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R S M 2 3 0 S P R I N G 2 0 2 2 FINAL R E V I E W P A C K A G E 导师：AMY ZENG | UTSG 校区 1 This complementary study package is provided by Easy Edu Inc. and its affiliated mentors. This study package seeks to support your study process and should be used as a complement, NOT substitute to course material, lecture notes, problem sets, past tests and other available resources. We acknowledge that this package contains some materials provided by professors and staff of the University of Toronto, and the sources of these materials are cited in detail wherever they appear. This package is distributed for free to students participating in Easy Edu’s review seminars and are not for sale or other commercial uses whatsoever. We kindly ask you to refrain from copying or selling in part or in whole any information provided in this package. Thank you for choosing Easy Edu. We sincerely wish you the best of luck in all of your exams. Easy Edu Inc. Disclaimer EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca d my JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 R S M 2 3 0 S P R I N G 2 0 2 2 FINAL R E V I E W P A C K A G E 导师：AMY ZENG | UTSG 校区 2 EQUITY AND STOCK MARKET OVERVIEW Two Ways Corporations Can Raise Capital 1. Debts (e.g. bonds): individuals lend money to a corporation and become its debtors 2. Equity (stock) – individuals contribute money to corporations and become its shareholders. What Are Stocks (Equity) Stocks represent ownership of a company, which is generally accompanied by voting rights that give stock owners some control over the organization Voting rights on appointments to the firm’s board of directors and other matters A share of common stock gives the holder claims to the cash flows and assets of a firm after all fixed obligations have been met (including principal and interest to debtholders)– claim on residual income Common stockholders are residual claimants because cash flows to (common) stockholders are uncertain in magnitude and timing. There is no guarantee that stockholders will receive anything. Stockholders will demand a higher return (r) in order to bear these risks. Cash flows to stockholders take the form of dividends and capital gains/losses. Firms produce cash flow. After all expenses are paid and necessary reinvestment (Capex) is made, the remaining “free cash flow” is distributed to equity holders and debtholders. FORECAST STOCK PRICE Believe that stock prices move in response to financial results & economic conditions Forecast stock price based on anticipated future earnings & cash flow. Common methods: Free cash flow method Dividend discount model Comparable (multiples) 1. Free-cash flow (FCF) method Free cash flow represents the amount available to be potentially distributed to shareholders. Stock price of the firm is valued based on FCF as: Free cash flow = Revenue – Expenses (Excluding depreciation) – CAPEX – Taxes Firm value = PV of expected free cash flow Equity value = Firm value – Debt Value Stock price = Equity value / # of shares outstanding EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 R S M 2 3 0 S P R I N G 2 0 2 2 FINAL R E V I E W P A C K A G E 导师：AMY ZENG | UTSG 校区 3 Example: Free cash flow to firm for ABC Inc. is currently $300 million and is expected to grow by 4% each year forever. The current market value of debt is $3,000 million. If the company’s cost of capital is 10% and ABC has 200 million shares outstanding, how is the per share value of ABC Firm value = $”## % &.#((#,& + #.#() = $5,200 million Equity value = $5,200 – $3,000 = $2,200 million Stock price = $2,200 / 200 = $11 per shares 2. Dividend discount method 2.1 Constant dividend: = Example: Suppose that the cost of equity is 15%, the expected dividend next year is $1. The share price today is: = -!. = $&&/% = $6.67 2.2 Growth dividend: = (%) g: growth rate of dividend, g = Retention ratio (b) x Return on equity = -!1″ + = dividend yield + growth rate Example: Suppose that the cost of equity is 15%, the expected dividend next year is $1 and the growth rate of earnings is 10%. The share price today is: = -!(.