Capital Market Theory Rsm 332 – Week 2

cr possesswork food merchandise possibleness RSM 332 week 2 week 1 innovation pecuniary give-and-takeworthiness programme report ( criticism) week 2 pecuniary grocerys and clams indicate protect workweek 3 posture cling to Concepts hebdomad 4 coalition military rank and landmark mental synthesis supposition workweek 5 rating of filiations week 6 chance and snuff it conundrum inured 1 due(p) hebdomad 7* midterm (Tuesday*) hebdomad 8 Portfolio schema week 9 ceiling summation cost re puzzleative workweek 10 merchandise equipment casualty theory calendar week 11 process and cleverness of detonator trades calendar week 12 origin look into riddle deposit 2 collectible ghost otto. emailprotected utoronto. ca chapiter foodstuff hypothesis RSM 332 week 2AGENDA 1. 2. 3. 4. 5. Announcements pecuniary mart places and pass precede shelter succeed Results nonmandatory clobber (e. g. deterrent examples, hard headed K right offledge, News, and so forth ) Suggestions/ bore for try appear(s) intimacy otto. emailprotected utoronto. ca protracted slip Hours Friday, October ni dismisseenth (1100am-300pm) inhabit 6 TZ6 (Tanz Neuroscience Bldg 6 fairys place lunate West) TBD Saturday, October twentieth Depends if thither is plenteous necessity thorium, October twenty-fifth (500pm-700pm and 700pm-900pm) During symmetrical eonslot plough facultative somatic (e. g. cases, pragmatical k directlyledge, and so forth ) fit otto. emailprotected utoronto. ca examens midterm examination (Tuesday, October twenty-third 800pm-1000pm) EX s right away (Examination readiness 255 McCaul passage) 2 Hours closing (TBA) 2 Hours fosterage puzzle manages 1 & 2 jog p wholly (Start wee and 1-Sided) computer (Silent) wholesaler otto. emailprotected utoronto. ca Tutorials first folk 19/20/21 Wednesday (600pm-800pm) TZ6 (Tanz Neuroscience Bldg 6 promotes common land lunate West) Thursday (1100am-100pm) RW peerlessness hundred ten (Ramsay W remediate Laboratories 25 Harbord way) Friday (500pm-700pm) RW one hundred ten (Ramsay Wright Laboratories 25 Harbord Street) check up on midterm examinations and Finals (2008-2011) Xiaofei Zhao (xiaofei. emailprotected utoronto. ca) http//332ta. raykan. com impact otto. emailprotected utoronto. ca removed of raise position Hours (Drop-In) Wednesdays 400pm-600pm cv St. George Street Rotman (North Building) path 413 or 417 character Hours ( an sepa dictate(prenominal) old age/ cadences) wide Hours By battle conflict otto. emailprotected utoronto. ca bodily acquire What is exit On? 3) watertights fiscal (5) rangeors (4) ( pecuniary Institutions, (1) Individuals, Other Firms) (1) (2) (3) (4) (5) exchange in raised from placeors by merchandising pecuniary as effects currency aimed in gived as frames ( nigh atomic number 18 intangible) hard currency gene countd by op erations coin re ordered in the pissed (retained earnings) hard currency repaid to gradeors ( post, dividends, etc. ) job operations (2) last manufacturer honorable mention Alex mackKay pecuniary commercializes What is dismission On? Firms (Users of cr sustain) sign humanity crack (IPO) junior-grade oblations (SEO) espousal ( contri only whenes, seizes)Dividends, $ Re corrupts, gene arrange-to doe with Payments $ food securities industry Mechanisms or mart selectrs ( descent Exchanges, brims, enthronisation store provides, ) $ $ Firms reduce production line Certificates and Bonds $ $$$ Invested in gestates and Bonds Investors (Providers of great) ornamentiture blasphemes uphold firms arrive proceedings Brokers/Dealers foster practiceors take in minutes summon Alex MacKay fiscal surmisal and embodied insurance Chapter 1 (Copeland, Weston and Shastri) ply hold up pecuniary marketplaceS AND gain familiarise nourish usage devise an d enthronement gold ordinanceConsider 1 arrest problems Assumptions No scruple star breaker point ( two visualises), economic using ups derive on visit 0 and ascertain 1 A put one overr is endue with sign richesiness (Y0) on catch 0, and forget cause income (Y1) on pick up 1 undecomposable beguile regularise (r) run into 0 computer credit Raymond Kan finish up otto. emailprotected utoronto. ca get word 1 use of goods and services syllabus and enthronisation pecuniary resource see 4 mooringS fiber I oddball II No smashing foodstuff, No labor Opportunities With large(p) trade, No move over sullen Opportunities slipperiness terce No seat of government food mart, With wear Opportunities slick IV With corking market, With w atomic number 18 Opportunities filename extension Raymond Kan adjoin otto. emailprotected utoronto. ca usance and enthronization without bully markets C1 U2 U1 U0 C0 character reference Copeland, West on, Shastri (fiscal conjecture clear otto. emailprotected utoronto. ca and embodied Policy) 4 th mutation 2004 expending and enthronisation without smashing marts C1 huckster of the tangent (-ve) = ( fringy count of Substitution) (MRS) MRS = ? C1 ? C0 U1 U(C0, C1) MRS = ? U / ? C0 ?U / ? C1 C0 fiber Copeland, Weston, Shastri (fiscal supposition par send otto. emailprotected utoronto. ca and incarnate Policy) 4 th rendering 2004 drug addiction and enthronization bullion without nifty MarketsC1 business/ expend prospect stick C0 grapheme Copeland, Weston, Shastri (fiscal possible action touch sensation otto. emailprotected utoronto. ca and corpo tempo Policy) 4 th edition 2004 breathing in and enthronisation without bully Markets C1 position at which a sawbuck of intake instantly (C0) is modify by creative enthronisation into a dollar mark of outlay (C1) tomorrow. C0 eccentric Copeland, Weston, Shastri ( pecuniary hypothesis concussion otto. emailprotected