Notesale: Turn your study into money

Document Preview

Extracts from the notes are below, to see the PDF you'll receive please use the links above

---

Lecture 1 - Financial Investment
Comprehensive Summary
Lecture 1 emphasizes the foundational concepts of investments, particularly the dominance of
stocks over other asset classes (bonds, commodities, and gold) in delivering long-term real
returns
...
It sets the stage
for exploring broader investment principles, including portfolio theory, utility, risk-return
trade-offs, and market efficiency, providing a critical prelude to advanced theories like the
Capital Asset Pricing Model (CAPM) and behavioral finance
...
1
...

● Supporting Evidence:
○ Historical crises, including the Great Depression and the 2008 financial crisis,
did not diminish the long-term advantages of stocks
...

3
...
Prelude to Investment Theory
● Utility Theory:
○ Foundation of investment decision-making; individuals aim to maximize
utility rather than wealth
...

● Risk-Return Trade-Off:
○ Investments with higher returns inherently carry higher risk
...

3
...
Efficient Frontier and Optimal Portfolio Choice
● Efficient Frontier:
○ Represents portfolios offering the maximum return for a given risk level
...

3
...
Behavioral Insights
● Highlights deviations from traditional investment models caused by cognitive biases
and irrational behaviors
...


3
...
The Role of Crises in Investment
● Learning from History:
○ Crises reveal vulnerabilities in financial systems but also present opportunities
for reform and innovation
...


Key Takeaways & Actionable Insights
● Key Messages:
○ Stocks are the cornerstone of long-term investment strategies
...

● Actionable Points:
○ Adopt a disciplined approach to investment, especially during market
turbulence
...


Critical Analysis
● Strengths:
○ Clear emphasis on the historical performance of stocks builds a strong case for
their dominance
...

● Weaknesses:
○ Lacks discussion on alternative asset classes’ potential advantages in specific
scenarios
...


Glossary of Terms
● Utility: A measure of satisfaction derived from investment choices
...

● Efficient Frontier: A curve representing optimal portfolios with the best risk-return
combinations
...


Lecture 1A - Preliminary on Financial System
● Purpose: To introduce the foundational components of the financial system, its
functions, structure, and evolving roles
...
It distinguishes between direct financing (via financial
markets) and indirect financing (via banking systems)
...
The evolution of the system from capital reallocation to risk
reallocation through derivatives since the 1970s is highlighted
...
The lecture
emphasizes the importance of both traditional and modern financial tools in driving economic
growth and managing financial risks
...
1
...

○ Enables capital reallocation to areas of need
...

○ Financial Markets: Direct financing where borrowers and lenders interact
directly
...
2
...

○ Facilitates liquidity and credit flow by managing risks (credit and liquidity)
...

● Mechanics:
○ Banks collect deposits, reserve a portion (e
...
, 1% in the Eurozone), and lend
the remainder
...
3
...

● Types:
○ Primary Market: Issuance of new securities (e
...
, IPOs)
...

3
...
Classification of Traditional Financial Markets
● By Maturity:
○ Monetary Markets: Short-term (e
...
, Treasury bills, commercial papers)
...
g
...

● By Ownership:
○ Debt Markets: For creditors with fixed returns (e
...
, bonds)
...
g
...

● By Market Organization:
○ Regulated Markets (Exchanges): Standardized and liquid (e
...
, NYSE,
Euronext)
...

3
...
Stocks vs
...

○ Variable returns and higher risk (shareholders paid last in bankruptcy)
...

○ Lower risk compared to stocks
...

3
...
Role of Derivative Markets
● Evolution of Purpose:
○ Initially for capital reallocation, expanded to risk reallocation through
derivatives
...

○ Conditional: Options
...

● Market Organization:
○ Regulated (e
...
, CME, Eurex) vs
...


Key Takeaways & Actionable Insights
●
●
●
●

The financial system ensures efficient allocation of capital and risk
...
g
...

Derivative markets are vital for managing risks in modern finance
...


Critical Analysis
● Strengths:
○ Clear, systematic breakdown of financial system components
...