+2) = $&(&/%+&#%) = $20 2.3 Growth Opportunities = × : Retention ratio (b) x Return on equity If b = 0, then D1 = EPS1 (no reinvest, no growth) = -!1″ = 314!1″ # = 314!. Now, let consider growth opportunities: EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 R S M 2 3 0 S P R I N G 2 0 2 2 FINAL R E V I E W P A C K A G E 导师：AMY ZENG | UTSG 校区 4 Growth adds value if and only if ROE > r, such as if projects have positive NPV to the firm. “Good growth” results from reinvest back the money into the firm and generate positive NPV growth opportunities. “Bad growth” results from reinvest back the money into the firm and generate negative NPV project # = 314. + , where PVGO = present value of growth opportunities Example ABC expects to earn $1 million per year in perpetuity if it undertakes no new investment opportunities. There are 100,000 shares outstanding, so EPS is $10 ($1,000,000 / 100,000). The firm will have an opportunity next year to spend $1,000,000 on a new marketing campaign. The new campaign will increase earnings in every subsequent period by $210,000 (or $2.10 per share). This is a 21% return per year on the project. The firm’s discount rate is 10%. What is the value per share before and after deciding to accept the marketing campaign Stock price before accepting the marketing campaign: $10 / 0.1 = $100 Stock price after accepting the marketing campaign: o Value of marketing campaign at Date 1: $210,000 / 0.1 – $1,000,000 = $1,100,000 o PVGO of the marketing campaign at Date 0: $1,100,000 / 1.1 = $1,000,000 o PVGO per share: $1,000,000 / 100,000 shares = $10 o Stock price: $100 + $10 = $110 Practice: S1. Evaluate the following claim: Microsoft (MSFT) is trading at $178 per share and Oracle (ORCL) is trading at $60 per share. Therefore, Microsoft is three times as valuable as Oracle. S2. Last year at this time, XYZ announced quarterly earnings of 12 cents per share. This year, analysts were expecting quarterly earnings to rise to 20 cents per share. Today, XYZ announced that earnings were 18 cents per share for this past quarter. (i) Will the stock price likely go up or go down after the announcement Explain. (ii) What might the size of the price change depend on Explain. EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 R S M 2 3 0 S P R I N G 2 0 2 2 FINAL R E V I E W P A C K A G E 导师：AMY ZENG | UTSG 校区 5 S5. Today (in February 2020), the government announces that starting January 1, 2022 there will be a reduction in the corporate tax rate. How will stock prices likely change today (immediately after the announcement) How will this affect share prices likely change in January 2022 Explain. S6. It has been argued that liquidity in the secondary market for stocks can affect real economic activity, such as opening new businesses and growing existing business. Briefly explain and evaluate this claim. P4. (6 points) The Rotman School Corporation (RSC) is expecting free cash flow next year of $200 million, $260 million the following year, $300 million in three years from now. After that, free cash flow is expecting to grow at 3% per year forever. The appropriate discount rate is 10%. a) What is the total value of the company b) Now that you know the total value of the company, you learn that RSC previously raised capital in both the equity and debt markets. It has 60 million shares of common stock outstanding. It also has long-term bonds outstanding that are valued at $600 million. What is the fair price per share of RSC EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 R S M 2 3 0 S P R I N G 2 0 2 2 FINAL R E V I E W P A C K A G E 导师：AMY ZENG | UTSG 校区 6 PORTFOLIO MANAGEMENT Risk – Return Trade Off High expected returns usually go hand in hand with high risk. Thus, financial decisions usually entail the classic risk-return trade-off: reducing risk tends to reduce expected returns, while increasing expected returns tend to increase risk. Expected return can equivalently be interpreted as: Required return of investor on an investment Discount rate for valuation Cost of capital for a firm Shareholder’s required rate of return on equity, = + , compensates for Time value of value: riskless rate of return, rf, (yield on government bonds) Risk: a risk premium depending on the risk level Measuring Risk Example: Suppose you invest $100 as follows – T = 0, pay $100 – T =1, 50% receive $100 and 50% receive $120 Return = 0% or 20% Expected Return: () = 50%(20%) + 50%(0%) = 10% Standard deviation: = W50%(20% 10%)7 + 50%(0% 10%)7 = 10% 「excel: = stdev.p(.)」 