Part 2:  Portfolio Analysis and the Capital Asset Pricing Model

Chapter 8
What is risk?

Risk characteristics of financial assets
Time horizons and risk—a safe security can be risky
Risk in stock prices—McDonald’s example
Advanced:  Using continuously compound returns to
            compute annualized return statistics

Excel functions:  Sqrt, Average, Stdevp, Varp, Frequency, Count, Ln

PPT for Chapter 8

Chapter 9
Statistics for portfolios

Basics:  Mean, standard deviation, covariance, correlation
Covariance and correlation
Portfolio mean and variance for two-asset portfolio
Using regressions
Advanced:  Portfolio statistics for multiple assets

Excel functions:  Average, Var, Varp, Stdev, Stdevp, Covar, Correl, Trendlines, Slope, Intercept, Rsq

PPT for Chapter 9

Chapter 10
Portfolio returns and the efficient frontier

Advantage of diversification
Kellogg and Exxon—a real-world example
Graphing portfolio returns
Efficient frontier and minimum variance portfolio
Correlation and the efficient frontier

Excel functions:  Average, Varp, Stdevp, Regression, Solver

PPT for Chapter 10

Chapter 11
Capital asset pricing model and the security market line

Risky portfolios and the riskless asset
Exploring optimal investment combinations
Sharpe ratio and the market portfolio
The security market line (SML)

Excel functions:  Varp, Stdevp, Sqrt, Solver

PPT for Chapter 11

Chapter 12
Using the security market line to measure investment performance

Jack and Jill’s investment argument
Measuring the investment performance of
            Fidelity’s Magellan Fund
Aggressive versus defensive stocks
Diversification pays
What does academic research tell us about
            investment performance?

Excel functions:  Average, Stdevp, Varp, Covar, Intercept, Slope, Rsq, Trendline

PPT for Chapter 12

Chapter 13
Security market line and cost of capital

CAPM and cost of equity
Using the SML to compute the cost of equity
Worked out example:  Hilton Hotels
Computing the weighted average cost of capital (WACC) using an asset beta

PPT for Chapter 13

Additional problems

Excel with answers