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Questions and Answers
What is the essential part of a career in finance that involves analyzing security investments?
What is the essential part of a career in finance that involves analyzing security investments?
Making good investment decisions is not important for retirement planning.
Making good investment decisions is not important for retirement planning.
False
Name one of the course topics covered on 31/10.
Name one of the course topics covered on 31/10.
Market Efficiency and Behavioral Finance
The main goal of managing investments is to increase _______.
The main goal of managing investments is to increase _______.
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Match the following career roles in finance with their functions:
Match the following career roles in finance with their functions:
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Realized return is always the same as expected return.
Realized return is always the same as expected return.
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What is the term for the uncertainty about the actual return that will be earned on an investment?
What is the term for the uncertainty about the actual return that will be earned on an investment?
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Investors are risk averse, meaning they dislike risk unless they are _________ for it.
Investors are risk averse, meaning they dislike risk unless they are _________ for it.
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Match the following terms with their definitions:
Match the following terms with their definitions:
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Every level of expected return can be attained regardless of risk.
Every level of expected return can be attained regardless of risk.
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Identify the rule that implies investors cannot earn a return without taking on risk.
Identify the rule that implies investors cannot earn a return without taking on risk.
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What is generally true about individual stocks compared to stock indices?
What is generally true about individual stocks compared to stock indices?
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Bond indices generally fluctuate more than stock indices.
Bond indices generally fluctuate more than stock indices.
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What is the primary reason for investing?
What is the primary reason for investing?
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The two basic concepts in finance discussed are return and __________.
The two basic concepts in finance discussed are return and __________.
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Match the concepts with their description:
Match the concepts with their description:
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Which of the following concepts is most associated with holding a variety of investments?
Which of the following concepts is most associated with holding a variety of investments?
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Higher returns are typically associated with higher risks.
Higher returns are typically associated with higher risks.
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Name one benefit of investing in bond indices compared to stock indices.
Name one benefit of investing in bond indices compared to stock indices.
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What is the primary role of financial markets?
What is the primary role of financial markets?
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Secondary markets involve initial transactions between issuers and investors.
Secondary markets involve initial transactions between issuers and investors.
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What is an IPO?
What is an IPO?
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Financial markets allow for the transfer of __________ to the future.
Financial markets allow for the transfer of __________ to the future.
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What is a characteristic of primary markets?
What is a characteristic of primary markets?
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Investment opportunities in IPOs have been consistently positive in the long term since 1980.
Investment opportunities in IPOs have been consistently positive in the long term since 1980.
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What assists firms and government in raising needed funds?
What assists firms and government in raising needed funds?
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Which asset classes were included in the historical record from 1980 to 2021?
Which asset classes were included in the historical record from 1980 to 2021?
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The MSCI US Stock Market consistently outperformed the German LT Government Bonds from 1980 to 2021.
The MSCI US Stock Market consistently outperformed the German LT Government Bonds from 1980 to 2021.
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What is the time range covered by the historical record presented?
What is the time range covered by the historical record presented?
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From the historical record, the realized returns for German ST Government Bonds were _____ than that of inflation.
From the historical record, the realized returns for German ST Government Bonds were _____ than that of inflation.
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Match the following asset classes to their risk-return characteristics as indicated in the historical record:
Match the following asset classes to their risk-return characteristics as indicated in the historical record:
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During the period from 1999 to 2011, which asset class shows a consistent risk-return trade-off?
During the period from 1999 to 2011, which asset class shows a consistent risk-return trade-off?
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The diagram indicates that returns were calculated without including dividends and coupons.
The diagram indicates that returns were calculated without including dividends and coupons.
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What trend were the MSCI US Stock Market and MSCI Europe Stock Market returns expected to follow?
What trend were the MSCI US Stock Market and MSCI Europe Stock Market returns expected to follow?
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The risk-return trade-off suggests that as _____ increases, expected returns also increase.
The risk-return trade-off suggests that as _____ increases, expected returns also increase.
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What was the peak year for realized returns in the MSCI US Stock Market according to the historical record?
What was the peak year for realized returns in the MSCI US Stock Market according to the historical record?
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What does a maintenance margin of 30% indicate?
What does a maintenance margin of 30% indicate?
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Short-selling is more likely to be attacked during periods of financial stability.
Short-selling is more likely to be attacked during periods of financial stability.