● Weaknesses:
○ Lacks detailed discussion on ethical issues or market manipulation risks
...


Glossary of Terms
●
●
●
●
●
●

Primary Market: Where new securities are issued and sold for the first time
...

Monetary Markets: Short-term debt markets (e
...
, Treasury bills)
...

OTC Markets: Over-the-counter, non-regulated private trading markets
...


Lecture 1B - Crisis Analysis
Purpose: To analyze financial crises, their causes, implications, and strategies for prevention,
while connecting them to investment theories and practices
...
It
begins by defining crises and their economic/financial aspects, emphasizing the importance
of historical analysis to mitigate future risks
...
Case studies highlight the
interconnectedness of global economies and the rapid transmission of crises through financial
instruments like Mortgage-Backed Securities (MBS) and Credit Default Swaps (CDS)
...


Detailed Section-by-Section Analysis
3
...
Introduction to Crises
● Definition:
○ Derived from the Greek "krisis," meaning unexpected, dangerous events often
requiring urgent action
...

● Distinction:

○ Economic Crisis: General disruptions affecting broader economic activities
...

● Interrelation: Prolonged economic crises can trigger financial crises, and vice versa
...
2
...

○ High-risk due to borrowers' inability to reliably repay
...

○ Banks targeted less solvent customers, contributing to unsustainable housing
demand
...
25% from 2004–2006) to
combat inflation
...

● Consequences:
○ Defaults reached 15% in 2007
...

3
...
Mechanisms of Crisis Transmission
● Securitization:
○ Banks bundled subprime loans into MBS, sold to global investors
...

● Credit Default Swaps (CDS):
○ Derivatives sold as "insurance" against loan defaults
...

3
...
Rescue Efforts
● Government Interventions:
○ Federal Reserve cut interest rates to near-zero levels
...

○ Quantitative Easing (QE) programs to inject liquidity
...

3
...
European Sovereign Debt Crisis
● Root Causes:
○ High debt-to-GDP ratios (e
...
, Greece at 120%)
...

● Timeline:
○ Began with Greece in 2010, spread to PIIGS nations (Portugal, Ireland, Italy,
Greece, Spain)
...

○ Austerity measures exacerbated economic pain
...
6
...

○ 1929–1932 Great Depression: Highlighted systemic flaws in capitalism
...

○ 2000 Dot-Com Bubble: Overvaluation of tech stocks
...
7
...

Keynesian Approach: Advocates government intervention to offset cycles
...

Marxist Perspective: Crises are inherent in capitalism due to overproduction and
inequality
...

○ Early warning systems (e
...
, monitoring price aberrations) are critical
...

○ Strengthen banking regulations (e
...
, Basel III standards)
...

○ Clear connection between historical events and current practices
...

○ Simplifies certain economic theories without in-depth critique
...

● Mortgage-Backed Securities (MBS): Investments tied to bundled home loans
...

● Quantitative Easing (QE): Central bank strategy of purchasing assets to increase
liquidity
...


Comprehensive Summary
This lecture explores macroeconomic indicators—GDP, employment, inflation, fiscal and
monetary policy, and exchange rates—and their interconnections
...
The material highlights the impacts of crises,
including the COVID-19 pandemic and the Russia-Ukraine war, on global economies,
inflation, and fiscal strategies
...

Key conclusions emphasize the interconnected nature of economic factors, the limitations of
Keynesian policies in certain contexts, and the evolving dynamics of global trade and
inflation due to crises
...


Detailed Section-by-Section Analysis
3
...

○ GDP measures economic activity, combining consumer spending (C),
investment (I), government spending (G), and net exports (X-M)
...

● Key Concepts Explained:
○ GDP Formula: GDP=C+I+G+(X−M)GDP = C + I + G + (X-M)
...

● Examples:
○ The US: C = 65%, I = 15%, G = 20%, X-M = 0%
...
2 Employment
● Main Ideas:
○ Employment relates to productive activities and is often measured via
unemployment rates
...

