14
votes
Accepted
How exactly are corporate bonds priced at issue
I am not an investment banker, but usually the procedure is something like this:
(0) The IB knows the yield of existing bonds with the same maturity and credit rating, so it is not too difficult for ...
- 9,440
6
votes
Accepted
Invested Capital: operating approach vs financing approach
Because ROIC is not part of of the official accounting standards such as US-GAAP or IFRS, its definition may vary, also depending a bit on how the party defining it is planning to use it and the ...
- 1,046
5
votes
Accepted
IPO Valuation: Share Pricing and Number of Shares
IPO valuation is super sophisticated. There is usually a Managing Underwriter, who has a team of analysts/asset pricers/investment bankers/lawyers/etc. with complicated terms and they go and value a ...
- 460
4
votes
How exactly are corporate bonds priced at issue
In addition to @AlexC answer there are 2 additional key points.
1) if the issue is oversubscribed the IB / syndicate team will choose the allocation to each client usually based on their relative ...
- 12.1k
4
votes
Accepted
How much market data is required to confidently predict the yearly returns of a stock?
It seems implicit in the question that you are happy to assume that the distribution of historical returns is an unbiased and consistent estimator of the distribution of future returns. Else "it ...
- 5,141
3
votes
Accepted
Calculate interest
You can't derive a formula from this equation to calculate $q$ (or $i$) directly for all values of $n$ given the other variables.
However, you can use the RATE() function in Excel (or a similar ...
- 1,046
3
votes
How to calculate performance of a private equity investment?
I am not an expert on GIPS, with its many pages of rules, but I do remember that under GIPS Private Equity results are to be given in terms of IRR (Internal Rate of Return). In most other cases (stock/...
- 9,440
3
votes
Accepted
Why are changes in stock market wealth considered permanent?
I guess the concept you're looking for are martingales. These are stochastic processes which remain on their current level (in expectation!).
Ignoring some technical conditions, a stochastic process $...
- 16.3k
3
votes
Accepted
How to (efficiently) calculate the maximum possible return of a perfect "crystal ball" investment strategy?
This answer seems to be wrong. Please read the edit and the comments.
To me, that smelled like dynamic programming too. After implementing a dynamic programming solution according to http://www.cs.rpi....
- 146
3
votes
How to incorporate ESG in Portfolio Optimization?
recall that, in general, you have the following elements:
A universe of possible stocks. There are tens of thousands of possible investments out there, so you apply screens to limit your universe to ...
- 13.2k
3
votes
Two specific questions about CAPM's assumptions and implications
If the two companies have indeed the same beta, then company A will have more total risk. Or in other words company A has more idiosyncratic risk (i.e. the risk that is not explained by the model);
...
- 8,621
3
votes
Accepted
Periodic investments with compound interest: where's the mistake?
The reasoning - without any math - is as follows.
At the beginning of each year, you get a cash amount $I_a$ that you can either invest instantly, so that it will yield $I_a*r$ over the next period, ...
- 7,140
2
votes
Accepted
Why should long-term investors care about flash crashes/ intra-daily volatility/HFT?
I agree with the implicit idea behind your question that "on the paper, high frequency fluctuations of prices should not affect long term moves".
One point is for sure: the volatility we have in mind ...
- 12.6k
2
votes
Optimizing Investment Portfolio
The scope of your question is quite unclear to me.
You seem to mention trading. If you have multiple trading strategies (that you think are good, and reasonably uncorrelated) and you want to trade ...
- 11.8k
2
votes
Optimizing Investment Portfolio
What does it mean that you will optime portfolio "without programming"? Does that mean that you will do calculations by hand???
Articles will not help you since every article you will be able find ...
- 1,667
2
votes
Estimating realised gains given growth rate and churn
Assume we start at $t=0$ with $P_0$, there are $t=1...N$ subsequent periods, and at each period-end $t$ an (entirely arbitrary) portion $c$ of our portfolio $P_t$ is churned and $(1-c)$ remains ...
- 1,416
2
votes
What is the duration of a rolling 5 year investment?
The duration represents the sensitivity of the price of a financial instrument to current interest rates. Since at the rolling date the price will be equal to the face value no matter what happens to ...
- 33
2
votes
NPV and efficient market hypothesis
The assumption that the discount rate should be derived from the IRR of an alternative investment is not correct.
Commonly the WACC of the company (or the WACC of the funds needed for the investment ...
- 51
2
votes
Open Interest on Stocks
In my opinion, your intuition that their definition is crap is correct.
Google doesn’t give me another source that uses this definition either.
- 8,619
2
votes
If I gave you 100 million dollars for 3 years, what would you do? What if it was 3 days?
There's one optimal strategy to minimize your loss function.
Pocket it.
Buy some politicians along the way.
Set aside a portion of
it to drag out your litigation defense forever.
Set up a rival firm
...
- 5,268
2
votes
Accepted
Justification for Reinvestment Assumption in NPV and IRR Formulas? Please help
I think you understood the basic issue, that $IRR \ne CAGR$
even though many people think it is or should be. It is equal only when the reinvestment assumption is true. But this does not prevent you ...
- 11.8k
1
vote
Accepted
Why individual investors are attracted to lottery stocks is a puzzle?
Standard preferences in classical economics follow certain "consistency rules" such as transitivity etc.pp. These classical preferences such as expected utility capture only the first two ...
- 600
1
vote
Fixed Income Index, ETF Replication
In practice, the ETF sponsors have "proxy baskets" that have 30-40 issues they will accept in lieu of a full replicated basket to create or redeem. However, the specific issues in the proxy ...
- 474
1
vote
The best "risk measure" for an investor who does not want to lose any of his seed money
As many have suggested in the comments, it might be hard, if not impossible, to find an investment that gives positive returns with certainty. However, you might consider a metric such as
$$R=\...
- 1,747
1
vote
Optimal investment strategy problem with competing bet-sizing options and limited budget
If I understand correctly, you are looking for the optimal allocation $b_1, \dotsc, b_n$. You can compute the expected log return for each asset - it is $p_i \log f(b_i),$ so you optimize the sum $\...
- 369
1
vote
Accepted
Comparison of Carhart alphas (four-factor model)
Setup
From your question, I assume you have two strategies $A$ and $B$ with excess returns $R_{A,t}, R_{B,t}$. You model these excess returns using the Carhart 4-factor models (FF3 factors + the ...
- 2,972
1
vote
Citation for the definition of Return on Investment
Any textbook on corporate finance contains the formula for ROI. Below are two popular ones,
Berk and De Marzo - Corporate Finance
Bodie, Kane, Marcus - Investments
- 3,090
1
vote
Accepted
What is this chart showing?
Consider a line through the scatter plot of X and Y, where the points are such that X+Y=10. i.e., if you plot the points {1,9}, {2,8}, {3,7},…,{9,1}, and draw a line through these points, you will get ...
- 6,242
1
vote
Accepted
Constructing an arbitrage opportunity for a company involving Forwards
In any "arbitrage" situation, you are trying to create a scenario where you sold a rich asset and bought a cheap asset, while keeping the overall position as flat as possible to risk.
Assuming ...
- 6,672
1
vote
Accepted
Security Analysis By Benjamin Graham Example Doubt
After announcement, in December, of the intention to call the bond in April at 11 the market price fell to 11 and apparently remained at 11 throughout January.
The broker could have purchased the ...
- 12.1k
Only top scored, non community-wiki answers of a minimum length are eligible