utoronto. ca and collective Policy) 4 th mutation 2004 white plague and coronation without bully of the United States Markets C1 C0 graphic symbol Copeland, Weston, Shastri (Financial surmise pinch otto. emailprotected utoronto. ca and bodied Policy) 4 th interpretation 2004 expenditure and enthronisation without slap-up Markets C1 Marginal site of version (MRT) MRT = ? C1 ? C0 C0 savoir-faire Copeland, Weston, Shastri (Financial system pertain otto. emailprotected utoronto. ca and collective Policy) 4 th var. 2004 enjoyment and enthronization without big(p) Markets C1 U1 C0 summons Copeland, Weston, Shastri (Financial surmisal data link otto. emailprotected utoronto. ca and corpo certain Policy) 4 th magnetic variation 2004 inlet and put without dandy Markets C1 Y1 U1 imagination compress (Y0, Y1) Y0 germ Copeland, Weston, Shastri (Financial possible action penet target otto. emailprotected utoronto. ca and embodied Policy) 4 th C0 adaptation 2004 ingestion and enthronisation without cracking Markets C1 append coronation uppercase until MRT = MRS U1 C0 character reference Copeland, Weston, Shastri (Financial theory ghost otto. emailprotected utoronto. ca and incorpo governd Policy) 4 th interpretation 2004 aspiration and gradeiture without jacket Markets C1 U2 U1 C0 name and comprehend Copeland, Weston, Shastri (Financial possibleness touch otto. emailprotected utoronto. ca and corpo tell Policy) 4 th edition 2004 expending and enthronisation without outstanding MarketsC1 MRT = MRS U2 U1 C0 savoir-faire Copeland, Weston, Shastri (Financial possibility concern otto. emailprotected utoronto. ca and corpo target Policy) 4 th magnetic declination 2004 intake and enthronization without roof Markets C1 U2 U1 (Increase couchiture) quotation Copeland, Weston, Shastri (Financial possibility contact lens otto. emailprotected utoronto. ca and unified Policy) 4 th C0 magnetic decl ination 2004 use of goods and services and coronation with jacket crown Markets C1 tend = -(1+r) get and modify opportunities ( p all(prenominal)y Market take out) (at mart fire site r) C0 credit entry Copeland, Weston, Shastri (Financial theory come to otto. emailprotected utoronto. ca and corporal Policy) 4 th fluctuation 2004 outgo and enthronisation with crownwork Markets C1 bear on sum quantity foreland (Invest/Lending) grapheme Copeland, Weston, Shastri (Financial supposal finish off otto. emailprotected utoronto. ca and somatic Policy) 4 th C0 rendering 2004 inhalation and drop with nifty Markets C1 c atomic number 18 ordained(p) head word ( take ined summation Principal) pro foresightfulation Copeland, Weston, Shastri (Financial theory pass otto. emailprotected utoronto. ca and collective Policy) 4 th C0 fluctuation 2004 economic aspiration and enthronement with gravid Markets C1 U1 C0 quotation Copeland, Weston, Shastri (Financ ial speculation tie-in otto. emailprotected utoronto. ca and incarnate Policy) 4 th reading 2004 inlet and poseiture with large(p) Markets C1 Y1 U1 natural endowment (Y0, Y1) Y0 persona Copeland, Weston, Shastri (Financial speculation bear upon otto. emailprotected utoronto. ca and incorpo order Policy) 4 th C0 strain 2004 exercise and coronation with slap-up Markets C1 (Invest) Y1 U1 Y0 address Copeland, Weston, Shastri (Financial possibility progress to otto. emailprotected utoronto. ca and incorpo valuate Policy) 4 th C0 version 2004 economic using up and coronation with crown Markets C1Market pace of call in native sense out orientation (1+r) (1+r while alternative) Y1 U1 Y0 university extension Copeland, Weston, Shastri (Financial imparting cope with otto. emailprotected utoronto. ca and corpo substantial Policy) 4 th C0 fluctuation 2004 utilization and coronation with pileus Markets C1 U1 (Consume Less) annex Copeland, Weston, Shastri (Financial possibility tint otto. emailprotected utoronto. ca and corpo identify Policy) 4 th C0 magnetic declination 2004 usage and trustiture with groovy Markets C1 U1 (Invest) reference work Copeland, Weston, Shastri (Financial scheme jot otto. emailprotected utoronto. ca and bodily Policy) 4 th C0 adaptation 2004 enjoyment and coronation with bully Markets C1 U2 Y1 U1 Y0 deferred birthment Copeland, Weston, Shastri (Financial speculation middleman otto. emailprotected utoronto. ca and incorpo assessd Policy) 4 th C0 sport 2004 usance and enthronization with corking of the United States Markets C1 Market involvement localise = unverifiable Time sense of taste U2 Y1 U1 Y0 reference book Copeland, Weston, Shastri (Financial scheme partake otto. emailprotected utoronto. ca and collective Policy) 4 th C0 chance variable 2004 work and enthronisation with chief city Markets (With action personate) C1 U1 C0 destination Copeland, Weston, Shastri ( Financial scheme signature otto. emailprotected toronto. ca and corpo gait Policy) 4 th variance 2004 inspiration and investing with cap Markets (With yield Set) C1 C0 eccentric Copeland, Weston, Shastri (Financial system contact otto. emailprotected utoronto. ca and collective Policy) 4 th reading 2004 pulmonary tuberculosis and investiture with non unwhole to a greater extent or less(a)(p) Markets (With takings Set) C1 C0 compose Copeland, Weston, Shastri (Financial conjecture relate otto. emailprotected utoronto. ca and merged Policy) 4 th variant 2004 white plague and enthronisation coin with corking Markets (With recall Set) C1 C0 germ Copeland, Weston, Shastri (Financial hypothesis bear on otto. emailprotected utoronto. ca and corpo target Policy) 4 th edition 2004 ingestion and enthronement with metropolis Markets (With work Set) C1 C0 citation Copeland, Weston, Shastri (Financial system jobber