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R (W I) /I E R Ae (X) +be (Y) Var R A Var (X) +B Var (Y) +2 Abcov (Xy) Cov (Xy) E (X E (X) Y E (Y) W A+B W

1. The Fisher separation theorem states that with perfect capital markets, production decisions are governed solely by objective market criteria without considering individual preferences, which affect consumption decisions. 2. Utility theory with uncertainty examines first-order and second-order stochastic dominance. First-order dominance requires greater wealth in any state of nature. Second-order dominance requires lower risk and dispersion, equivalent to maximizing expected utility for risk-averse investors. 3. Mean-variance portfolio theory analyzes portfolio risk and return using equations such as the budget constraint and factors that determine security prices like time preferences and probabilities associated with states of nature.

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Marta Barradas
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51 views1 page

R (W I) /I E R Ae (X) +be (Y) Var R A Var (X) +B Var (Y) +2 Abcov (Xy) Cov (Xy) E (X E (X) Y E (Y) W A+B W

1. The Fisher separation theorem states that with perfect capital markets, production decisions are governed solely by objective market criteria without considering individual preferences, which affect consumption decisions. 2. Utility theory with uncertainty examines first-order and second-order stochastic dominance. First-order dominance requires greater wealth in any state of nature. Second-order dominance requires lower risk and dispersion, equivalent to maximizing expected utility for risk-averse investors. 3. Mean-variance portfolio theory analyzes portfolio risk and return using equations such as the budget constraint and factors that determine security prices like time preferences and probabilities associated with states of nature.

Uploaded by

Marta Barradas
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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1 - Consumption, investment & capital markets

- Fisher separation theorem - with perfect and complete


capital markets, the production decision is governed solely
by an objective market criterion without considering
individuals preferences (which affect their consumption
decisions).
- Transactions Cost (Borrowing and lending rates different)

3 - State preference theory

2 - Utility theory with uncertainty

Firts Order Stochastic Dominance- Para um activo dominar


estocasticamente outro o individuo ter de receber maior riqueza em
qualquer state of nature ou menor Var e maior mdia. As funes
comulativas no se podem cruzar.
Second Order Stochastic Dominance- Oferecer menor risco (menor
disperso) Second order stochastic dominance is equivalent to
maximizing expected utility for risk averse investors e ter Utilidade
marginal positive, ambas as funes so concavas.

4 - Mean-variance portfolio theory


Risk free rate of interest

r=(wi)/i

w- end f period w & i- initial investement

Portfolio risk & return

E ( R p ) =aE ( X ) +bE ( Y )

Budget constrain (BC)

w 2=a+b w1

Escrevauma equao aqui .


- risk-free w1=w2
Factors that determine price of pure securitys
- time preferences for consumption and productivity of
capital
- probabilities associated with each state of nature
- individuals .attitudes towards risk
6 - Efficient Capital markets
(Fama) weak-form efficiency (past information useless); semistrong (publicly information useless); strong (all information
useless public or not)/ Information used by investors nave
hypothesis asset prices are arbitrary and unrelated to future
payoffs; speculative equilibrium hypothesis: asset prices
determined by investors attempts to anticipate other investors
behavior; intrinsic value hypothesis: prices determined by
individual estimates of asset payoffs/ info acquisition is costly: 2
strategies random asset selection and with analysis (gives higher
returns but has more costs) fund managers give more return but
have more cost. In average is the same result.
What is relevant information? market value of a firm is the
present value of future cash flows discounted at the appropriate
risk-adjusted rate investors should consider relevant any info that
affects future cash-flows inconclusive (some patterns observed,
others not). Usefulness of annual reports use nave model to
predict results. Compare to results obtained from reports (if better
than expected positive abnormally high results or vice-versa);
most adjustments take place before the report is released;
quarterly earnings and dividends - contains more information, but
appear with dividends changes (both affect stock prices speed is
5 15 minutes after disclosure; block trades affect prices through
prices (of the traded block) or information effect (why is it
happening). There are abnormal returns immediately after de BT
(which became public) and prices have to adjust (semi-strong)after 15 minutes no more profitability opportunities; semi strong
form anomalies OPA (19% abnormal return at the end of first
trading day negative in the long run after 3years) since prices are
below the fair value of the security; stock splits (positive abnormal
returns before the split due to selection bias: split because their
value have increased with higher returns- expectation of future
higher dividends; investor surveys investment advisory services
use indicators to evaluate stocks (price-earnings ratio, changes in
dividends..) most of these use past data to try to predict. Using the
Value Line Investor Survey which rank securities in performance
group shows that portfolios composed of long positions
(compradora) in the top performing group. Share repurchases

Var ( R p )=a2 Var ( x )+ b2 Var ( y ) +2 abCov ( xy )


Cov ( xy )=E ( ( xE ( x ) )( y E ( y ) ))
- efficient set locus of all risky assets combinations which
offer the highest return for a given risk / opportunity set is
the locus of all risky assets combinations which offer the
lowest risk for a given return
Minimum variance opportunity - locus of risk and return
combinations offered by portfolios of risky assets which yield
the minimum variance for a given return

var ( x ) +Var ( y ) 2 cov (xy)


Var ( x )Cov (xy)/

a =
2 risky assets:
-The efficient set is the increasing segment of the above
minimum variance opportunity set/ the decreasing is
stochastically dominated by the increasing
1 risky & 1 risk free
2

E ( R p ) =aE ( x )+ (1a ) r f Var ( R p ) =a Var ( x)


Minimum variance opportunity set is linear
Many risky
N

E ( R p ) = wi E ( Ri ) Var ( R p )= wi w j ij
1=1

Equilibrium with N risky + 1 risky


V-value of portofolio

w i=V i / V i

- Capital market line

E ( R p ) =r f +(E ( Rm ) r f )/ (Rm ) (R p)
If investors have homogeneous beliefs, than they all have the same
linear efficiency set Is the market price of risk (MPR)

Portfolio diversification
Relatively straightforward to demonstrate that as N increases, the
portfolio variance decreases and approaches the average covariance.
Important result because it immediately indicates that the crucial
element in risk is not an individual assets variance but instead its
covariance with other assets.

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