Formulas and facts: ⚫ Accrued interest = (#days since last coupon/number of days per coupon period)*coupon • CAPM: E(ra) = rƒ + Ba (E(rm) - rƒ) or E(rarf) = ẞa (E(rm) — rƒ) ⚫ CAPM test regression: Tit-Tft = ai + ẞi(rmt − rft) + Eit Fama French 3-factor model: E(rar): E(SMB)+ha E(HMLt) = - BaE(Tm rf) + Sa * Fama French test regression: Tat - rft = αa + Ba * (Tmt - Tft) + Sa * (SMB)+ha (HMLt) + Eit Carhart 4-factor model: E(rar) = Ba* E(™m - rƒ) + Sa * E(SMBt) + ha * E(HMLt) + maE(MOM) Carhart 4-factor test regression: Tat-Tft = a + Ba* (Tmt − ˜ft) + Sa * (SMB₁) + ha* (HMLt) + ma* (MOM₁) + Eit • mktr ft = rmt-Tft is the excess return on the US stock market. ⚫ SMB₁ = "small,t - "big,t is the return on the portfolio of small-cap US stocks in excess of the return on a portfolio of large-cap US stocks. • HML₁ = Thigh,t-Tlow,t is the return on the portfolio of high book-to- market (value) stocks in excess of the return on the portfolio of low book-to-market (growth) stocks. ⚫ MOM₁ = "Winners,t - "Losers,t is the return on stocks with high returns over the prior 12 months in excess of the return on stocks with low returns over the prior 12 months. ⚫ return = Ending Value-Starting Value Starting Value Price+Div-Price Priceo • Ba= = corr(rm.ra)σ(ra) 0(1b) = Slope of the best fit line through plot of ra vs. Tm • (1+11/2)2-0.5 (1+12/2)2-2 P CF₁ CF₂ - + + + CFT CF1 CF2 = (1+ytm/2)1-2 (1+ytm/2)2-2 + + (1+r7/2)1-2 CFT (1+ytm/2)1-2 + P= (w1, 1,, Wn) ⇒ Duration: = w₁ D₁+w2 ⋅ D₂+ ... + Wn · Dn AP/P-Durp Ay . •AP/P-Durp Ay + ½ Convexity (Ay)² wo . • ΨΑ = where w = 1+wo(1-BA) αA/02(EA) E(rm-rƒ)/0²(rm)* WM = 1 - WA. • t-statistic = estimate-null value standard error • If t>2, then p-value < 0.05 • P = D₁ = E₁x (1- b)
Formulas and facts: ⚫ Accrued interest = (#days since last coupon/number of days per coupon period)*coupon • CAPM: E(ra) = rƒ + Ba (E(rm) - rƒ) or E(rarf) = ẞa (E(rm) — rƒ) ⚫ CAPM test regression: Tit-Tft = ai + ẞi(rmt − rft) + Eit Fama French 3-factor model: E(rar): E(SMB)+ha E(HMLt) = - BaE(Tm rf) + Sa * Fama French test regression: Tat - rft = αa + Ba * (Tmt - Tft) + Sa * (SMB)+ha (HMLt) + Eit Carhart 4-factor model: E(rar) = Ba* E(™m - rƒ) + Sa * E(SMBt) + ha * E(HMLt) + maE(MOM) Carhart 4-factor test regression: Tat-Tft = a + Ba* (Tmt − ˜ft) + Sa * (SMB₁) + ha* (HMLt) + ma* (MOM₁) + Eit • mktr ft = rmt-Tft is the excess return on the US stock market. ⚫ SMB₁ = "small,t - "big,t is the return on the portfolio of small-cap US stocks in excess of the return on a portfolio of large-cap US stocks. • HML₁ = Thigh,t-Tlow,t is the return on the portfolio of high book-to- market (value) stocks in excess of the return on the portfolio of low book-to-market (growth) stocks. ⚫ MOM₁ = "Winners,t - "Losers,t is the return on stocks with high returns over the prior 12 months in excess of the return on stocks with low returns over the prior 12 months. ⚫ return = Ending Value-Starting Value Starting Value Price+Div-Price Priceo • Ba= = corr(rm.ra)σ(ra) 0(1b) = Slope of the best fit line through plot of ra vs. Tm • (1+11/2)2-0.5 (1+12/2)2-2 P CF₁ CF₂ - + + + CFT CF1 CF2 = (1+ytm/2)1-2 (1+ytm/2)2-2 + + (1+r7/2)1-2 CFT (1+ytm/2)1-2 + P= (w1, 1,, Wn) ⇒ Duration: = w₁ D₁+w2 ⋅ D₂+ ... + Wn · Dn AP/P-Durp Ay . •AP/P-Durp Ay + ½ Convexity (Ay)² wo . • ΨΑ = where w = 1+wo(1-BA) αA/02(EA) E(rm-rƒ)/0²(rm)* WM = 1 - WA. • t-statistic = estimate-null value standard error • If t>2, then p-value < 0.05 • P = D₁ = E₁x (1- b)