● Example:
○ In December 2022, unemployment was 3
...
3% in France
...
3 Inflation

● Main Ideas:
○ Inflation is the rate of price increase; measured by the Consumer Price Index
(CPI)
...
g
...

● Examples:
○ Stagflation in the 70s and 80s resulted from oil price surges, weakening
Keynesian fiscal policies
...
4 Fiscal Policy
● Main Ideas:
○ Fiscal policy involves tax and public spending adjustments to manage the
economy
...

● Examples:
○ France’s fiscal deficit in 2021: 6
...
5% of
GDP
...
5 Monetary Policy
● Main Ideas:
○ Central banks use interest rates to manage money supply
...

● Examples:
○ In 2022, the Federal Reserve raised rates to 4
...
5%, to combat inflation
...
6 Exchange Rates
● Main Ideas:
○ Exchange rates can be floating, fixed, or managed
...

3
...

3
...

● Example:
○ During COVID-19, fiscal deficits soared as governments provided
unprecedented financial support
...

○ Inflation control requires coordinated fiscal and monetary policies
...

● Practical Applications:
○ Monitor GDP, inflation, and unemployment for investment insights
...


Critical Analysis
● Strengths:
○ Comprehensive overview of interconnected macroeconomic indicators
...

● Weaknesses:
○ Limited depth on complex dynamics like global trade impacts
...

● Biases:
○ Slight Keynesian tilt in fiscal policy discussions; alternative schools of
thought underexplored
...

Fiscal Policy: Government strategies involving taxation and spending
...

CPI: Index measuring consumer price changes over time
...


Comprehensive Summary
This lecture focuses on utility theory as the foundation of investment decisions
...
Key concepts include the utility function,
Arrow-Pratt risk aversion measure, and indifference curves
...
Practical
implications include understanding investor behavior in different economic contexts and the
role of utility in portfolio construction
...


Detailed Section-by-Section Analysis
3
...
Risk-Free Investments
● Main Ideas:
○ Risk-free investments have certain outcomes (e
...
, T-Bills), while risky
investments have probabilistic outcomes
...
A risky investment can grow to €150 or fall to €80 with respective
probabilities of 0
...
4, giving an expected return of 22% but with
standard deviation σ=34
...
29\%
...
g
...

3
...
Most
common
...

○ Risk-Seeking: Prefers higher risk; accepts lower returns for riskier
investments
...

● Implications:
○ Risk aversion varies with economic conditions and personal circumstances
...
3 The Utility Function
● Definition: Measures the satisfaction derived from wealth or investments
...

○ Concave Shape: Diminishing marginal utility; each additional unit of wealth
brings less incremental happiness
...
5Aσ2U = E(R) - 0
...

○ Interpretation:
■ A>0A > 0: Risk-averse
...

■ A<0A < 0: Risk-seeking
...
4 Certainty Equivalent
● Definition: The risk-free return providing the same utility as a risky investment
...
22%16
...

■ A=3A = 3: Certainty Equivalent = 4
...
66\%
...
90%-6
...

○ Higher risk aversion leads to lower certainty equivalents
...
5 Indifference Curves
● Definition: Graphs showing combinations of risk (σ\sigma) and expected return
(E(R)E(R)) that yield the same utility
...

○ More risk-averse investors have steeper indifference curves
...
6 Practical Implications
● Economic Downturns: Higher AA values drive investors toward safer assets (“flight
to quality”)
...


Key Takeaways & Actionable Insights
● Key Points:
○ Utility functions quantify trade-offs between risk and return, guiding portfolio
choices
...

○ Indifference curves help visualize investment preferences and portfolio
optimization
...

○ Use utility functions to compare investment alternatives quantitatively
...

○ Bridges theoretical concepts with practical calculations
...

○ Overemphasis on risk aversion; less attention to real-world risk-seeking
scenarios
...


Glossary of Terms
●
●
●
●

Risk Premium: Extra return demanded for taking on additional risk
...

Indifference Curve: Graph showing equal utility for combinations of risk and return
...