SD is a statistical measure which measures by how much you are likely to miss the average Diversification – “Don’t Put All Your Eggs in One Basket” Example: Suppose you split your investment of $100 into two independent investment of $50 each – T = 0, pay $50 for each – T =1, receive $50 or $60 for each, equal probability Total payoff: $100 (prob. 25%), $110 (prob. 50%); or $120 (prob. 25%) Expected Return: () = 25%(20%) + 50%(10%) + 25%(0%) = 10% Standard deviation: = W25%(20% 10%)7 + 50%(10% 10%)7 + 25%(0% 10%)7 = 7.07% When diversifying, expect return average still at 10%, but standard deviation decreases to 7.1% Diversification reduces risk. To diversify the portfolio, invest in assets which are not exposed to the same risks. EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca d my JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 R S M 2 3 0 S P R I N G 2 0 2 2 FINAL R E V I E W P A C K A G E 导师：AMY ZENG | UTSG 校区 7 Correlation Correlation is a statistical measure (ρ) of the co-movement of two random variables. Better diversification is achieved when there is low correlation between assets. Correlation is away measured between -1 and +1 Correlation = 1: perfectly positively correlated Correlation > 0: tendency to move together Correlation = 0: uncorrelated Correlation < 0: tendency to move opposite Correlation = -1: perfectly negatively correlated Diversification with Two Stocks Stocks are less correlated, the standard deviation of the portfolio is lower, reflecting a larger gain from diversification Diversification always reduces risk unless assets are perfectly correlated Even with a positive correlation, there is less risk in holder a portfolio than in holding individual stocks Diversification with Many Stocks Many risks facing individual securities are unique and so these unique risks are offset by holding many securities in a portfolio. However, “the more” is not necessarily “the better”. According to statistical data, risk of a portfolio is halved with just randomly selected 20 equities, most of the benefits of diversification can be achieved by investing in 40 to 50 different “positions” (investments). “As portfolio size increases, risk declines, but does not disappear.” Systematic and Unsystematic Risk Total Risk = Systemic Risk + Unsystematic Risk Unsystematic risk (also known as specific risk; unique risk; idiosyncratic risk; diversifiable risk). Affect a particular company and can be reduced by diversification. Systematic (also known as market risk; non-diversifiable risk), Affect all companies and cannot be reduced by diversification. The risk of the overall market cannot be avoided. EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tth

ew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 R S M 2 3 0 S P R I N G 2 0 2 2 FINAL R E V I E W P A C K A G E 导师：AMY ZENG | UTSG 校区 8 Investment in the index Standard deviations for individual stocks (2000-2020) Stock (U.S.) Amazon.com 46.6% Microsoft 28.9% Ford 48.3% General Electric 28.3% Coca-cola 17.2% Pfizer 19.3% Exxon Mobil 18.3% S&P 500 14.6% – Individual stocks are riskier than the S&P 500 – The risk of the S&P 500 is well above 0 S&P 500: A stock market index that measures the stock performance of 500 large companies listed on stock exchanges in the United States. Dow Jones Industrial Average (DJIA): A stock market index that measures the stock performance of 30 large companies listed on stock exchanges in the United States. Nasdaq: A stock market index of the common stocks and similar securities listed on the Nasdaq stock market. The composition of the NASDAQ Composite is heavily weighted towards information technology companies. Practice: 3) (8 marks) These questions are about diversification. a) Explain how diversification works (in words!) (2 marks) S1. (2 points) In order to achieve diversification, you are considering investing in an S&P500 index fund or a Dow Jones (DJIA) index fund. Compare these two possibilities in terms of the extent of diversification. S9. (3 points) What are the main differences between systematic and unsystematic risk EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 R S M 2 3 0 S P R I N G 2 0 2 2 FINAL R E V I E W P A C K A G E 导师：AMY ZENG | UTSG 校区 9 OPTIONS Basic Options Concepts Options are contracts that give the buyers the right not the obligation to buy or sell a fixed quantity of the underlying asset at a predetermined price sometime in the future. However, seller of the option is obligated to fulfill the contract if buyer decides to execute. Types of options: Call option: the buyer has the right to buy the underlying asset at the exercise price Put option: the buyer has the right to sell the underlying asset at the exercise price Key terms: Long option: buy the option & pay premium Short option: sell the option & receive premium Exercise/Strike price: price at which option is exercised Moneyness: An option is “in the money”/ “at the money”/ “out of the money” if exercising it immediately yields a positive/negative/zero profit European