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Investments - Hand-In #1 Deadline, April 17

This Thursday, April 2, there are no lectures. Get to know more about the results of Case 1 and the nitty-gritty details of utility maximization and trading. Sharpe's Ch. 2 and Ch. 3 up to ~3.8 will be covered. Find out how to use Sharpe's Case 1 Excel file and the "old school" whiteboard. Also, get assistance with the My Case1ByHand Excel file and Section 3.7 notes. Discover the concepts and quantitative caveats of the market portfolio and returns.

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Investments - Hand-In #1 Deadline, April 17

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  1. Investments, Thursday April 2, 2009 Need-to-know: • Hand-In #1 has been posted. Deadline April 17. • There are no lectures tomorrow. Scientific contents: • More on the results of Case 1 where Hue and Mario trade ’till equilibrium. The rest of Sharpe Ch. 2 • ”Nitty-gritty details” of utility maximization and trading. Sharpe Ch. 3 up to ~3.8.

  2. How? • Sharpe’s Case 1 Excel-file • ”Old school” i.e. whiteboard • My Case1ByHand Excel-file supported w/ a note on Section 3.7

  3. In Equilibrium in Case 1 Hue and Marie completely diversify non-market risk away. (In this case, ”non-market risk” has a clear-cut interpretation: whether the fish go North or South.) Market risk cannot be diversifed away. The less risk-averse Mario bears more of that. As compensation, his expected returns are higher (as we shall see).

  4. Gains from Trade ”Ex-ante” (i.e. beforehand) trading makes both Hue and Mario better off. ”Ex-post”: Yeah, well, we don’t know exactly what happens. Sharpe says this in Section 2.9.3. Sounds perfectly reasonable. In Hand-In #1 you get to work on how (and how not) to quantify it.

  5. Concepts and Quantitative Ceveats The market portfolio: The total of risky assets. In Case 1 the portfolio w/ 10 shares of MFC and 10 shares of HFC. (Some sources define portfolios via the security weights, not the #securities.) Return: Sharpe’s ”returns” are ”gross rates”, i.e. price(time 1)/price (time 0). (Some sources use ”net rates” or ”profit and loss”.)

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