Discount model is in terms of conditional moments The first order condition is,u'( BE, [u'(c )x 1] The expectation is conditional expectation on investor's time t information; The basic pricing equation is P, =E, (m +1X1+)

Introduction In this class, we again look at the stock return data, but with a very different view point; Previously, we examined the data through the \eyes\of CAPM. We had a noble intension, although it didn't work very well; Now we are going to get our hands \dirty\, and plunge

Predictions and applications CAPM: in market equilibrium, investors are only rewarded for bearing the market risk; APT: in the absence of arbitrage, investors are only rewarded for bearing the factor risk Applications: ---professional portfolio managers: evaluating security returns and

Introduction The consumption-based model as a complete answer to most asset pricing question in principle, does not work well in practice; This observation motivates effects to tie the discount factor m to other data; Linear factor pricing models are most popular models of this sort in finance; They dominate discrete-time empirical work

Consumption-Based Model and Basic Pricing model Basic question to decide for an investor: (1) how much to save; (2)how much to consume; (3)what portfolio of assets to hold. Pricing equation come from the first order condition for this decision

Outline MM ean-variance analysis; ean-variance analysis and utility maximization; Does high moment matter?

Discussion Points How to measure returns? How to choose benchmark? How to adjust for risk? Performance attribution. Active return and risk

Introduction Overview of investment styles; Empirical evidence on returns of small capitalization firms and value stocks; How to identify investment styles of a mutual fund Characteristic-based style analysis Return-based style analysis Style benchmarks

Stock market index Stock market index is an indicator that is designed to reflect the performance of an entire market or a particular market segment. Indexes have many uses in investments: --allow us to quickly and easily assess market performance; --Serve as underlying securities for futures and options contracts;

INVESTMENTS Fourth Edition Efficient Market Hypothesis (EMHD Do security prices reflect information Why look at market efficiency Implications for business and corporate finance Implications for investment