MAF101 FUNDAMENTALS OF FINANCE Subject Notes â Deakin ...
MAF101 FUNDAMENTALS OF FINANCE Subject Notes – Deakin University
MAF101 Fundamentals of Finance Subject Notes
These notes retain copyright to the original author at Deakin University and may not be distributed or sold and are for personal use only. Ensure that these terms are met.
HOW TO USE THESE NOTES These notes were prepared in trimester 1, 2017, and should assist in you achieving high marks in MAF101. They have been carefully prepared and edited. These notes may assist in your understanding of Assignment format; exam structure and exam content. That said, it is important to supplement these notes with tutorial content and with the readings and textbook content. The readings and textbook may be examinable. I strongly recommend in taking up any advice by the tutors and lecturers in MAF101, I have found this particular subject to be assessed and examined very closely to the subjects content and learning objectives. There is a significant amount of content to cover. Be aware that formula sheet can change between trimesters and the subject is often updated. I strongly recommend studying for the exam by carefully understanding the content in this document and the questions in the seminars. Note: The most important basic takeaway for performing any finance calculation is to ensure that the elements inputted into an equation all match in terms of compounding period. Black text: Examinable content information Blue Text: Examples to assist in understanding of course content
Best of luck for MAF101, I hope that you achieve that HD that you are seeking.
Week 7/ Topic 4: Risk and Return Part 2 Topic 4 Learning Objectives – Define and calculate the expected return and risk of a portfolio comprised of 2 assets – Define and explain the impact of the correlation coefficient between 2 assets on the risk of the portfolio – Understand the benefits of diversification. Correlation: relationship between the assets. Value exists between -1 and 1. PORTFOLIO AND RISK DIVERSIFICATION – – – –
Risk minimization can be achieved by diversifying across different assets. A portfolio’s expected return is the weighted average of the returns of the assets that make up the portfolio. A portfolio’s variance is the weighted average of the variances of the assets that make up the portfolio and the covariance between the pairs of securities. There is diversification benefit so long as the assets are not perfectly correlated to each other.
EXPECTED RETURN OF A PORTFOLIO – –
How do you calculate return of a 2 asset portfolio? Find the weighted average of the expected returns of the assets that comprise the portfolio (weights are the % of the investors wealth invested).
– – – – – –
E = expected r = return p = portfolio Mu = expected return of the portfolio W1 = weight of the investment associated with asset 1 (x) Expected return of asset 1. Wj = Overall return = amount invested in asset 1 / total amount invested in all assets.
Example: – You invested $100,000 in a portfolio comprises of 2 assets A & B. You invested $60,000 in A and the remaining in B. The expected return of A is 0.08 while the expected return of B 0.12. Calculate the expected return of the portfolio. – Answer: The $ amount of investment in asset B must be 100,000-60,000=40,000. o The weight of asset A in the portfolio is 60,000/100,000=0.6. o The weight of asset B is 1-0.6=0.4 or 40,000/100,000=0.4. – The expected return of the portfolio is 0.6*0.08+0.4*0.12=0.096 or 9.6%
MAF101 Fundamentals of Finance Subject Notes
These notes retain copyright to the original author at Deakin University and may not be distributed or sold and are for personal use only. Ensure that these terms are met.
HOW TO USE THESE NOTES These notes were prepared in trimester 1, 2017, and should assist in you achieving high marks in MAF101. They have been carefully prepared and edited. These notes may assist in your understanding of Assignment format; exam structure and exam content. That said, it is important to supplement these notes with tutorial content and with the readings and textbook content. The readings and textbook may be examinable. I strongly recommend in taking up any advice by the tutors and lecturers in MAF101, I have found this particular subject to be assessed and examined very closely to the subjects content and learning objectives. There is a significant amount of content to cover. Be aware that formula sheet can change between trimesters and the subject is often updated. I strongly recommend studying for the exam by carefully understanding the content in this document and the questions in the seminars. Note: The most important basic takeaway for performing any finance calculation is to ensure that the elements inputted into an equation all match in terms of compounding period. Black text: Examinable content information Blue Text: Examples to assist in understanding of course content
Best of luck for MAF101, I hope that you achieve that HD that you are seeking.
Week 7/ Topic 4: Risk and Return Part 2 Topic 4 Learning Objectives – Define and calculate the expected return and risk of a portfolio comprised of 2 assets – Define and explain the impact of the correlation coefficient between 2 assets on the risk of the portfolio – Understand the benefits of diversification. Correlation: relationship between the assets. Value exists between -1 and 1. PORTFOLIO AND RISK DIVERSIFICATION – – – –
Risk minimization can be achieved by diversifying across different assets. A portfolio’s expected return is the weighted average of the returns of the assets that make up the portfolio. A portfolio’s variance is the weighted average of the variances of the assets that make up the portfolio and the covariance between the pairs of securities. There is diversification benefit so long as the assets are not perfectly correlated to each other.
EXPECTED RETURN OF A PORTFOLIO – –
How do you calculate return of a 2 asset portfolio? Find the weighted average of the expected returns of the assets that comprise the portfolio (weights are the % of the investors wealth invested).
– – – – – –
E = expected r = return p = portfolio Mu = expected return of the portfolio W1 = weight of the investment associated with asset 1 (x) Expected return of asset 1. Wj = Overall return = amount invested in asset 1 / total amount invested in all assets.
Example: – You invested $100,000 in a portfolio comprises of 2 assets A & B. You invested $60,000 in A and the remaining in B. The expected return of A is 0.08 while the expected return of B 0.12. Calculate the expected return of the portfolio. – Answer: The $ amount of investment in asset B must be 100,000-60,000=40,000. o The weight of asset A in the portfolio is 60,000/100,000=0.6. o The weight of asset B is 1-0.6=0.4 or 40,000/100,000=0.4. – The expected return of the portfolio is 0.6*0.08+0.4*0.12=0.096 or 9.6%