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What are the two main types of investing discussed in the overview?
What are the two main types of investing discussed in the overview?
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The course covers _____ theories related to return and risk.
The course covers _____ theories related to return and risk.
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Which topic focuses on how markets respond to new information?
Which topic focuses on how markets respond to new information?
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Match the following course topics with their descriptions:
Match the following course topics with their descriptions:
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The CAPM model is solely designed for bond markets.
The CAPM model is solely designed for bond markets.
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What is the primary focus of the course session on Bond Valuation?
What is the primary focus of the course session on Bond Valuation?
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Study Notes
Investment Analysis and Portfolio Management
- This course covers investment analysis and portfolio management.
- The introduction discusses general concepts and investment processes.
Some Practical Information
- Lecturer: Koen Inghelbrecht
- Lectures: Thursdays, 8:30 AM - 12:30 PM, Auditorium C - Hein Picard
- Questions: Ask before, during, or after lectures, or use Wooclap.
- Exercises: Integrated into lectures and self-study.
- Practical Sessions: Video lectures using Excel.
- Ufora/Connect: Slides, articles, exercises, multiple-choice questions, data, groups, reports, and video lectures; Ufora: https://ufora.ugent.be/; Connect: https://connect.mheducation.com/class/iapm-lectures-2024-2025
Course Material
- Textbook: Bodie, Kane, and Marcus, 2024, Essentials of Investments, 12th Edition, McGraw-Hill (ISBN: 978-1-266-88538-9)
- Additional Materials: Slides, scientific articles, and news articles (Ufora)
- Exercises: Open exercises and multiple-choice questions (Connect)
- Video Material: Available through Ufora
- Assignments: In groups
- Exam: Open questions and multiple-choice questions
Connect
- URL: https://connect.mheducation.com/class/iapm-lectures-2024-2025
- How to Register and Pay: Follow the steps on the provided Connect URL, accessing the platform using a university email address and password to purchase an e-book for 30 euros + VAT or get a 50% discount on the print copy from within Connect
Multiple Choice Questions
- Connect: https://connect.mheducation.com/class/iapm-lectures-2024-2025
-
Wooclap: Used during lectures; Use smartphone, tablet, or PC; Answer questions anonymously; Use messages (Wall) to ask questions.
- How to access Wooclap: app.wooclap.com/IAPM1 (Topic 1), app.wooclap.com/lAPM2 (Topic 2), etc.
- Questions: Examples include experiences in investing (actively in stocks, passively in mutual funds/ETFs/pensions) or preferences in investment assets like cash, Government bonds, Corporate bonds, Individual stocks, Mutual funds/ETFs, Real estate, Gold, Bitcoin, Other
Group Assignment
- Assignment: Analyze different asset classes; construct, motivate, and evaluate optimal risky portfolios using asset allocation strategy; The report should not exceed 6 pages (including tables and figures).
- Details: In lecture on 14/11
- Deadline: 06/12
- Teams: 5 students per team.
- Evaluation: Based on criteria and peer evaluation after completion
Assessment
- Written Exam: 70%
- Group Report: 30% (includes peer evaluation)
- Important Notes: Pass the written exam to pass the course. If the weighted average of the written exam and the assignment is 10/20 or higher, but the written exam grade is failing, the resulting course grade will be lowered to 9/20. Retake option available in the first term.
Goals
- Learn to invest directly and indirectly.
- Understand risk-return trade-offs in financial markets
- Learn to determine price, expected return, and risk of a financial asset.
- Learn to construct portfolios and diversify funds.
- Evaluate investments and strategies.
Why Study Investments?
- Most individuals make investment decisions to manage and increase wealth.
- Sound decision-making is critical for retirement planning.
- Example figures shown of investment returns over specific periods under sample return percentages
- Careers involve roles like security analysis, portfolio management, stockbrokers, or financial advisors/planners.