options: options that can be exercised only at maturity American options: options that can be exercised anytime until the maturity date. Position Diagrams Call Option Put Option Long (Pay Premium) Short (Receive Premium) EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy Je Ma tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 R S M 2 3 0 S P R I N G 2 0 2 2 FINAL R E V I E W P A C K A G E 导师：AMY ZENG | UTSG 校区 10 Summary Potential Gain Downside Risk Long call Unlimited Limited Long put High Limited Short call Limited Unlimited Short put Limited High Options Price Valuation Option Price (Premium) = Intrinsic Value + Time Value Intrinsic value: the value of the option if it were exercised today – i.e. the value of certainty Intrinsic value of call option = price of underlying asset – strike price = P – X Intrinsic value of put option = strike price – price of underlying asset = X – P If an option is out of money, it has zero intrinsic value Time value: the value of an option arising from the time left to maturity – i.e. the value of uncertainty. Value of Call Option Increases when the price of the underlying asset increases Increase when the time to expiration increases since there is more opportunities to hold the right to buy the asset for a fixed price is available for a longer period. Increases when the volatility of the underlying asset price increases since the downside is limited to zero, but the option value is higher as the price of the underlying asset increases. Value of Put Option Decreases when the price of the underlying asset increases Generally (but not always) increases when the time to expiration is longer since there is longer time to exercise the option. In rare cases, for European options, the put option value can decrease since the PV of the strike price that will be getting lower. Increases with the volatility of the underlying asset price since the downside limited to zero, but the option value is higher as the price of the underlying asset decrease. EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 R S M 2 3 0 S P R I N G 2 0 2 2 FINAL R E V I E W P A C K A G E 导师：AMY ZENG | UTSG 校区 11 Option Combination Strategy Straddle: One call option and one put option on the same underlying asset with same exercise price and same expiration date. Example: A straddle of one XYZ call and one XYZ put with strike price of $100 and three month to expiration. This straddle costs $3 + $7 = $10. o At the money: when XYZ price is $100 – both are worthless and the net loss is $10. o At prices different than $100, one option is in the money and the other is out of the money. Thus, the payoff diagram increases with a slope of 45-degrees to the left and to the right of $100. A straddle is a way to bet on volatility. Since both call and put premiums increase with the volatility of the underlying asset, you should buy a straddle if you believe that volatility is about to increase. With the now higher volatility the straddle value increases and you can sell it for more. Strangle: Similar to a straddle but it has a lower cost and less upside. Call option has higher exercise price than the put option. Example: A strangle consisting of one $95 put option and one $105 call option on XYZ with three month to expiration. Suppose the put sells for $4 and the call sells for $2. Your loss is limited to $6. Comparing to the $100 straddle, you need larger price movement to start profiting. When the underlying asset is priced between the two exercise prices both options are out of the money and the strangle holder makes no profit. A strangle is cheaper than a straddle with an exercise price between those of the put and the call of the strangle since both the call option and the put option are cheaper. EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tth w 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca d my JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 R S M 2 3 0 S P R I N G 2 0 2 2 FINAL R E V I E W P A C K A G E 导师：AMY ZENG | UTSG 校区 12 Portfolio Insurance: used to hedge or insure from adverse movement of a stock or portfolio. For example, if you hold the S&P 500 portfolio, you can reduce your downward risk by buying a put option on the S&P 500 Index. This practice is called portfolio insurance. Portfolio insurance is a common practice among professional portfolio managers who try to avoid big losses on their portfolios. Practice: S8. (3 points) Bob buys a call option on Walmart shares with a strike price of $70 and 6 months to maturity. Mary writes a put option on Walmart shares with a strike price of $70 and 6 months to maturity. In what ways are Bob’s and Mary’s gambles similar In what way are they different 11. The strike price of an option is: a) the value of the underlying asset at expiration. b) the price of the option. c) the proceeds generated if today was the expiration day. d) the price at which an investor can buy or sell the underlying asset. 