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    FINA2320 - ABC - 2023 - Tutorial 1

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    Aaron Wong
    This document provides an introduction to financial markets and security types. It discusses real versus financial assets, market players, money markets, bond markets, equity markets, derivatives markets, and stock and bond market indexes. It also covers price-weighted, value-weighted and equally-weighted indexes. Sample index calculations are provided. Finally, it briefly discusses primary and secondary security markets, including initial public offerings and how securities are traded in dealer, auction and other markets.

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    Download as PDF, TXT or read online from Scribd

    FINA2320 - ABC - 2023 - Tutorial 1

    Uploaded by

    Aaron Wong
    47 views5 pages
    This document provides an introduction to financial markets and security types. It discusses real versus financial assets, market players, money markets, bond markets, equity markets, derivatives markets, and stock and bond market indexes. It also covers price-weighted, value-weighted and equally-weighted indexes. Sample index calculations are provided. Finally, it briefly discusses primary and secondary security markets, including initial public offerings and how securities are traded in dealer, auction and other markets.

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    FINA2320_ABC_2023_Tutorial 1

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    This document provides an introduction to financial markets and security types. It discusses real versus financial assets, market players, money markets, bond markets, equity markets, derivatives markets, and stock and bond market indexes. It also covers price-weighted, value-weighted and equally-weighted indexes. Sample index calculations are provided. Finally, it briefly discusses primary and secondary security markets, including initial public offerings and how securities are traded in dealer, auction and other markets.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    47 views5 pages

    FINA2320 - ABC - 2023 - Tutorial 1

    Uploaded by

    Aaron Wong
    This document provides an introduction to financial markets and security types. It discusses real versus financial assets, market players, money markets, bond markets, equity markets, derivatives markets, and stock and bond market indexes. It also covers price-weighted, value-weighted and equally-weighted indexes. Sample index calculations are provided. Finally, it briefly discusses primary and secondary security markets, including initial public offerings and how securities are traded in dealer, auction and other markets.

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    FINA2320_ABC_Tutorial 1

    THE UNIVERSITY OF HONG KONG


    HKU Business School
    FINA2320_ABC_Investments and Portfolio Analysis
    1st SEMESTER, 2023-2024

    Introduction to Financial Market (covers Lecture 1)

    ➢ Real Assets vs. Financial Assets (Chapter 1.1)

    ➢ Markets Are Competitive (Chapter 1.5)

    ➢ The Players (Chapter 1.6)

    ➢ Fixed-Income: The Money Market (Chapter 2.1)


    ▪ Treasury Bills
    ▪ Time Deposits/Certificates of Deposits
    ▪ Commercial Paper
    ▪ Bankers’ Acceptance
    ▪ Eurodollar
    ▪ Federal Funds
    ▪ Brokers’ Calls
    ▪ LIBOR
    ▪ Repos and Reverse Repos

    ➢ Fixed-Income: The Bond Market (Chapter 2.2)


    ▪ Treasury Notes and Bonds
    ▪ Federal Agency Debt
    ▪ Municipal Bonds
    ▪ Corporate Bonds

    ➢ Equity Securities (Chapter 2.3)


    ▪ Common Stocks
    ▪ Preferred Stocks

    ➢ Derivative Markets (Chapter 2.5)


    ▪ Options
    ▪ Futures

    FINA2320_ABC_Tutorial 1
    FINA2320_ABC_Tutorial 1

    ➢ Stock and Bond Market Indexes (Chapter 2.4)


    ✓ Price-Weighted Index (PWI)
    ▪ Invest 1 share in each stock in an index portfolio, the investment in each stock in
    that portfolio is proportional to the stock price.

    ∑𝐍𝐢=𝟏 𝐏𝐢,𝐭
    𝐏𝐖𝐈 𝐯𝐚𝐥𝐮𝐞𝐭 =
    𝐍
    where Pi,t is the price of the stock i that is included in the index at time t.
    N is the divisor; initially equals to the number of stocks included in the
    index. When there are stock splits, N needs to be adjusted instantly.