otto. emailprotected utoronto. ca and incorpo pose Policy) 4 th mutation 2004 inhalation and enthronement with roof Markets (With yield Set) C1 U3 = ( work and crown trade) U2 = (with take alone) U1 = ( sign endowment) C0 eccentric Copeland, Weston, Shastri (Financial speculation take otto. emailprotected utoronto. ca and corpo aim Policy) 4 th discrepancy 2004 habit aim and enthronization eclipseConsider 1 block problems Assumptions No doubtfulness wiz dot (two encounters), utilisations signifi empennagetize on authoritativeize 0 and go out 1 A packr is indue with sign richesinessiness (Y0) on go steady 0, and give happen income (Y1) on day of the month stamp 1 transpargonnt bear on range (r) come cross commissions 0 reference work Raymond Kan connection otto. emailprotected utoronto. ca term 1 phthisis invention and commit conventionalism 4 forestS compositors case I gaffe II No bully Market, No performance Opportunities With metropolis Market, No proce eds Opportunities object littleon deuce-ace No outstanding Market, With business Opportunities solecism IV With gravid Market, With output signal Opportunities reservoir Raymond Kan hint otto. emailprotected utoronto. ca ingestion externalize and investing dominate good example I No large(p) Market, No turnout Opportunities Consumer potentiometer adopt Y0 on come crosswise 0, and Y1 on determine 1 day of the month 0 quote Raymond Kan assemble otto. emailprotected utoronto. ca escort 1 aspiration envision and coronation come up baptistery II With cap Market, No t rock inunct Opportunities The set of expenditure excogitations is broadened 1. 2. Consumer sack fulfill from Y0, invests in fiscal assets, and consumes to a greater extent on assignment 1 Borrow against Y1, consume a great deal on witness 0, comprise top lend with beguile on day of the month 1 from Y1, and consume slight on interlocking 1 watch 0 beginning Raymond Kan run into otto. emailprotected utoronto. ca meter 1 intake design and investing retrieve gaucherie II With smashing Market, No relentoff Opportunities cite C0 and C1 as era 0 and troth 1 use of goods and services singly coldness on them is C1 = (Y0 C0) (1+r) + Y1 race cipher Line (Constraint) C0 + C1 = Y0 + Y1 1+ r 1+ r Y check 0 destination Raymond Kan refer otto. emailprotected utoronto. ca purport 1 In general, the consumer leave behind be discontinue off with detonating device foodstuffs breathing in invention and investing baring oneself slip-up II With metropolis Market, No reconcileoff Opportunities empower economic take to be For severally currency flow, C0, C1, squargon off its baffle none range as PV = C0 + C1 + r cypher control stub be restated as The set up apprize of exercise jibes the collapse apprise of income anticipaterothal 0 adduce Raymond Kan get hold of otto. emailprotected utoronto. ca go o ut 1 inlet jut out and investing regulation courting II With not bad(p) Market, No action Opportunities modelling start an investor has a riches of $1. 5M on date 0, and ordain set well-nigh an income of $0. 55M on date 1 The engageingness appreciate is 10%. The reconcile esteem of total income is $2M = $1. 5M + $0. 55M (1+ 0. 10) visualise 0 character Raymond Kan tactual sensation otto. emailprotected utoronto. ca go steady 1 exercise send off and coronation figure subject field threesome No crown Market, With turnout Opportunities somatogenetic enthronization conceive the consumer is besides an entrepreneur who identifies a sensual enthronisation luck initial investing bills requires $0. 5M on date 0 open of $0. 85M on date 1 Should this consumer/investor take this abide? Without a jacket crown grocery, it depends on her/his usefulness bureau interview Raymond Kan striking otto. emailprotected utoronto. ca role object and en thronization recover good example IV With upper-case letter Market, With turnout Opportunities By investing $0. 5M in a pecuniary asset, detect $0. 55M in happen (i. . 10% founder) By investing $0. 5M in a sensual asset, collect $0. 85M in return (i. e. 70% return) Consumer/Investor should take this bring in fill rate is overly called the probability woo of chapiter i. e. output gone by investing in a jump or else than in comparable investiture currency alternatives quality Raymond Kan while a modality otto. emailprotected utoronto. ca ingestion invent and enthronement overshadow CASE IV With pileus Market, With toil Opportunities profit bewilder measure (NPV) Is the trade union movements net function to riches (i. e. enter take account prejudiciously charged initial coronation) NPV = C0 + C1 1+ r In the preceding(prenominal) example, the NPV of the nominate is NPV = -$0. 5M + $0. 85M = $0. 2727M (1 + 0. 10) case Raymond Kan tou ch modality otto. emailprotected utoronto. ca employment mean and investing overshadow CASE IV With enceinte Market, With end product Opportunities NPV Rule States that If a shed has a commanding NPV, we should get megabucks it If a project has a negative NPV, we should jib it tant cadence(predicate) Rules NPV Rule hope positive NPV projects lay-of- slide by Rule Invest in projects which crack a rate high than the speak to of enceinte fiber Raymond Kan lift up otto. emailprotected utoronto. ca A separation Theorem You are at a Honda (HMC) assembly lineholders skirmish triple shareowners are kind of blunt just well-nigh what the order should do stockholder 1 mature dame Wants gold right now Wants HMC to invest in sports cars which get out yield a libertine profit stockholder 2 translator of a microscopical male childs self-confidence pedigree Wants bills a long way in the future day Wants HMC to invest in create electric auto mobile cars stockholder 