you draw or calc. It

5
Chapter 8

• Chapter 8
• Risk reduction with diversification
• Systematic risk-market risk
• Idiosyncratic risk-firm specific risk
• 2 risky securities (return, variance, SD)
• Covariance
• Correlation of 2 risky assets, negative
  correlation, impact on correlation and risk
• Formula for 3 or more risky assets being combined
  (understand it not calc it, but know the
  formula!)
• Minimum Variance Formula You MUST know and be
  able to use this Understand the concept and how
  to use it, calculate it
• Optimal combinations result in the lowest risk
• Efficient frontier
• Steps of asset allocation

6
II and III of Random Walk

• Technical vs. Fundamental analysis
• Modern portfolio theory and how its used
• Modern theories/predictions in Chapter 10
• Note the concepts of risk and return are very
  simply laid out in these 5 chapters I ENCOURAGE
  all of you to read these 5 chapters it will help
  you understand many of the concepts we have
  discussed in class