Lecture 3 - Risk, Return, and Portfolio Diversification
Purpose: To measure risk and return for individual assets and portfolios, and demonstrate the
benefits of diversification in reducing investment risk
...
It explains the principles of portfolio diversification, focusing on how
combining assets with varying correlations can reduce overall risk without sacrificing returns
...
geometric returns, risk decomposition, and the computation of
portfolio metrics
...

Key takeaways emphasize that diversification reduces unsystematic risk, while systematic
risk can only be managed through asset selection and portfolio optimization
...
1 Basics on Return and Risk
● Main Ideas:
○ Arithmetic Return: AR=(Pt+1+D)−PtPtAR = \frac{(P_{t+1} + D) P_t}{P_t}
...

○ Geometric Return: GR=ln⁡(Pt+1+DPt)GR = \ln \left( \frac{P_{t+1} +
D}{P_t} \right)
...

○ Probability Distribution: Return variability is measured via variance
(σ2\sigma^2) or standard deviation (σ\sigma)
...

3
...

○ E(Rp)=∑i=1nxiE(Ri)E(R_p) = \sum_{i=1}^n x_i E(R_i), where xix_i =
weight of asset ii
...

○ Cov(Ri,Rj)=σiσjρij\text{Cov}(R_i, R_j) = \sigma_i \sigma_j \rho_{ij}, where
ρij\rho_{ij} = correlation coefficient
...
3 Diversification and Risk Decomposition
● Unsystematic Risk: Specific to individual assets and can be mitigated through
diversification
...


● Diversification reduces portfolio risk when asset returns are less than perfectly
correlated (ρ<1\rho < 1)
...
4 Case Studies and Examples
● Example 1: Equally Weighted Portfolio
○ Portfolio with two stocks (AA and BB), each with equal weights
(xA=xB=50%x_A = x_B = 50\%)
...
Lower ρ\rho
reduces σp\sigma_p
...

■ Risk (σp\sigma_p) is linear for xs>0x_s > 0, but non-linear if xs<0x_s
< 0 (short-selling)
...
5 Practical Formulas and Tools
● Short-Selling: Selling borrowed assets to profit from expected price declines
...

● Efficient Frontier: Represents portfolios offering the best risk-return tradeoff
...

○ With Short-Selling: Extends to a ray beyond the risky asset
...

○ Portfolio optimization relies on understanding correlations and asset weights
...

● Practical Actions:
○ Combine low-correlation assets to reduce risk effectively
...

Critical Analysis
● Strengths:
○ Clear explanation of mathematical tools for risk-return analysis
...

● Weaknesses:
○ Assumes normal distributions for returns, which may oversimplify real-world
dynamics
...

● Biases: Reliance on quantitative models might underemphasize qualitative factors in
risk assessment
...

● Geometric Return: Compounded annual growth rate
...

● Efficient Frontier: Optimal portfolios providing maximum return for a given risk
...
g
...

Lecture 4 - Efficient Frontier
Purpose:
To explain the concepts of portfolio optimization, focusing on Markowitz's Efficient Frontier
and Capital Market Line (CML) models
...
It expands on Markowitz's Efficient Frontier theory, which identifies portfolios
providing the best possible returns for a given level of risk
...
Key components include:
● Techniques to compute risk-return trade-offs
...

● Examples from U
...
financial market data
...


Detailed Section-by-Section Analysis
3
...
Risk and return of a portfolio are determined by individual stock returns and
their covariance
...
Feasible portfolios fall within a parabolic curve in the risk-return space
...
Efficient Frontier: Upper part of the curve offering maximum return for a
given risk level
...
Minimum Variance Portfolio (MVP): The leftmost point on the curve with
the lowest possible risk
...
Feasible Portfolios: Combinations of assets that investors can construct
...
Efficient Portfolios: Portfolios that dominate others by either offering higher
returns for the same risk or lower risk for the same return
...
Covariance Matrix: Measures how assets move in relation to each other
...

2
...

4
...

Compute their daily returns, average returns, and standard deviations
...

