Summary: Principles Of Asset Trading

Read the summary and the most important questions on Principles of asset trading

• Lecture 1

  This is a preview. There are 3 more flashcards available for chapter 09/09/2015
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• By asset trading, you can create the following types of cash flows

  • Deterministic cash flows: amount known in advance
  • Stochastic cash flow: occurring on a stochastic point in time (risk)

• Two ways to determine whether to start a project or not

  • NPV rule: NPV should be positive 
  • RoR rule: Rate of Return should exceed the opportunity cost of capital

  
  
  (these two rules are equivalent)

• Lecture 2

  This is a preview. There are 5 more flashcards available for chapter 16/09/2015
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• Formula for the market price of this bond

  Market price is PV of the coupons + nominal value

• Lecture 3

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• You have to pay ... for a loan that starts at the end of year 1 and stops at the end of year 2

  The forward rate is defined by this formula. So, if you want to invest your money for 2 years, you better put it in the two years fixed spot rate, if you view is that the next year the 1 year spot rate will be below the calculated forward rate.

• Lecture 6

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• Markowitz model: explain the graph..

  The left border is the minimal variance set, also known as the efficient frontier. 
  Investors are greedy: they want for a given risk the highest rate of return.

• One fund theorem. Explain the diagram..

  
  
  In the diagram, a straight line leaves the point (0,rf) to every feasible risky portfolio. The feasible set becomes triangular. This picture is an example of a triangular feasible set of saving money (green) and borrowing money (red). In this picture you're always long the risky portfolio. 

• The one fund theorem:

  There exists one fund F, such that every efficient portfolio can be duplicated by a combination of the risk-free asset and the risky fund F.

• Beta in the CAPM model can be interpreted as..

  The normalized covariance of the individual asset with the market. 
  Then the expected excess-return of asset i is proportional to the covariance of the asset with the market. 

• Lecture 7

  This is a preview. There are 5 more flashcards available for chapter 21/10/2015
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• What is a Venture capitalist and how do you get him/her on board

  The venture capitalist is an early stage investor. 
  In order to get a venture capitalist on board you typically need a business plan. It is not too easy to onboard a Venture Capitalist and off course he wants something in return for his investment (stake in the company)

• You use an auction to determine the issue price (typically for bonds). A and B will get the bonds, but the question is for what price?In case of the uniform price?In case of the discriminatory price?What type of auction would give the seller the best price?

  • Uniform price: everybody is charged at the same price, in this case both at a price of 1000.
    
  • Discriminatory price: everybody pays his own price, so A pays 1020 and B 1000. 
    

  
  The uniform price auction protects the bidders against overbidding, resulting in higher average bid prices and therefore higher auction proceeds.