12. Jay writes a call option with a strike price of $50. What will be Jay’s payoff in dollars if the underlying asset price at expiration is $55 a) $5 b) $5 c) 0 d) $105 13. The strike price on a call option is $8 and the price of the underlying stock is $10. What is the time value of money of the call option if the option premium is $3 a) $4 b) $3 c) $2 d) $1 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 R S M 2 3 0 S P R I N G 2 0 2 2 FINAL R E V I E W P A C K A G E 导师：AMY ZENG | UTSG 校区 13 INVESTMENT FUNDS Trading Stock – Type of Accounts Cash Account Only hold position that are long, i.e. positive holdings Full payment is required by the settlement date, which is 2 business days after the trade date Margin Account Margin accounts are used by clients who wish to buy or sell securities on partial credit. Margin accounts require only partial payment for a purchase of securities. The word margin refers to the amount of funds the investor must personally provide. Minimum margin requirements vary with the price of the stock o Initial margin: the percentage of the purchase price that must be covered by the investor’s own money o Maintenance margin: amount of equity the investor must maintain in margin account Example Client buys 1,000 shares of ABC on margin at $50.00 with margin = 50% and maintenance margin = 30% Total costs: $50,000 Margin loan @ 50% $25,000 Margin (cash put up by client) $25,000 à your own money Account balance $50,000 (value of shares) The shares purchased are used as collateral against the borrowed amount If stock price falls to $40.00 New value of shares $40,000 (value of shares) Margin loan $25,000 Equity value (37.5%) $15,000 If stock price falls to $35.00 New value of shares $35,000 Margin loan $25,000 Equity value (28.6%) $10,000 (below maintenance margin) Minimum balanced needs $17,500 ($35,000 x 50%) Additional fund required $(7,500) Margin call for extra cash of $7,500 needed EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 R S M 2 3 0 S P R I N G 2 0 2 2 FINAL R E V I E W P A C K A G E 导师：AMY ZENG | UTSG 校区 14 Short Selling Stocks Short selling is selling shares that you don’t own à so you have a negative position in the market (betting the stock price will go down) Example: short sell 100 shares of ABC at $140. Collect $14,000 If ABC falls to $130 per share, buy back 100 shares for $13,000 (profit = $1,000) If ABC rises to $150, buy back 100 shares for $15,000 (loss = $1,000) How do you sell something you don’t own When you short sell, your broker will borrow shares from someone else on your behalf. Those shares will be sold. When you cover your position (buy back shares), those shares will be returned to lender. When you short sell, you pay any dividends that happen. Investment Funds (Indirect Investing) Overview of Investment Funds 1. Basic structure of investment funds Provide an easy alternative to direct ownership of individual securities Fund gives everyone an opportunity to invest in the market. Investment funds are financial intermediaries that manage investments on behalf of a group of investors who share in the fund’s return Individuals invest in the fund do not directly own the securities held in the underlying portfolio, but benefit from shared ownership Asset management of the fund is delegated to a professional fund manager who has legal authority to invest their client’s assets (money) 2. Benefits of investment funds Diversification: Investors may not have enough money to properly diversify their portfolio across many different securities. With investment funds, investors can lower their risks by diversifying across many investments. Liquidity: Investors easily can buy or sell units of the fund on a daily basis, can quickly convert investments into cash Cost advantage: Large size of the fund means that the mutual funds can negotiate lower transaction fees than would be available to the individual investor. Professional management o Investors may have limited knowledge in investment o Many investors prefer to rely on professional many managers for their investment expertise and enforcement of claims EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy JenMa tthew 70703 EZ Aca demy