Solve optimization problems to identify portfolios minimizing risk for each
target return
...
2 Capital Market Line (CML) - Including a Risk-Free Asset
● Main Ideas:
○ Incorporates a risk-free asset (e
...
, Treasury Bills)
...

○ Tangency Portfolio: The portfolio on the original frontier that touches the
CML, representing the market portfolio in CAPM
...

● Key Equations:
E(RT)=Rf+λσTE(R_T) = R_f + \lambda \sigma_T,
where RfR_f is the risk-free rate, σT\sigma_T is the total risk, and λ\lambda is the
slope indicating the Sharpe ratio
...
3 Risk-Free Asset Characteristics
● Short-term government bonds like U
...
Treasury Bills are often used
...

○ Minimal inflation or interest rate risks due to short maturities
...
4 Investor Behavior on the Frontier
● Risk Preferences Impact Choices:
○ Risk-averse investors prefer portfolios closer to the risk-free rate
...

● Utility Function Explanation:
Investors choose portfolios maximizing their utility, determined by a combination of
expected returns and risk tolerance
...
5 Practical Applications with U
...
Market Data
● Historical data analysis highlights the impact of diversification and efficient portfolio
selection
...


Key Takeaways & Actionable Insights
● Efficient Frontier: Maximizes return for any risk level; fundamental for portfolio
optimization
...

● Practical Applications: Use data analysis tools like Excel to model real-world
portfolio scenarios
...

○ Gradual progression from simple (Markowitz) to more complex (CML)
...
g
...

○ Limited discussion on the limitations of risk-free asset assumptions (e
...
,
real-world availability)
...

● Risk-Free Asset: An asset assumed to have zero default and reinvestment risk
...

● Tangency Portfolio: The portfolio where the CML touches the Efficient Frontier
...


Comprehensive Summary
This lecture builds on the efficient portfolio concepts from Markowitz and introduces the
Sharpe Single-Index Model and CAPM
...
Key highlights:
● CAPM assumptions, including market equilibrium and investor rationality
...


● Practical applications in identifying under- or over-valued securities using the
Security Market Line (SML)
...


Detailed Section-by-Section Analysis
3
...

○ Relates individual stock returns to market returns via a linear regression:
Ri=αi+βiRm+eiR_i = \alpha_i + \beta_i R_m + e_i,
where αi\alpha_i is the intercept, βi\beta_i measures sensitivity to market
returns, and eie_i is the stock-specific residual
...

○ Decomposes risk into systematic risk (β2Var(Rm)\beta^2 \text{Var}(R_m))
and specific risk (Var(ei)\text{Var}(e_i))
...

3
...

○ RfR_f: Risk-free rate
...

○ E(Rm)E(R_m): Expected return of the market portfolio
...

○ Markets are frictionless (no taxes, no transaction costs)
...

● Beta as Risk Measure:
○ Beta (β\beta) quantifies systematic risk (relative to the market):
■ β=1\beta = 1: Stock moves with the market
...

■ β<1\beta < 1: Stock is less volatile than the market
...
3 Security Market Line (SML)

● Definition: Graphical representation of CAPM, plotting E(R)E(R) versus β\beta
...

○ Intercept = Risk-free rate (RfR_f)
...

■ Assets below SML are over-valued (negative alpha)
...

■ Stock B (β=0
...
5): E(RB)=7%E(R_B) = 7\%
...
4 CML vs
...

● Security Market Line (SML): Includes all portfolios (efficient or not) and focuses
on (E(R),β)(E(R), \beta) space
...

○ Helps identify mispricing in assets
...

● Investor Behavior: Encourages diversification to eliminate specific risk, leaving only
market (systematic) risk
...

○ Beta provides a clear metric for systematic risk
...
g
...

○ Beta's stability and accuracy in representing risk are often debated
...


Glossary of Terms
● Beta (β\beta): A measure of an asset’s sensitivity to market returns
...

● Systematic Risk: Non-diversifiable risk tied to market movements
...

● SML: A graph plotting CAPM's relationship between risk (beta) and return
...