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
1. Ace Ventures, Incorporated, has expected earnings of $5 per share for next year. The firm’s
Group of answer choices
- $25
- None of the above
- $75
- $50
- $100
2. Which of the following is an important reason to know the economic theory behind patterns in returns you trade on or recommend to clients? MARK ALL THAT APPLY
Group of answer choices
- Determining appropriate weights and rebalancing your portfolio's asset allocation
- Impressing your friends with your knowledge
- Understanding whether your trading strategy will persist into the future
- Identifying whether the economic conditions are right for your strategy to succeed
- Knowing the theory increases the statistical significance of your alpha
Transcribed Image Text:Formulas and facts:
⚫ Accrued interest = (#days since last coupon/number of days per coupon
period)*coupon
• CAPM: E(ra) = rƒ + Ba (E(rm) - rƒ) or E(rarf) = ẞa (E(rm) — rƒ)
⚫ CAPM test regression: Tit-Tft = ai + ẞi(rmt − rft) + Eit
Fama French 3-factor model: E(rar):
E(SMB)+ha E(HMLt)
=
-
BaE(Tm rf) + Sa *
Fama French test regression: Tat - rft = αa + Ba * (Tmt - Tft) + Sa *
(SMB)+ha (HMLt) + Eit
Carhart 4-factor model:
E(rar) = Ba* E(™m - rƒ) + Sa * E(SMBt) + ha * E(HMLt) +
maE(MOM)
Carhart 4-factor test regression:
Tat-Tft = a + Ba* (Tmt − ˜ft) + Sa * (SMB₁) + ha* (HMLt) + ma*
(MOM₁) + Eit
• mktr ft = rmt-Tft is the excess return on the US stock market.
⚫ SMB₁ = "small,t - "big,t is the return on the portfolio of small-cap US
stocks in excess of the return on a portfolio of large-cap US stocks.
• HML₁ = Thigh,t-Tlow,t is the return on the portfolio of high book-to-
market (value) stocks in excess of the return on the portfolio of low
book-to-market (growth) stocks.
⚫ MOM₁ = "Winners,t - "Losers,t is the return on stocks with high returns
over the prior 12 months in excess of the return on stocks with low
returns over the prior 12 months.
⚫ return = Ending Value-Starting Value
Starting Value
Price+Div-Price
Priceo
• Ba= =
corr(rm.ra)σ(ra)
0(1b)
=
Slope of the best fit line through plot of ra vs. Tm
Transcribed Image Text:•
(1+11/2)2-0.5 (1+12/2)2-2
P
CF₁
CF₂
-
+
+ +
CFT
CF1
CF2
=
(1+ytm/2)1-2 (1+ytm/2)2-2
+ +
(1+r7/2)1-2
CFT
(1+ytm/2)1-2
+
P= (w1,
1,, Wn) ⇒ Duration: = w₁ D₁+w2 ⋅ D₂+ ... + Wn · Dn
AP/P-Durp Ay
.
•AP/P-Durp Ay + ½ Convexity (Ay)²
wo
.
• ΨΑ
=
where w
=
1+wo(1-BA)
αA/02(EA)
E(rm-rƒ)/0²(rm)*
WM = 1 - WA.
• t-statistic =
estimate-null value
standard error
• If t>2, then p-value < 0.05
• P
=
D₁ = E₁x (1- b)
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