    ▪ High price stock dominates the price-weighted index performance.

    ✓ Value-Weighted Index (VWI)


    ▪ Investment in each stock in the index portfolio is proportional to the market
    value of each stock.

    ∑𝐍𝐢=𝟏(𝐏𝐢,𝐭+𝟏 × 𝐐𝐢,𝐭+𝟏 )
    𝐕𝐖𝐈 𝐯𝐚𝐥𝐮𝐞𝐭+𝟏 = 𝐕𝐖𝐈 𝐯𝐚𝐥𝐮𝐞𝐭 ×
    ∑𝐍𝐢=𝟏(𝐏𝐢,𝐭 × 𝐐𝐢,𝐭 )
    where Pi,t is the price of the stock i that is included in the index at time t.
    Qi,t is the quantity of shares outstanding related to the stock i that is included
    in the index at time t.

    ▪ High market value stock dominates the value-weighted index performance.

    ✓ Equally-Weighted Index (EWI)


    ▪ Invest equal amount in each stock in the index portfolio.
    ▪ Market performance is measured by equally weighted average return of the returns of
    each stock in the index.
    ▪ To reset the portfolio to equal weights, periodic rebalancing is required.
    Pi,t+1 − Pi,t
    R i,t,t+1 =
    Pi,t
    where Pi,t is the price of the stock i that is included in the index at time t.
    R i,t,t+1 is the return of the stock i that is included in the index at time t.

    ∑𝐍𝐢=𝟏 𝐑 𝐢,𝐭,𝐭+𝟏
    𝐑 𝐄𝐖𝐈,𝐭,𝐭+𝟏 =
    𝐍

    𝐄𝐖𝐈 𝐕𝐚𝐥𝐮𝐞𝐭+𝟏 = 𝐄𝐖𝐈 𝐕𝐚𝐥𝐮𝐞𝐭 × (𝟏 + 𝐑 𝐄𝐖𝐈,𝐭,𝐭+𝟏 )

    FINA2320_ABC_Tutorial 1
    FINA2320_ABC_Tutorial 1

    IN-CLASS EXERCISE 1 (Stock Market Indexes)


    Consider the three stocks: HYA, MAR, and HLT in the following table. Pt represents price
    at time t, and Qt represents shares outstanding at time t. Stock HLT splits two for one in the
    last period and stock split is the only factor that contributes to the fall of stock HLT price.

    P0 Q0 P1 Q1 P2 Q2
    HYA 90 100 95 100 100 100
    MAR 50 200 60 200 65 200
    HLT 100 200 115 200 57.5 400

    a. Calculate the price-weighted index value of the three stock at time 0 and time 1 and the
    rate of return of the index from time 0 to time 1.

    b. What is the divisor for the price-weighted index at time 2 after the HLT stock split?

    c. Calculate the price-weighted index value of the three stock at time 2 and the rate of
    return of the index from time 1 to time 2.

    FINA2320_ABC_Tutorial 1
    FINA2320_ABC_Tutorial 1

    d. If the starting value of the value-weighted average index is 100, calculate the rates of
    return from time 0 to time 1 and the index value at time 1.

    e. If the starting value of the equally-weighted index is 100, calculate the rates of return
    from time 0 to time 1 and the index value at time 1.

    FINA2320_ABC_Tutorial 1
    FINA2320_ABC_Tutorial 1

    How are Securities Traded (covers Lecture 2)

    ➢ Primary Market (Chapter 3.1)


    ✓ IPO Process
    ✓ Underwriters
    ✓ Buyers
    ✓ Costs of IPOs

    ➢ Secondary Market (Chapter 3.2)


    ✓ Types of Markets
    ▪ Direct Search Markets
    ▪ Brokered Markets
    ▪ Dealer Market
    - Bid and Ask Prices
    • Bid Price: the price at which each dealer is willing to buy and investor
    can sell.
    • Ask Price: the price at which each dealer is willing to sell and investor
    can buy.
    • Bid < Ask.
    ▪ Auction Markets

    FINA2320_ABC_Tutorial 1

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