Comprehensive Summary
This lecture addresses the efficient market hypothesis (EMH), which asserts that financial
markets reflect all available information in stock prices
...
Insights into irrational investor behavior, as highlighted by prospect theory, provide a
lens to understand deviations from market efficiency
...


Detailed Section-by-Section Analysis
3
...

● Key Points:
○ Traditional finance assumes rational investors; behavioral finance recognizes
psychological biases
...


■ Overconfidence (overestimating one’s investing abilities)
...

○ Loss Aversion: Losses hurt more than equivalent gains bring joy
...
g
...

3
...

● Three Forms:
○ Weak Form: Prices reflect all past market data
...

○ Semi-Strong Form: Prices reflect all publicly available information
...

○ Strong Form: Prices reflect all information, public and private
...

● Illustration of Implications:
○ A monkey randomly selecting stocks could perform as well as professional
fund managers
...
3 Implications of EMH
● Stock Valuation:
○ Weak form challenges technical analysis
...

○ Strong form undermines insider trading
...

● Practical Takeaway:
○ To achieve higher returns, investors must accept higher risk (as per CAPM)
...
4 Real-World Evidence on EMH
● Empirical Evidence:
○ Mixed support: While some markets show efficiency, anomalies persist
...

● Challenges to EMH:
○ Behavioral biases, such as regret avoidance and overreaction to news, lead to
inefficiencies
...
5 Behavioral Biases Impacting Market Efficiency
● Overconfidence: Investors overestimate their knowledge and control
...
g
...

● Regret Avoidance: Reluctance to admit bad decisions, leading to holding onto losing
stocks too long
...


Key Takeaways & Actionable Insights
● For Investors:
○ Beware of behavioral biases; strive for rational decision-making
...

● For Analysts:
○ Market anomalies (e
...
, calendar effects) offer opportunities but challenge
EMH validity
...


Critical Analysis
● Strengths of EMH:
○ Offers a robust theoretical framework for understanding market efficiency
...

● Weaknesses:
○ Unrealistic assumptions about investor rationality and equal information
access
...

● Behavioral Finance Perspective:
○ Provides a practical counterpoint to EMH by acknowledging irrational
behaviors and market inefficiencies
...

● Prospect Theory: Behavioral model focusing on decision-making under risk,
emphasizing loss aversion
...

● January Effect: An anomaly where small-cap stocks outperform in January
...
passive management and evaluating fund performance
...
It
examines the implications of the Efficient Market Hypothesis (EMH) on fund strategies,
contrasting passive (index-tracking) with active (market-beating) approaches
...
g
...
Various methods of stock selection and timing
are outlined, along with alternative asset management strategies like hedge funds
...

Core Message: The choice between passive and active fund management reflects differing
beliefs in market efficiency and impacts portfolio performance
...
EMH Implications in Fund Management
● Key Ideas:
○ EMH implies asset prices fully reflect available information
...
g
...

○ Skeptics of EMH pursue active management, exploiting inefficiencies to "beat
the market
...
Market Indexes
● Main Ideas:
○ Price-weighted index: Based on stock prices (e
...
, Dow Jones Industrial
Average)
...
g
...

● Examples:
○ A price-weighted index may misrepresent economic realities, while a
capitalization-weighted index better reflects market trends
...
Exchange-Traded Funds (ETFs)
● Definitions:
○ ETFs are investment funds traded on exchanges, originally used to track
indexes
...

○ Since 2008, non-index ETFs have emerged
...
Tracking Error in Passive Management
● Definition: Measures how closely a portfolio follows its benchmark
...

○ Composition mismatches
...

○ Sampling Duplication: Selective replication, higher tracking error but lower
costs
...
Active Fund Management
● Strategies:
○ Market Timing: Deciding when to enter or exit markets (e
...
, buying low,
selling high)
...

○ Alternative Asset Management: Utilizing diverse instruments (e
...
,
derivatives, hedge funds)
...

○ Bottom-up: Focus on individual stocks irrespective of macro trends
...
Fund Performance Metrics
● Key Ratios:
1
...

2
...

3
...