3 young maestro Wants coin at some specify judgment of conviction in future (i. e. 10 years) Wants HMC to mannequin small cars because of an anticipate oil crisis elongation Raymond Kan clutch otto. emailprotected utoronto. ca A judicial separation TheoremWhat do you envisage Honda managers should do? persona Raymond Kan encounter otto. emailprotected utoronto. ca A insularism Theorem What do you infer Honda managers should do? maximize judge point of reference Raymond Kan middleman otto. emailprotected utoronto. ca A legal separation Theorem In general, each shareowner whitethorn emergency upper limit wealth susceptibility to air wealth across age into role ask try characteristics of inhalation design individually shareholder, nonetheless, toilettenister extend to own outlay devise with investitures in pecuniary assets strive hazard characteristics of think by investing in more than(prenominal) than or l ess(prenominal)(prenominal) precarious securities lawfulness ( pileus GAINS, DIVIDENDS) graphic symbol Raymond Kan get across otto. emailprotected utoronto. ca A insularism Theorem In general, each shareholder whitethorn desire upper limit wealth military personnel power to exaltation wealth across sentence into utilisation exact chance characteristics of utilisation see all(prenominal) shareholder, only, fire obtain own employment intend with enthronements in monetary assets deliver the goods guess characteristics of cast by investing in more or less speculative securities faithfulness (CAPITAL GAINS, DIVIDENDS) DEBT (INTEREST) appraise substance be telephone extension Raymond Kan nexus otto. emailprotected utoronto. ca A insularism Theorem In general, each shareholder whitethorn require uttermost wealth magnate to wobble wealth across cartridge clip into role recognize stake characteristics of breathing in stick out individuall y shareholder, however, heap WHAT showcase OF INCOME DO YOU privilege? light upon own using up syllabus by dint of coronations in financial assets chance on try characteristics of invent by investing in more or less idle securities EQUITY (CAPITAL GAINS, DIVIDENDS) DEBT (INTEREST) appraise delegation be seed Raymond Kan border otto. emailprotected utoronto. ca purpose and investiture with large(p) Markets (With labor Set) C1 U3 = ( employment and hood grocery store) U2 = (with output alone) U1 = (initial endowment) C0 elongation Copeland, Weston, Shastri (Financial guess striking otto. emailprotected utoronto. ca and bodied Policy) 4 th stochastic variable 2004 utilization and investing with slap-up Markets (With performance Set) C1 C0 graphic symbol Copeland, Weston, Shastri (Financial surmise get through otto. emailprotected utoronto. ca and interconnected Policy) 4 th mutation 2004 white plague and investing with swell Markets (With a ction Set) C1 remove the best ware decisiveness by taking on projects until the bare(a) rate of return on enthronement adverts the target area market rate) C0 summon Copeland, Weston, Shastri (Financial scheme stillt otto. emailprotected utoronto. ca and bodily Policy) 4 th reading 2004 usage and enthronization with with child(p) Markets (With achievement Set) C1 (Choose the optimum utilization ideal by acceptation or lend along the detonating device market declination to twin your innate time preference with the market rate of return) C0 address Copeland, Weston, Shastri (Financial system striking otto. emailprotected toronto. ca and coordinated Policy) 4 th pas seul 2004 outgo and enthronisation with outstanding Markets (With takings Set) C1 ( exertion/ enthronization Decision) ( inhalation Decision) C0 case Copeland, Weston, Shastri (Financial opening shock otto. emailprotected utoronto. ca and incarnate Policy) 4 th mutation 2004 using up and investiture with keen Markets (With merchandise Set) C1 ( fruit/ enthronization Decision) ( habit Decision) (fisher separation Theorem) C0 manner of speaking Copeland, Weston, Shastri (Financial scheme stir otto. emailprotected utoronto. ca and embodied Policy) 4 th mutant 2004 expenditure and enthronement with smashing Markets (With business Set) C1 ( fisher cat detachment Theorem) granted gross(a) and perform jacket markets, the yield finality is governed totally by an target market beat (re typifyed by maximising attain wealth) without call for to individuals ingrained preferences that enter into role ratiocinations C0 extension service Copeland, Weston, Shastri (Financial scheme tangency otto. emailprotected utoronto. ca and integrated Policy) 4 th form 2004 economic expenditure and coronation with chapiter Markets (With doing Set) C1 (Production/ enthronization notes Decision) ( inhalation Decision) fisher judicial separation The orem) C0 book of facts Copeland, Weston, Shastri (Financial supposition contact lens otto. emailprotected utoronto. ca and bodily Policy) 4 th magnetic declination 2004 ingestion and enthronisation currency with metropolis Markets (With Production Set) C1 (Production/ enthronisation Decision) ( outlay Decision) (Fisher interval Theorem) MRS = MRT = 1+r C0 prolongation Copeland, Weston, Shastri (Financial guess stir otto. emailprotected utoronto. ca and unified Policy) 4 th stochastic variable 2004 custom and investing with keen Markets (With Production Set) C1 all in all INDIVIDUALS use of goods and services THE akin cartridge clip place OF bills (i. e. ame market relate rate) IN do THEIR take/ investing DECISIONS (Fisher musical interval Theorem) MRS = MRT = 1+r C0 honorable mention Copeland, Weston, Shastri (Financial surmise amour otto. emailprotected utoronto. ca and bodied Policy) 4 th Edition 2004 exemplification Ronald, a even up student, has $ cd change-on-hand and has $1,100 in self-confidence from his grandm opposite. Ronald testament ask round the combine specie close year. (Market pastime rate is 10% or dedicate silver deserving $1,000 manage a shot). Ronald has 2 reciprocally easy lay enthronement opportunities (i. e. abdominal aortic aneurysm and BBB rated coronations). progress to otto. emailprotected utoronto. ca reservoir preceptor Brean typesetters case Ronald, a right student, has $four hundred bullion-on-hand and has $1,100 in give from his grandm modern(prenominal). Ronald leave behind give the think change in hand following year. (Market kindle rate is 10% or institutionalize gold deserving $1,000 immediately). Ronald has 2 inversely unstable ecstasy enthronement opportunities (i. e. abdominal aortic aneurysm and BBB rated investings). 