Investment Bodie Kane Notes

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Study notes of Bodie, Kane & Marcus

By Zhipeng Yan

Investment
Zvi Bodie, Alex Kane and Alan J. Marcus
Chapter One: The Investment Environment ....................................................................... 2 Chapter Two: Financial Instruments................................................................................... 4 Chapter Three: How Securities Are Traded........................................................................ 8 Chapter Six: Risk and risk aversion.................................................................................. 12 Chapter Seven: Capital Allocation between the Risky asset and the risk-free Asset ....... 17 Chapter Eight: Optimal Risky Portfolios:......................................................................... 20 Chapter Nine: The Capital Asset Pricing Model .............................................................. 24 Chapter Ten: Index Models: ............................................................................................. 28 Chapter Eleven: Arbitrage Pricing Theory and multifactor models of risk and return .... 32 Chapter Twelve: Market Efficiency and Behavioral Finance........................................... 35 Chapter Fourteen: Bond prices and yields ........................................................................ 43 Chapter Fifteen: The Term Structure of Interest Rates..................................................... 48 Chapter Sixteen: Managing Bond Portfolios .................................................................... 53 Chapter Eighteen: Equity Valuation Models .................................................................... 57 Chapter Twenty: Option Markets: Introduction ............................................................... 59 Chapter Twenty-one: Option Valuation............................................................................ 64 Chapter Twenty-two: Futures Markets ............................................................................. 74

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Study notes of Bodie, Kane & Marcus

By Zhipeng Yan

Chapter One: The Investment Environment
I.

Real assets versus financial assets
1. The material wealth of a society is determined ultimately by the productive capacity of its economy, which is a function of the real assets of the economy: the land, buildings, knowledge, and machines that are used to produce goods and the workers whose skills are necessary to use those resources. 2. Financial assets, like stocks or bonds, contribute to the productive capacity of the economy indirectly, because they allow for separation of the ownership and management of the firm and facilitate the transfer of funds to enterprise with attractive investment opportunities. Financial assets are claims to the income generated by real assets.

3. Real vs. Financial assets:
a. Real assets produce goods and services, whereas financial assets define the allocation of income or wealth among investors.
b. They are distinguished operationally by the balance sheets of individuals and firms in the economy. Whereas real assets appear only on the asset side of the balance sheet, financial assets always appear on both sides of the balance sheet. Your financial claim on a firm is an asset, but the firm’s issuance of that claim is the firm’s liability. When we aggregate over all balance sheets, financial assets will cancel out, leaving only the sum of real assets as the net wealth of the aggregate economy.

c. Financial assets are created and destroyed in the ordinary course of doing business. E.g. when a loan is paid off, both the creditor’s claim and the debtor’s obligation cease to exist. In contrast, real assets are destroyed only by accident or by wearing out over time.

II.
Financial markets and the economy
1. Smoothing consumption: “Store” (e.g. by stocks or bonds) your wealth in financial assets in high earnings periods, sell these assets to provide funds for your consumption in low earnings...
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