FINTECH 522 Asset Pricing and Risk Management
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FINTECH 522
Asset Pricing and Risk Management
MIDTERM CHECKLIST
Spring 2023
NOT ALLOWED on this exam:
• ChatGPT
• Smartphones
• Each other – NO messaging apps of any kind. PLEASE quit/disable all email & messaging apps to avoid even the appearance of collaboration, because if a message app pops up on your computer during the midterm, it will look like you’re cheating
Computer Preparation:
• It’s expected that you have Excel working and running on your laptop.
• System freezes and bugs, if they happen are your responsibility!
• Best way to avoid system bugs & freezes (as well as random message notifications that will look suspicious to the exam proctors) :
o Make sure to update your OS before the exam
o Turn off all extraneous apps
o Close all browser tabs that aren’t used
o Restart your computer.
Excel Skills
Be able to:
o Create a scatter graph from data
o Add a trendline through data and display the equation and R2
o Definitely should know & be able to use the following functions:
o SQRT(), PRODUCT(), SUM(), COUNT()
o IRR(), NPV()
o COVARIANCE.P(), STDEV.P()
o SLOPE(), INTERCEPT()
o ARRAY functions
o SUMPRODUCT(), MMULT(), TRANSPOSE() (don’t forget ctl + shift + enter!)
o INDEX() and MATCH() to quickly create a covariance matrix
o Comfortable with solver
o Understand constraints
o Realize that the initial values of your cells matter – might have to run it a few times with different starting values to converge on correct answer
Interest Rates
o Compounding – what it is and how to identify how it’s being done (e.g., an annual interest rate being APPLIED monthly? Etc)
o Be able to convert interest rates between either or both time basis or compounding
o Net present value (NPV) – what an investment costs / is worth TODAY
o Internal Rate of Return (IRR) – the unique interest rate that causes the NPV to be 0
o IRR: the one that DOES take into account initial cash outlay
o NPV: the one that DOESN’T.
o The PMT() formula in Excel: handy if you know how to use it, but confusing & misleading if you don’t. Your choice on whether to use it or not.
Return Metrics
Know and be able to calculate:
o Log Returns
o Arithmetic Mean Return (and why this can be misleading)
o Geometric Mean Return
o Total (or absolute) return
o Understand the difference between:
o Returns as descriptors of compounding over time (e.g., effective daily rate)
o Returns as statistical estimators of what’s likely to happen over a given time period
o Be able to handle dividends & splits to calculate period-over-period returns for equities
Bond Analysis
o Bond Price Formula for semi-annual bonds : P = 
[1 −(1 + y)#n] + 
o C: quoted coupon / 2
o y: quoted yield / 2
o n: 2*maturity
o Daily treasury yield curve rates:
o Where to find them: https://home.treasury.gov/resource-center/data-chart- center/interest- rates/TextView?type=daily_treasury_yield_curve&field_tdr_date_value_month=202302
o Rough idea of how they’re calculated & what they mean
o Yield curve (term structure); Inverted vs. not
o Bond terms:
o Basis points (bp)
o Par value
o Face value
o Coupon
o Strips
o Yield to maturity (total rate of return for the bond)
o Yield to first call
o Premium vs discount
o Market Value and how to calculate it correctly – without forgetting how bond prices are quoted in “ units” of hundred dollar bills.
o Convexity & duration won’t be on this exam … but they will show up later in the course!
Basic Accounting
o The four key statements: Balance sheet, Statement of Cash Flows, Income Statement, Statement of Shareholders’ Equity
o What they are and the info they contain
o The fundamental balance sheet equation
o How does the balance sheet link to the income statement?
o EBITDA: What is it and why do we care?
o Enterprise Value = MCAP + Net Debt
o Net Debt = Short Term Debt + Long Term Debt – Cash
o EBITDA multiple = EV / EBITDA
o P/E Multiple = MCAP / Net Income
Statistical Concepts
Know and know how to calculate from DATA:
o σ, the Standard Deviation (Volatility, or Risk)
o σ2, the Variance
o σ2A,B, the Covariance
o Covariance Matrix
o β, the slope of a line-of-best-fit through data
o α, the y-intercept of a line-of-best-fit through data
CAPM & Markowitz Portfolio Theory
Efficient Frontier
Be able to:
o Graph the efficient frontier for a market of 2 stocks
o Use Solver to calculate the:
1. Stock weightings
2. Expected risk
3. Expected return
4. Sharpe ratio
… for the Market Portfolio (portfolio with best Sharpe ratio) in a market of up to three (3) stocks
Capital Market Line
o Calculate the Capital Market Line by drawing a line-of-best fit through the risk-free rate and the Market Portfolio (MP)
o The ‘Lever Rule’ (handout 3)
o Buy risk-free assets to create an optimal portfolio with risk LESS than that of the MP
o Issue debt (take out a loan) at the risk-free rate and use the cash to create an optimal portfolio with return GREATER than that of the MP
The Security Market Line
o How to calculate α and β if given data for a stock and a benchmark
o The Security Market Line: Expected return of any asset as a function of that asset’s β with the market, and that market’s expected return
o E(ri ) = rf + βi [E(rM ) - rf]
o Use it to tell if a stock is overvalued or undervalued
Efficient Market Hypothesis
o Be able to describe some of the basic assumptions of the Efficient Market Hypothesis
o Identify what is or isn’t an efficient market if given a list
Equities Concepts
o What is portfolio rebalancing and why do we care?
o What are some examples of universes (or sectors), and some equities that are members?
o If given a security that is a member of a sector – such as Amazon, a member of the Online Retail universe – could you come up with a sector that should be:
o Positively correlated, i.e., goes up & down with Amazon, such as Warehousing Services?
o Negatively correlated, i.e., when Amazon goes up, it goes down and vice versa, such as brick-and-mortar Retail businesses? (Target, Barnes & Noble, Wal-Mart, etc)
o What is Active Risk?
o What is the long-term predicted value for α for any security?
o What are some good ways to evaluate fund managers?
Shorting
o Short Fees
o Who offers shorting services?
o Who benefits from short fees?
o Shorting availability
o What is a “short squeeze”?
o Calculating expected return of shorting a stock
2023-03-06