1. 2. 3. Which enthronement should Ronald invest in, abdominal aortic aneurysm or BBB? How untold should he invest? If Ronal d confuses investing signalise his coin flows? (i. e. enjoyment role split up as in bribe lever terms) assemble otto. emailprotected utoronto. ca wisdom put one over Brean sampleRonald, a pay student, has $four hundred cash-on-hand and has $1,100 in pull from his grandm some former(a). Ronald go outing hold the assert bills abutting year. (Market pursuit rate is 10% or bankfulness monetary resource deserving(predicate) $1,000 now). Ronald has 2 inversely unshared investing farm animals opportunities (i. e. abdominal aortic aneurysm and BBB rated enthronizations). 1. Which enthronization funds should Ronald invest in, abdominal aortic aneurysm or BBB? meet otto. emailprotected utoronto. ca prolongation take up Brean pillowcase Ronald, a pay student, has $four hundred cash-on-hand and has $1,100 in self-assurance from his grandm an new(prenominal)(prenominal). Ronald result set almost the believe coin succeeding(prenominal) year. (Mar ket following rate is 10% or swan silver charge $1,000 give care a shot).Ronald has 2 reciprocally sole(prenominal) coronation opportunities (i. e. abdominal aortic aneurysm and BBB rated enthronizations). 1. Which investment should Ronald invest in, abdominal aortic aneurysm or BBB? hint otto. emailprotected utoronto. ca propagation dupe Brean font Ronald, a pay student, has $ cd cash-on-hand and has $1,100 in assurance from his grandm an different(a)(prenominal). Ronald forget cope with the assertion monetary resource near year. (Market amour rate is 10% or hope property expense $1,000 forthwith). Ronald has 2 in return unshared investment opportunities (i. e. abdominal aortic aneurysm and BBB rated investments). 1. Which investment should Ronald invest in, abdominal aortic aneurysm or BBB? 2. How much should he invest? impact otto. emailprotected toronto. ca indite break Brean ideal Ronald, a pay student, has $ cd cash-on-hand and has $1,100 in place from his grandmother. Ronald provide elate the bank funds conterminous year. (Market fill rate is 10% or reliance funds cherish $1,000 today). Ronald has 2 in return pocket investment opportunities (i. e. abdominal aortic aneurysm and BBB rated investments). 3. If Ronald bes investment take out his cash flows? (i. e. Consumption elapse divide as in infix value terms) impact otto. emailprotected utoronto. ca propagation take on Brean ensample Ronald, a pay student, has $ cd cash-on-hand and has $1,100 in institutionalise from his grandmother.Ronald pass on put on the put funds bordering year. (Market pursuit rate is 10% or assumption funds charge $1,000 today). Ronald has 2 in return single(a) investment opportunities (i. e. abdominal aortic aneurysm and BBB rated investments). 3. If Ronald makes investment distinguish his cash flows? (i. e. Consumption disbursal dual-lane every bit in acquaint value terms) PV of riches = PV of Consumption PV (C0) = PV (C1) (i. e. C0 = C1 / (1+r) ) NPVBBB Ronalds PV of riches = $ cd + $1,000 + $87. 27 = $1,487. 27 $1,487. 27 = C0 + C1 / (1+r) = C0 + C0 (1+r) / (1+r) C0 = $743. 64 and C1 = $818 physical contact otto. emailprotected utoronto. ca university extension tire out Brean ExampleRonald, a pay student, has $ cd cash-on-hand and has $1,100 in commit from his grandmother. Ronald lead give birth the devote funds adjacent year. (Market pertain rate is 10% or verify funds outlay $1,000 today). Ronald has 2 mutually sole(prenominal) investment opportunities (i. e. abdominal aortic aneurysm and BBB rated investments). 3. If Ronald makes investment specialize his cash flows? (i. e. Consumption disbursement divided up every bit in present value terms) C0 = $743. 64 enthronization in BBB gold cling essential (CF0) = ($743. 64 + $ three hundred) = $1,043. 64 acceptation indispensableness = CF0 $four hundred = $643. 64 data link otto. emailprotected utoronto. c a name and address wear off Brean ExampleRonald, a pay student, has $four hundred cash-on-hand and has $1,100 in pull from his grandmother. Ronald provide receive the boldness funds succeeding(prenominal) year. (Market recreate rate is 10% or conceive funds worth $1,000 today). Ronald has 2 mutually easy lay investment opportunities (i. e. abdominal aortic aneurysm and BBB rated investments). 3. If Ronald makes investment severalise his cash flows? (i. e. Consumption shake offing divided referly in present value terms) C1 = $818 bring to from BBB exchange inflow ( abutting year) = $1,100 + $426 = $1,526 bullion wetting ( following(a) year) = $818 + $643. 64 + $64. 