Overview Course Topics
- Introduction: General Concepts and Investment Process (26/09)
- Investing Direct and Indirect (03/10)
- Return and Risk, and Portfolio Theory (10/10)
- Efficient Diversification (17/10)
- CAPM and Multifactor Models (24/10)
- Market Efficiency and Behavioral Finance (31/10)
- Equity Valuation (07/11)
- Bond Valuation and Bond Portfolio Management (14/11)
- Portfolio Performance Evaluation (21/11)
- Investing using Derivatives (28/12)
- Applied Portfolio Management (Guest Lecture) (05/12 or 12/12)
Agenda Topic 1
- Introduction
- Basic concepts
- Return and risk trade-off
- Efficient markets
- Pricing of assets
- Diversification
- Types of investments
- Investment process
- Investment decisions
- Investment management
- Factors affecting investment decisions
- Players in the financial markets
- Role of financial markets (primary vs. secondary)
- Price-contingent orders, buying on margin, and short sales
References Topic 1
- Required Reading: Bodie, Kane and Marcus, 2024, Essentials of Investments, Chapter 1, Sections 1.1 to 1.6; Bodie, Kane and Marcus, 2024, Essentials of Investments, Chapter 3, Section 3.1 to 3.9
- Background Reading: Jones, 2010, Investments: Principles and Concepts, Chapter 1
- Additional Resources: Refinitiv/LSEG Datastream
Glossary of Terms
- Ex Ante: Before the event or fact; expected
- Ex Post: After the event or fact; realized
- Risk Aversion: Dislike of risk, unless compensated for.
- Efficient Markets: Markets that reflect all information.
- Efficient Market Hypothesis (EMH): Asset prices fully reflect all available information.
- Passive Management: Mimicking market indexes; least risk.
- Active Management: Seeking opportunities above market returns; higher risk.
Two Basic Concepts: Return and Risk
- Return: Earned from investment. Holding cash has an opportunity cost.
- Expected Return: Anticipated return in a future period.
- Realized Return: Actual return in a past period. Realized return is not always expected!
- Risk: The possibility that the realized return will differ from the expected return. Uncertainty about future returns characterizes investment.
Multiple Choice Question: Risk-Return Trade-Off
- Riskier assets generally have higher expected returns than lower-risk assets.
Trade-off between Risk and Return
- How to earn return
- No-free-lunch rule: You need to assume risk to earn a return above risk-free rate.
- Investors are risk averse
- Underlying investment decisions: A trade-off between expected return and risk.
- Investment horizon and risk tolerance influence risk levels.
Efficient Markets
- Two types of expected returns
- E(r): Expected return based on fundamental information.
- Required r: A return required as compensation for risk
- If markets are efficient, the expected return equals the required return for the asset. No bargains (no-free-lunch). What happens when E(r) > required r?.
- Implications for efficient market hypothesis (EMH): All information is reflected in asset prices immediately; no excess returns are available. Return you get/expect is compensation for risk. Not possible to consistently outperform the market. Passive is preferred over active.
Pricing of Assets
- Present value model (for stocks)
- Fair price (V)
- Market price (P)
- If markets are efficient, P=V (fair price)
Diversification
- Holding different assets in your portfolio is likely to decrease your portfolio risk.
Types of Investments
- Nature of investment: Reduce current consumption for higher future consumption.
- Real Assets vs Financial Assets.
- Tangible assets
- Claims on assets
- Direct vs. Indirect financial investments; Individual vs Pools of assets
Financial Assets
- Common Stock (Ownership stake in entity, residual cash flow)
- Derivative securities
- Fixed Income securities
Investment Process
-
Define investment process- (individual/institutional investors; what marketable securities to invest in, how extensive the investments should be, when the investments should be made).
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Five step process
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Set investment policy - Identify investor's goals, Determine investable wealth, State return, risk objectives and identify potential investment categories.
-
Investment Policy: (Mission statement, long-term financial goals, risk tolerance)
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Asset allocation: Choice among broad asset classes: money, stocks, bonds, real estate, commodities, derivatives; Top-Down
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Security selection: Choice of particular securities within each asset class; Bottom-up
-
Additional step Process: - Perform security analysis and valuation
- Understand security characteristics and factors affecting them.
- Next, apply valuation model to determine current market price against fair value.
- Identify undervalued securities.
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Revise a portfolio: When and how to revise a portfolio; Periodically repeat step 3 when necessary; increase/decrease existing securities or add or delete securities.
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Evaluate performance: How to measure portfolio performance; involves determining performance against risk and return; appropriate measures of risk and return.
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Description
Test your knowledge of essential concepts in finance, including investment analysis, risk management, and the roles of finance professionals. This quiz will challenge you to match terms with definitions and understand the primary reasons for investing. Perfect for students or professionals looking to refresh their finance skills!
