Bus. Econ. 271 -- Portfolio Theory
J. Sell
Spring1998

Second Examination Outline and Review

Outline of Materials Covered prior to second Examination. This is in addition to the material covered previously. Note: You should be able to discuss the following concepts clearly and completely without the use of notes and talk about why each is important to the study of Marketing. You should also be able to give examples of the concepts other than the ones given in class.

I. Fixed-Income investments

A. Cootner's Model and the Economic Theory of Price
B. The Theory of Time Preference and Interest -- Fisher, Böhm-Bawerk, etc.
C. Real vs. Nominal Interest rates.
D. Current Yield and Yield to Maturity
E. Pricing fixed-income securities

1. The present-value model.
2. Estimating future interest rates from the yield curve.
3. Bond ratings and rating agencies.
4. Hickman's study and the use of rating to adjust risk-free prices.

F. The first approach to investment strategy: prices and time until maturity, yields, coupons.
G. Duration

1. An example with a fixed time horizon.
2. McCaulay's duration formula.
3. How and why does duration work?
4. Duration as an investment strategy.
5. The use of duration to estimate price changes when yields change.

H. Passive/Active Bond strategies

II. Equity Investments

A. How do equities differ from bonds?
B. The Gordon Model

1. Derivation and assumptions
2. Estimating "g"

a. Fama and Babiak Study
b. Trend line estimates

3. Firm and Market Factors
4. Sharpe's study.

III. Modern Portfolio Theory

A. The Markowitz Model

a. Expected yield and risk (standard deviation)
b. Portfolio weights
c. Security yields and portfolio yields
d. Security risk and portfolio risk.

B. The Efficient Set

a. Risk-minimizing weights
b. The Insurance principle and covariance.
c. Dominant portfolios and the efficient frontier
d. Bruno Solnick's study

1. Ease of diversification
2. Diversifiable and Systematic risk

C. Capital Asset Pricing Model (beginnings)

a. The Characteristic Line
b. Alpha and Beta -- calculation and interpretation
c. The interpretation of R2.
d. Individual and portfolio betas.

Revised 1 April 1998 by Jws.