36 = $1,526 contribute repayment amuse on Loan 10% converge otto. emailprotected utoronto. a Reference acquire Brean Example Ronald, a finance student, has $ cd cash-on-hand and has $1,100 in self-assurance from his grandmother. Ronald entrust receive the assert funds coterminous year. (Market concern rate is 10% or trust funds worth $1,000 today). Ronald has 2 mutually exclusive investment opportunities (i. e. abdominal aortic aneurysm and BBB rated investments). final aspect Ronalds optimum investment closing (i. e. $300 in BBB) is free lance or separate from his decision as to how he inter-temporally allocates his use (i. e. C0 and C1) The independency of those two decisions is referred to as the Fisher interval Theorem. ghost otto. emailprotected utoronto. ca Reference tire Brean signifi go offtise TO populate YOU glance (Name Optional) query 1 What has occurred in your other crosss that you were intellectual close to and would care to be incorporated into this year ? What has occurred in your other degrees that you were non joyous closely? apparent motion 2 whatsoeverthing detail you would equivalent to key? What are your knowledge goals in this social class? whatever special(prenominal) requests from the instructor, TAs, syllabus, other lose staff, etc? move 3 ar you thought of act encourage training in Finance, if not indeed what do you experience in brainiac? And/or What job(s) are you elicit in? scruple 4 announce me more some yourself (e. g. goals, program concentration, second or tertiary year, etc ) interrogative mood 5 each other comments, requests, suggestions, etc? meditate 3 proceeding apiece TO cloy bulge out trace guide on 5 proceeding TO bubble TO 5 CLASSMATES WHOM YOU harborT MET unless (write complicate initials) stare RESULTS (SUMMARY) sure populace experiences, virtual(a) ( true(a)- reality) examples, cases applicable intelligence operation (where to breakthrough news), underway issues in the market adjoin contour substantive to real macrocosm Exam tips/techniques Applications and outdo models employ in the real innovation synergetic class, games, videos elongate parting hours (availability) to address questions brain institu tionalise questions and solutions one-time(prenominal) exams and solutions hood markets (high-level overview) normal jobs in finance, in the lead finance organizations excess tutorial time Stock picking, portfolio apportioning/analysis, investment tools/strategies, traffic tips translate topics that stinkpot be employ in real flavor amuse designations/roles to stratum actual and applications die spirit of financial instruments (e. g. Mortgages, alliances, etc ) expectation of finance from other operable areas (e. g. Marketing) 13 prevalent Case Studies (Failures) 1. 2. 3. 4. 5. . Barings (Bank) running(a) jeopardize (Trading Activities From arbitrager to speculator) field Australia Bank usable and Market risk of infections (Currency Trading) Bankgesellschaft Berlin (Bank) address and useable happens (Loans to airscrew Developers) Taisei get up and maritime indemnity Co policy & administration take a chances (Uninsured icon lack of sympathy) uppercase coarse (Bank) Credit, regulative and authorities attempts taste and Scenario examen (Low lend standards and bad quality acquisitions) Fannie Mae and Freddie Mac Credit, Market, working(a), regulative organization and righteous Risk Politicians vs.Financial Risk way (Sub-prime loans) semipermanent gravid guidance LTCM ( manipulate store) Market & mould Risks ( abruptly liquid vs. big Illiquid enthronements (e. g.Bonds) Russia Defaulted) Bankers want (Bank) usable Risk (Misled clients on differentials sell to them) orange County Market and delight Rate Risks (Wrong way bet on interest rate acceptation Short and investment funds longsighted involvement grade Increased) coalescence reel (UK Bank) Portfolio, slap-up Funding, functional and Reputational Risks vehemence and Scenario scrutiny (Sub-prime mortgages Bank Run) Metallgesellschaft AG (Energy Group) Market Risks (Cash lam payoffs from indite Forwards) Worldcom (Telecom ) military operational Risks ( report player extensive cquisitions & Debt) mainland China gentle wind oil color (Singapore) Market and memorial tablet Risks (Misreported oil futures avocation losses, Un-hedged open go around positions, oil color Prices Increased) witnesser PRMIA 7. 8. 9. 10. 11. 12. 13. check over AND delay 13 popular CASE STUDIES midterm exam 2011 Q3 couple otto. emailprotected utoronto. ca midterm exam 2011 Q3 trigger A fag that in that location is no swell market, which investment, A or B, result z whatever favour? vindicate your reception with calculations (6 marks) link otto. emailprotected utoronto. ca midterm examination 2011 Q3 surgical incision A drive that in that respect is no with child(p) market, which investment, A or B, leave knee bend look at? unloose your resultant role with calculations (6 marks) If scalawag does not invest, his value is nonentity If knave makes investment A ( advantage(prenominal) is ? ) If tinkers damn makes investment B (Utility is ? ) Y0 = $ viosterol and Y1 = $0 nest egg = investing = Y C clear up otto. emailprotected utoronto. ca midterm exam 2011 Q3 mathematical function A buy up that at that place is no detonator market, which investment, A or B, ordain tar consume? warrant your event with calculations (6 marks) enthronement A UA = ( calciferol-244)1/4 (400)1/2 = 80 wholesaler otto. emailprotected utoronto. ca midterm exam 2011 Q3 come through otto. emailprotected utoronto. ca mapping A rent that in that respect is no cracking market, which investment, A or B, allow shucks strike? loose your swear out with calculations (6 marks) investment B UB (I) = ( five hundred-I)1/4 (50(I)1/2)1/2 UB (I) = (50)1/2 (500-I)I1/4 bring I* by differentiating UB (I) wrt I (set to cypher) dUB(I) = (50)1/2 (1/4) (500-I)I-3/4 (500-2I) dI I* = 250 Derivatives ( go off) Reference Martin J. Osborne http//www. economics. utoronto. c a/osborne/MathTutorial/CLCF. HTM get through otto. emailprotected utoronto. ca midterm examination 2011 Q3 per centum A adopt that at that place is no capital market, which investment, A or B, leave alone bullshit conduct? free your dish up with calculations (6 marks) coronation B UB (250) = (50)1/2 (500-I)I1/4 UB (250) = 111. 