Learning Notes Coursera Financial Markets

VaR - value at risk

Stress Tests

Beta - measure of how a stock price relates to the aggregate market

Normal Distribution - Standard deviation 1,3

Finance does not follow Normal Distribution— tends to have fat tails

The standard deviation is √(p(1-p)/n)

Central Limit Theorem - Averages of a large number of independently identically distributed shocks are approximately normally distributed



Capital Asset Pricing Model (CAPM)

Credit Default Swap - 

Short Sales - hold negative quantities of a stock.

** Gordan Growth Model - present value given future growth

Limited Liability

Inflation Indexed Debt

Unidad de Fomento - Unit of Development (Chile 1967) - Unit of account tied to consumer price index

Representativeness heuristic - something seen in the past is representative of what we’ll see in the future

Random Walk Hypothesis - Each change is independent of previous changes and totally unforecastable

Efficient Market Hypothesis - revolution in the 50s

PDV of stock (Gordon Model): P = E/(r-g) or P/E = 1/(r-g)

Behavioral Finance

Prospect Theory - revolution in the 90s

Wishing Thinking Bias e.g. My team has higher chance of winning

Overconfidence in people e.g. Hiring a CEO

Cognitive Dissonance - mental conflict that occurs when one learns one’s beliefs are wrong i.e. avoidance behavior

Mental Compartments - fun vs. retirement portfolios

Attention Anomalies - e.g. everyone paying attention to same stock == inflated prices

Anchoring - stock prices are anchored to past prices

Disjunction Effect - inability to make desicision that is contingent on future infomation

Newcomb’s paradox - People sometimes change their behavior when they learn about a prediction which has been made about the future.

Magical Thinking - i.e.. superstitions

Federal Funds Rate - shortest term interest rate (overnight), only banks

Causes of Interest Rates

Compound Interest - (1 + r/n)^nt, where n is the number of times compounding per year

Discount Bond

Present Discounted Value: PDV = 1/(1 + r) ^ n ** Important thing to calculate

Conventional Coupon Bond

** Market risk of bonds: coupon is fixed, but market price of bond fluctuates

Forward Rates - interest rates that represent future bond interest rates ???

Inflation and Interest Rates

Leveraging - putting more money in the asset than you have

Market Capitalization - price per share X number of shares of common stock (US 151% of GDP)

Common (equity vs Preferred Stock - preferred has a specified divined which does not grow through time; does not need to be paid

Stock dividend - pay dividend in stock

Share repurchase - same as dividend, but tax break

PDV of Expected Dividends (Gordon Model): P = E/(r-g) or P/E = 1/(r -g)

Lintner Model of Dividends = dividends correspond to earnings

Inverted Yield Curves - short term interest rate are above long term rates

Commercial Real Estate

Real Estate Partnerships

Limited Partnership

REITs  (Real Estate Investment Trusts) 


Good investment : house price below construction cost in area on the up 

30-year mortgage rate tracks 10-Year Treasury

CMO - Collateralized Mortgage Obligation - pool of mortgages sold to investors

CDO - Collateralized Debt Obligation - same thing as CMO except w/ different forms of debt

MicroPrudential - regulation to protect one person

MacroPrudential - protect whole system

5 levels of regulation:

1. Within-firm regulation

2. Regulation set by trade group

3. Local regulation

4. National regulation

5. International regulation

Public securities - approved by SEC, have to make quarterly filings

FASB - Federal Accounting Standards Board

Securities Investor Protection Corporation (SIPC) - like FDIC - protect account at brokers

Forward contract - contract to deliver at a future date (exercise date) at certain price (exercise price)

Forward Exchange Rate = Spot Exchange Rate * (1 + <interest rate currency 1>)/(1 + <interest rate currency 2>)

Future contracts

Options - used to manage risk e.g. put a floor on loses.

Call option - right to buy

Put option - right to sell

Exercise date - option expires

Exercise price - price at which buy/sell

Underly - underlying asset

Put-Call Parity Relation

Interesting things to think about

No arbitrage means no sure profit. Any profit entails risk. Once option expires, risk expires. !!

When put options become expensive that is sign market is worried about a crash

Stop-loss order as an alternative to put option

Investment Banks

Glass-Steagal Act 1933

Closed-end fund - like Mutual Fund except buy individual funds

Inequality is due to unmanaged risk.

Human Capital