Key Takeaways & Actionable Insights
● Passive vs
...

● Portfolio Optimization: Use weighted indexes to better align with market trends
...


Critical Analysis
● Strengths:
○ Clear explanation of EMH implications
...

● Weaknesses:
○ Limited discussion of behavioral finance implications
...

● ETF (Exchange-Traded Fund): A fund traded on stock exchanges like individual
shares
...


Lectures 8 - Stock Valuation and Market Forecasting
Purpose:
To explore whether financial markets operate efficiently, the implications of this efficiency,
and the behavioral factors influencing investor decisions
...
The fundamental approach evaluates
intrinsic value based on financial metrics, while the technical approach uses price trends and
patterns to anticipate market movements
...

Core Message: A blend of fundamental and technical analysis can provide a more holistic
understanding of stock prices and market behavior
...
Why Value Stocks?
● Concepts:
○ Intrinsic Value (IV): The "fair" price of a stock based on fundamentals
...

● When Needed:
○ Initial Public Offerings (IPOs)
...

○ Financing decisions
...
Fundamental Analysis vs
...

○ Relies on the weak form of EMH
...

○ Relies on past trading information to predict future trends
...
Fundamental Valuation Methods
1
...

○ Example: Firm H with historical book value = 2080 M€, adjusted book value
= 3480 M€
...
Present Approach (Comparative):
○ Compares financial ratios (e
...
, Price-Earning Ratio) of similar companies
...
5 M€
...
Future Approach (Dynamic):
○ Uses discounted cash flows (e
...
, Dividend Discount Model)
...


IV
...

● Patterns:
○ Trend Patterns: Channels and triangles
...

● Moving Averages:
○ Smoothens short-term volatility
...


V
...

○ Sell when the market closes 1% below
...


Key Takeaways & Actionable Insights
● Use intrinsic valuation for long-term investment decisions
...

● Recognize the limitations of models and consider external factors like market
sentiment
...

○ Incorporates practical examples and case studies
...
g
...

○ Limited discussion of integrating behavioral finance insights
...

● Price-Earning Ratio (PER): Ratio of stock price to earnings per share
...


Lecture 9 - Financial Derivatives in Fund Management

Purpose:
To explore how financial derivatives are used in risk management and investment strategies
in fund management
...
The focus is on derivatives like options, futures, and forward contracts,
and their application in real-world fund management
...
Derivatives allow fund managers to hedge against market
downturns while taking calculated risks for higher returns
...


Detailed Section-by-Section Analysis
3
...

○ Implied Volatility: Derived from current option prices, reflecting market
expectations
...

● Insights:
○ Volatility is unpredictable over time but negatively correlated with stock price
levels
...
2 Forward and Futures Contracts
● Forward Contracts:
○ Agreement to buy/sell an asset at a set price on a future date
...

● Futures Contracts:
○ Standardized contracts traded on exchanges like CME
...

● Example:
○ S&P 500 Index Futures:
■ Futures price: 1,000 points
...

■ Gain/Loss determined by difference in settlement price
...
3 Options and Their Use in Fund Management
● Definitions:
1
...

2
...

3
...

4
...

● Strategies:
1
...

■ Example: A manager expects stock prices to drop from 100 to 80 but
buys a put with a strike price of 100 for protection
...
Covered Call:
■ Use: To enhance returns during anticipated stable or declining markets
...

3
...

● Insights:
○ Ensures consistent pricing between calls and puts
...

3
...

● Speculative Strategies:
○ Leverage options for high-reward trades, e
...
, betting on implied volatility
changes
...

○ Incorporate futures for hedging or speculative purposes
...

● Practical Tools:
○ VIX as a volatility measure can guide derivative strategy decisions
...

○ Practical examples, e
...
, S&P 500 futures and protective puts, ground the
theory
...
g
...

○ Assumes a high level of familiarity with mathematical concepts like option
pricing
...

● Put-Call Parity: Relationship between the prices of puts, calls, and the underlying
asset
...

● Covered Call: Selling call options while holding the underlying asset to generate
income
...




---