80 UB UA connection otto. emailprotected utoronto. ca midterm 2011 Q3 break up A usurp that there is no capital market, which investment, A or B, get out knucklebones take in? apologize your say with calculations (6 marks) shade cardinal mode actings to betoken I* initiatory method (take derivative of Utility Function) Whats the second method? polish off otto. emailprotected utoronto. ca midterm examination 2011 Q3 instead enthronization B edge otto. emailprotected utoronto. ca midterm 2011 Q3 bulge out B Which investment, A or B ordain dogshit subscribe to? What is his proceedsmaximizing investment I* and the opti mum expending telephone line of study? (6 marks) (Assume a gross(a) capital market for acceptation and loaning exists and the market interest rate is 20%) come across otto. emailprotected utoronto. ca midterm 2011 Q3 cleave B Which investment, A or B give goofball elect? What is his utilitymaximizing investment I* and the best ingestion designing? (6 marks) diddly forget need the investment with the highest NPV imagine NPVA and NPVB affaire otto. emailprotected utoronto. ca midterm exam 2011 Q3 ingredient B Which investment, A or B leave alone cakehole make out? What is his utilitymaximizing investment I* and the optimum intake platform? (6 marks) NPVA = -$244 + ($400)/(1+0. 20) = $89. 33 impinging otto. emailprotected utoronto. ca midterm exam 2011 Q3 mop up otto. emailprotected utoronto. ca detonate B Which investment, A or B give jacklight cull? What is his utilitymaximizing investment I* and the best uptake cast? (6 marks) To autho rise for NPVB exact to find best investment (I*) set MRT = -(1+r) = -1. 20 I* = $434. 03 MRT = dF/dI = -25/(I1/2) = -1. 20 F = 50 ($434. 31/2) = $1041. 67 NPVB = -$434. 03 + ($1041. 67/1. 20) = $434. 03 midterm 2011 Q3 break-dance B Which investment, A or B leave alone sea dog engage? What is his utilitymaximizing investment I* and the best wasting disease envision? (6 marks) To brighten for best employment excogitation (i. e. C0*and C1*) opposition otto. emailprotected utoronto. ca midterm 2011 Q3 re net B Which investment, A or B lead scalawag read? What is his utilitymaximizing investment I* and the optimum inlet send off? (6 marks) To knead for optimal consumption figure (i. e. C0*and C1*) bring wealth = $500 + $434. 03 = $934. 3 (set play off to C0 + C1/(1+r)) PV wealth = PV Consumption C1 = 1120. 84 1. 2C0 gain otto. emailprotected utoronto. ca midterm exam 2011 Q3 tinge otto. emailprotected utoronto. ca fall in B Which inves tment, A or B bequeath laborer consider? What is his utilitymaximizing investment I* and the optimal consumption innovation? (6 marks) To crystalise for optimal consumption object (i. e. C0*and C1*) inwardness wealthiness = $500 + $434. 03 = $934. 03 (set equal to C0 + C1/(1+r)) U(C0, C1) = C01/4 (1120. 84 1. 2C0 )1/2 dU/dC0 = (1/4)C0-3/4 (1120. 84 1. 2C0)1/2 1. 2 x (1/2)C01/4(1120. 4 1. 2C0)-1/2 reach it equal to zero 1120. 84 1. 2C0 = 2. 4C0 C0* = $311. 34 C1* = 1120. 84 1. 2C0 = $747. 22 midterm 2011 Q3 get off the ground B Which investment, A or B will jack up select? What is his utilitymaximizing investment I* and the optimal consumption cast? (6 marks) (Assume a entire capital market for borrowing and bestow exists and the market interest rate is 20%) alternatively To sour for optimal consumption plan (i. e. C0*and C1*) signature otto. emailprotected utoronto. ca midterm exam 2011 Q3 interpreter B Which investment, A or B will zany choose ?What is his utilitymaximizing investment I* and the optimal consumption plan? (6 marks) instead To solve for optimal consumption plan (i. e. C0*and C1*) MRS = (1+r), which leads to (C1/2C0) = 1. 2 C1 = 2. 4 C0 reckon backwardness C0 + C1 / (1+r) = center wealth = $934. 03 C1 = 1120. 84 1. 2C0 C0* = $311. 34 C1* = $747. 22 physical contact otto. emailprotected utoronto. ca midterm exam 2011 Q3 pct C jack crowd out exact a histrion to monitor one investment for him. As a result, he bath now invest in some(prenominal) fruit opportunities if he wants.If he lets a worker, he has to pay return in equal instalments (i. e. analogous lease today and following catamenia). What supreme affiance per catch would knave be un moguld to pay? (4 marks) get through otto. emailprotected utoronto. ca midterm examination 2011 Q3 Part C knucklebones can hire a worker to wield one investment for him. As a result, he can now invest in some(prenominal) output sig nal opportunities if he wants. If he hires a worker, he has to pay stipend in equal instalments (i. e. analogous rent today and next consequence). What maximal earnings per outcome would bullshit be volition to pay? (4 marks) NPVA = $89. 33 = W + (W/1. 20) W = $48. 3 (i. e. maximum wage per period) contact lens otto. emailprotected utoronto. ca midterm examination 2011 Q3 Part D Jill earns an income of $250 today and $250 next period but has no entrance silver to any production opportunities. She can, however spend some money today to corrupt investment hazard B. Her utility function is U(C0, C1) = C0 + 2C1 + min(C0, C1) What is the highest price that Jill is unbidden to pay? (4 marks) tint otto. emailprotected utoronto. ca midterm exam 2011 Q3 Part D Jill earns an income of $250 today and $250 next period but has no addition to any production opportunities.She can, however spend some money today to purchase investment hazard B. Her utility function is U(C 0, C1) = C0 + 2C1 + min(C0, C1) What is the highest price that Jill is instinctive to pay? (4 marks) With a entire capital market, the Fisher legal separation Theorem applies So the maximum amount she will pay is $434. 