Equity and Fixed Income

obowiązkowe

There will be 7 meetings covering the practical aspects of the following material:

1. Return and risk

2. CAPM and cost of capital

3. Equity valuation

4. Stock indexes – calculation and forecasting

5. Interest rates

6. Term structure of interest rates

7. Modeling interest rate curves.

There will be 7 meetings covering the following material:

1. Return and risk.

a. Total returns, annual average returns

b. Arithmetic and geometric average returns

c. Log returns

d. Log-normal model of equity returns

e. Forecasting equity returns using log-normal model, Cornish-Fisher VaR and Monte Carlo simulation

2. CAPM and cost of capital

a. Overview of the CAPM model

b. Estimating risk free rate

c. Estimating beta (individual and sector betas)

d. Equity risk premium

e. Country risk premium

3. Equity valuation

a. Overview of equity valuation methods

b. Economic equivalence of dividends and buybacks

c. Dividend Discount Model – derivation

d. DDM – variants

e. Comparative equity valuation

4. Stock indexes

a. Principles of equity index building

b. Price and total return indexes

c. Indicators for indexes (P/E, P/BV, EV/Sales, dividend yield)

d. Long run source of equity index returns

e. Forecasting index returns

f. Implied equity risk premium

5. Interest rates

a. Quoting and compounding

b. Yields and returns

c. Promised yields and expected yields

d. Calendar conventions

e. Spot and forward rates

f. Zero-coupon rates

6. Term structure of interest rates

a. Overview of interest rate curves

b. Constructing interest rate curves, interpolation

c. Valuation of bonds

7. Modeling interest rate curves

a. PCA analysis

b. Nelson-Siegel model

Same as for the lecture.

The student will be able to perform practical calculations relating to past and expected return, risk and interest rates. He/she will learn how to value stocks and bonds and calculate cost of capital. He/she will know how to estimate simple models that are helpful in the analysis of equity and fixed income instruments, including CAPM, Nelson-Siegel, PCA and Cornish-Fisher VaR.

Attendance and written exam.

Attendance is mandatory. Students need to be present on at least 6 out of 7 meetings in the semester. Those students who meet the attendance requirement need to pass lab exam. The first attempt to do so is on the last lab, the second in the week before Summer Exam Session. Labs need to be completed before taking the course final exam.