Lessons learned investment mgt - s4
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This document provides key lessons and takeaways from an investment management course. It discusses important concepts like returns and risk, including standard deviation, Sharpe ratio, alpha, and beta. It also covers bond pricing, how various factors like coupon rate, yield to maturity, and duration impact bond prices. Additionally, it discusses bond portfolio construction and how duration and maturity impact risk.
Lessons learned investment mgt - s4
- 2. Disclaimer This is not intended to be a condensed outline of the course, but simply what I took as key takeaways. In some courses there are many areas discussed that aren’t contained in these slides, as they are items I was already familiar with and didn’t feel the need to document or felt they wouldn’t be useful to me in my current career. I think of these as my “cheat sheet” of material that can help me in my current & future roles and are DRAFT…like Google’s Beta are subject to change – Matt Crane Shrider, David. (2010). Course presented on Investment Management. Miami University, Oxford & Cincinnati, OH. Various Investopedia articles – the textbook and accompanying slides could be too academic sometimes
- 3. Returns & Risk • Variance/Std Deviation: returns dispersed around mean (desire lowest value for low volatility) • Sharpe ratio: indicates if portfolio’s returns are due to good investment decisions or excess risk – (Rp – Rf) / Pstd dev – Rp = Return of Portfolio – Rf = Risk Free Rate – Rp – Rf = Risk Premium • Avg Std Dev of Portfolio return decreases as number of stocks increases ~10 is ideal • Alpha: excess return over benchmark index (what you/your manager is “earning”)
- 4. Returns & Risk, cont. • Portfolio risk: depends on correlation b/w returns of assets in portfolio • Covariance: degree which assets move together – + = they move together – - = they move inversely • Correlation & Covariance measure how returns move together • Beta: volatility measure, compared to market as a whole • R-Squared: % of a fund/security’s movements that can be explained by movement of an index – Indexes: T-bill (fixed income), S&P (equities) – 0-100: 100 is completely explained by index, <=70 doesn’t act much like index (if 100, just buy the index and save fees)
- 5. Bonds • Par (Face) value: amount you receive at maturity • Yield: rate of return • Price: current price of bond • YTM: interest rate that makes PV of payments = price • Coupon rate: interest payment received • Indenture: contract terms (T&C’s) • Bond innovations: – Inverse floater: coupon floats inverse benchmark rate – Asset-backed (ABS): backed by assets, other than mortgage – Catastrophe (CAT): insurance linked – if catastrophe happens insurance/reinsurance doesn’t pay – Indexed: indexed to something, like CPI/inflation
- 6. Bond Pricing • C / (1 + i)1 + C / (1 + i)2…C / (1 + i)n + M / (1 + i)n Or • PV of annuity + M / (1 + i)n • i = interest rate • n = number of payments • C = Coupon • T = periods until maturity • M = par value
- 7. More Bond & Other Stuff • Protection against default: – Sinking fund: periodically paying payments toward par – Subordination: higher priority than future debt • Zero-coupon bond: no coupon payments but trades at deep discount • Mezzanine: high interest debt, usually with warrants • Yield curve: graphical relationship b/w yield and maturity – Upward slope: short-term rates will likely be higher
- 8. Bond Portfolios • Long-term bonds are more sensitive to price • Duration: time (years) it takes to recover cost of bond by coupon payments – Higher = more risk & price volatility – Zero-coupon duration = time to maturity – Duration of perpetuity = (1 + y) / y