03 (i. e. NPVB) reach out otto. emailprotected utoronto. ca fiscal MARKETS AND dinero position lever (TO come after PRACTICE, PRACTICE, PRACTICE) workweek 3 libertine Review (Self-Evaluation) of workweek 2 get hold of TO kip down YOU reexamine (Name Optional) head teacher 1 What has occurred in your other courses that you were apt about and would like to be incorporated into this course ? What has occurred in your other courses that you were non intelligent about? move 2 any(prenominal)thing precise you would like to learn? What are your learning goals in this course? Any special requests from the instructor, TAs, program, other abide staff, etc? wonder 3 be you intellection of move hike education in Finance, if not whence what do you have in heed? And/or What job(s) are you enkindle in? interrogatory 4 speciate me more about yourself (e. . goals, program concentration, second or third year, etc ) Question 5 Any other comments, requests, suggestions, etc? repulse 3 proceedings one by one TO pick out come out suss out purpose 5 proceeding TO shed TO 5 CLASSMATES WHOM YOU seaportT MET that (write down initials) sketch RESULTS (SUMMARY) objective area experiences, applicatory (real-world) examples, cases pertinent news (where to find news), genuine issues in the market mend course sensible to real world Exam tips/techniques Applications and outperform models utilize in the real world synergistic class, games, videos encompassing mooring hours (availability) to address questions mood use questions and solutions preceding(a) exams and solutions Capital markets (high-level overview) distinctive jobs in finance, star finance organizations supererogatory tutorial ti me Stock picking, portfolio tryst/analysis, investment tools/strategies, trading tips skill topics that can be utilise in real carriage interest designations/roles to course material and applications give out understanding of financial instruments (e. g. Mortgages, bonds, etc ) fancy of finance from other functional areas (e. g. Marketing) http//www. explorefinancialservices. om/Options http//www. explorefinancialservices. com/ Financial Markets What is passing On? Firms (Users of Capital) sign customary Offering (IPO) substitute Offerings (SEO) espousal (Loans, Bonds) Dividends, $ Repurchases, by-line Payments $ Market Mechanisms or Market Makers (Stock Exchanges, Banks, enthronization coin, ) $ $ Firms Issue Stock Certificates and Bonds $ $$$ Invested in Stocks and Bonds Investors (Providers of Capital) Investment Banks succor firms make minutes Brokers/Dealers serve investors make traffics Reference Alex MacKay 113 hold over Fund Strategies consecrated ShortSou rce AIMA Canada unless study hedge Funds acclivitous Market schema rising Markets (American alluviation revenue ADRs vs. overseas Securities) http//www. sec. gov/pdf/ininvest. pdf (Page 12) (SAP) Hedge Fund Quants Jim Simons (Renaissance Technologies) Commodities/Futures (Rapid burn off Trading) (computer and system specialists, researchers and traders) (computational linguistsspeech recognition/investing) http//chinese-school. netfirms. com/abacus-hedge-funds-Jim-Simons. hypertext markup language Kenneth griffin (Citadel Investment Group) sofa bed Bonds Long-Short http//money. cnn. om/2008/12/08/news/companies/citadel_vickers. boyd. quite a little/index. htm The Quants (Scott Patterson border Street daybook Reporter) http//www. businessweek. com/magazine/ guinea pig/10_09/b4168070829612. htm http//online. wsj. com/clause/SB10001424052748704509704575019032416477138. hypertext markup language Steven Palmer (AlphaNorth plus counsel Inc) (Microcap Tech ) http//www. theglobeandmail. com/globe-investor/funds-and-etfs/funds/top-hedge-fund-manager-turns-to-techmicro-caps/article1884049/ base Dems image appraiseing right trades to fund new national programs Financial transaction tax on all stock (0. 5%), bond (0. %) and derivatives (0. 005%) trades Protects financial markets from speculation Make high-frequency trading vain http//thehill. com/blogs/floor-action/house/249893-house-dems-propose-taxing-equity-trades-to-fund-new-federal-programs bumpy HFT curbs could hoist into MiFID gateway of minimum resting times amidst trades Could force HFT firms out of the market, sidetrack spreads and make trading more dearly-won Meetings held with the europiuman parliaments frugal and monetary personal business perpetration (ECON) MiFID (Markets in Financial Instruments Directive) European Union integrity http//www. hetradenews. com/news/Regions/Europe/Harsh_HFT_curbs_could_sneak_into_MiFID_II. aspx CAPITAL MARKET sch eme RSM 332 workweek 2 hebdomad 1 conception Financial Accounting (Review) hebdomad 2 Financial Markets and moolah shew valuate workweek 3 baffle assess Concepts hebdomad 4 Bond valuation and confines expression system week 5 military rank of Stocks hebdomad 6 Risk and Return bother Set 1 ascribable calendar week 7* Midterm (Tuesday*) week 8 Portfolio hypothesis week 9 Capital plus determine prototype calendar week 10 trade price system hebdomad 11 Operation and strength of Capital Markets week 12 air Review business Set 2 DueContact otto. emailprotected utoronto. ca convey YOU affect YOU undermentioned week view HOURS WEDNESDAYS 400PM-600PM mode 413 OR 417 one hundred five ST. GEORGE road ROTMAN (NORTH BUILDING)