Getting More Out of Two Asset Portfolios

Two-asset portfolio mathematics is a fixture in many introductory finance and investment courses. However, the actual development of the efficient frontier and capital market line are generally left to a heuristic discussion with diagrams. In this article, the mathematics for calculating these attributes of two-asset portfolios are introduced in a framework intended for the undergraduate classroom

Adding Depth to the Discussion of Capital Budgeting Techniques

The subject of capital budgeting generally encompasses a significant percentage of any beginning finance course with net present value (NPV) often receiving the most attention. Even after this substantial time allotment, critical assumptions and comparisons of the different techniques (such as payback period, discounted payback period, NPV and IRR) are frequently glossed over due to time constraints. Consequently, the goal of this paper is to present these non-NPV techniques in a manner that allows the beginning finance student to expeditiously see the intuition, inherent assumptions, and any connection with the more popular NPV calculation. A small portion of this paper may be more applicable to slightly more advanced finance students and can be introduced at the instructor\u27s discretion. Further, the lesson plan takes advantage of Excel to provide a visual presentation of how a given technique is executed (the Excel templates are also appropriate for assignments)

An Easy Method to Introduce MIRR into Introductory Finance Classes

In this paper, the modified internal rate of return (MIRR) is demonstrated to be a holding period return calculation that is not dependent on knowing a project\u27s internal rate of return (IRR) nor the process for finding the IRR. Further, the MIRR calculation can be directly connected to the calculation of the profitability index (PI) and the net present value (NPV) if project cash flows are discounted using a firm\u27s weighted average cost of capital. This connection to the PI and NPV allows for an intuitively appealing presentation of the MIRR calculation

Simplified Portfolio Optimization Using Cramer’s Rule in Excel

The matrix algebra associated with finding minimum variance portfolio weights, mapping the efficient frontier, and determining the tangency portfolio weights is greatly simplified in Excel by applying Cramer’s Rule. Only a scant knowledge of linear algebra is necessary for producing a very intuitive presentation for a multi-asset portfolio. The technique is very easily replicated for an assignment or for providing a classroom resource

ADR Risk Characteristics and Measurement

While a healthy empirical literature exists on international diversification and its benefits, surprisingly few studies have examined the risk characteristics and efficacy of asset pricing models for one avenue of international diversification – investments in American Depository Receipts (ADRs). Originating in approximately 1927, ADRs provide an opportunity for investors to indirectly purchase shares of foreign firms. ADRs represent a claim to a given number of shares of a foreign firm held by a U.S. financial institution (e.g., Bank of New York). With the increasingly significant presence of ADR trading in the American stock markets – increasing six-fold between 1990 and 1999 - an analysis of these securities’ diversification impact on a U.S. stock portfolio and tests of the acuity of asset pricing models for predicting their returns should contribute to investors’ utility in efficiently diversifying risk

Understanding The Impact Of Financial Decisions on Financial Statements: A Pedagogical Note

Viable financial planning requires financial managers\u27 understanding of the consequences of impending decisions on their company\u27s financial performance and position. Understanding the impact of prior decisions on their financial statements also enables future decisions aimed at improving their shareholders\u27 wealth. This note intends to contribute to developing this capacity in finance students. We provide a presentation format directly connecting financial decisions to financial statement impacts. Bridging material covered in accounting courses and a finance student\u27s needs as a possible future manager or analyst, this classroom pedagogy supplements and reinforces the objectives of the financial planning component of a finance course

Social Security Decisions: Should Recipients Opt for Early Payments?

Two Excel-based templates are developed to help determine when it is optimal for starting to receive monthly social security benefits. The decision information accounts for uncertain life expectancy by implementing a rate of return that should be set, at a minimum, to the individual’s expected return on investments or based on a metric provided in the article that considers potential life expectancy. Key Takeaways: Excel templates allow for a comparison of receiving lower monthly social security benefits at an earlier age versus waiting for higher monthly benefits at a later age. A “reserve rule of 72” metric allows for adjustments on comparing the different social security payment structures based on life expectancy. Other adjustments for comparing the different social security structures can made for those who work while receiving benefits

Do Option Markets Substitute for Stock Markets?

Using a sample of cash tender offers occurring between 1993 and 2002, we find evidence that the options market has become the preferred venue for traders attempting to profit on anticipated announcements. Options offer advantages relative to stocks. Traders gain leverage by trading in options and multiple options contracts on an individual stock. The results of our study indicate that a substitution effect does exist. Abnormal volume in the option market replaces abnormal volume in the stock market prior to cash tender offer announcements, and this abnormal option volume precedes abnormal stock volume for targets with or without traded options

Intuitive Black-Scholes Option Pricing with a Simple Table

The Black-Scholes option pricing model (1973) can be intimidating for the novice. By rearranging and combining some of the variables, one can reduce the number of parameters in the valuation problem from five to two: 1) the option\u27s moneyness ratio and 2) its time-adjusted volatility. This allows the computationally complex Black-Scholes formula to be collapsed into an easy-to-use table similar to those in some popular textbooks. The tabular approach provides an excellent tool for building intuition about the comparative statics in the Black-Scholes equation. Further, the pricing table can be used to price options on dividend-paying stocks, commodities, foreign exchange contracts, futures contracts, and exchanges of assets, and can be inverted to generate implied volatility. Formulas for reproducing the tables in Excel are included

Abnormal accumulation of autophagic vesicles correlates with axonal and synaptic pathology in young Alzheimer’s mice hippocampus

Dystrophic neurites associated with amyloid plaques precede neuronal death and manifest early in Alzheimer’s disease (AD). In this work we have characterized the plaque-associated neuritic pathology in the hippocampus of young (4- to 6-month-old) PS1M146L/APP751SL mice model, as the initial degenerative process underlying functional disturbance prior to neuronal loss. Neuritic plaques accounted for almost all fibrillar deposits and an axonal origin of the dystrophies was demonstrated. The early induction of autophagy pathology was evidenced by increased protein levels of the autophagosome marker LC3 that was localized in the axonal dystrophies, and by electron microscopic identification of numerous autophagic vesicles filling and causing the axonal swellings. Early neuritic cytoskeletal defects determined by the presence of phosphorylated tau (AT8-positive) and actin–cofilin rods along with decreased levels of kinesin-1 and dynein motor proteins could be responsible for this extensive vesicle accumulation within dystrophic neurites. Although microsomal Aβ oligomers were identified, the presence of A11-immunopositive Aβ plaques also suggested a direct role of plaque-associated Aβ oligomers in defective axonal transport and disease progression. Most importantly, presynaptic terminals morphologically disrupted by abnormal autophagic vesicle buildup were identified ultrastructurally and further supported by synaptosome isolation. Finally, these early abnormalities in axonal and presynaptic structures might represent the morphological substrate of hippocampal dysfunction preceding synaptic and neuronal loss and could significantly contribute to AD pathology in the preclinical stages