Econ 136: 10/6/11 -2nd midterm closed book.

1 pg cheat sheet of formulas -ch11 (efficiency)-12 (is the market rational? If A is clearly better than B, then A is rational and B is irrational) has no problems only text. - must have correct info ex: Prof buying a house -Process info and make the decision looks fine, bought no use toilet clogs due to pipes and roof cracked creating flood in house. Sometimes you take risk (w things he didnt have info on on the house) hidden data/risk apply to company/industries -random walk every step you take the next doesnt mecessarily follow. Every function is not a function of another, prices of stock follows random walk cannot exploit market by making certain assumptions. Ex: Steve Jobs death affect stock price of Apple? -Efficient market hypotheses (EMH): reflection of impact on market (is efficient, which you cannot beat if you have insider trading you have private info (access to info others dont have) and take advantage of the mkillegal): price of stocks reflect everything on company Semi-strong: prices and all other releveant public info Strong: all info public and private *Select relevant info from a subset of info (ex: driving, pipes under house, etc.) Watch out for bribes (considered illegal if someone paid a meal for you over $50) *Processing of info (info out there, but how do you use it?) E.g.: selecting Pres of US Gov of NJ fat infer that he doesnt look after his own health how can he take care of U.S. (some vote on looks, religion, etc.) [bias] There are some who do not believe mk is efficient *Event analysis: does an event have an impact on company (its effect) E.g.: Microsoft buying Yahoo (take over), Seteve Jobs passing, etc. Formulas:

Mutual Funds and Analysts Performance. MFs do not outperform the mk. Picture indsutires are sliced up (segmentation by industry) -forecast about future (loss/gain money) -give choice on risks and returns; nothing to do with mk; MF presents you with choices Ch 12: Behavorial Analysis 1. Fundamental analysis (LR analysis) of securities: study entire fundamentals of company. Pension funds uses 2. Technical analysis (chartist) chart theories of behavior of stock prices; believe in patterns (dont believe in random walks) collective psychology of people. Dow Theory (created Dow Jones) follow 3 things: 1. Trend fundamentalists work on 2. Cyclical movements technical work on 3. Random cant do nothing about if (daytraders work on) -trend statistics take ave volume of declining stks divided by number over ave volume of increasing divided by number Eq: -leading economic indicators no absolute trying to be rational (can only be near rational) mk near perfect, but not perfect 1 leakage/insider info prevents) -this ch is hard to read because about prof research that are inconclusive if confuse, not your fault. Eg: coffee and chocolate good or bad for you? Bigcharts.combest for technical analysts

Econ 136 Lecture: 10/11/11

-types of bonds 1. treasury (US gov) 2. state and local (muni) 3. corporate bond -plain FV: 1000 Maturity: 10 years Corporate: 8% (semi-annual every 6 months get 4%) [for simplicity, use annual] Eq:

Bond with call provision FV: 1,000 Maturity: 10 years coupon 8.5% Call in 2 years: give $ back with bonus Bond with a put FV: 1,000 Maturity= 10 years Put in 3 years coupon Convertible bond FV: 1000 Maturity= 20 years Time to convert: 25 years Conversion ratio: 50 shares conversion price of $20 50X15=250 50X100=5000 Bonds with warrants gives right to purchase stock FV=1000 Maturity = 20 years Warrant: in 5 years, can buy 40 shares @ $25 coupons 7.5%

Econ 136 Lecture notes: 10/13/11 Bonds 4 types -Plus: Zero coupon bond: borrow money, dont pay interest; paid lump sum coupon bond = 0 so Reduced interest: paying much less I (?) than mk Floating rate bonds: no fixed rate, rate determine by markets and usu tied to index (US treasury bill) Inverse floaters: floating rate bonds where if rates of mk go down inverse rates go up and vice versa Indexed bonds: Treasury infl protected securities (TIPS)

1. Yield to maturity 2. Yield to call 3. Realized yield 4. Holding period yield 1. PV= $1000 C= 8% (annual) T=30 years P8= $1267 10 years passed for traders Ex on p.454

Ex p458

-3 years

Gap is capital gains

Fair Isaac Comp (FICO) -credit important for taking loans -liability measures run regressions -calculated z scores Debt security (DSCI) 99.5% Ratings go down risk go up, rates go up Default risks -bad credit PMI credit debt swap (CDI) insurance -AIG CH14 HW: 10, 11, 20, 22, 23 (p.473-474) 2nd midterm up to this point