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Finance 319 Lecture 8

Finance 319 Lecture 8 . Course Website http://www.citi.umich.edu/u/galka/319 Galina Albert Schwartz Department of Finance University of Michigan Business School. Investment History Video: what have we learned? . 1. Market efficiency. Does it hold?

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Finance 319 Lecture 8

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  1. Finance 319 Lecture 8 Course Website http://www.citi.umich.edu/u/galka/319 • Galina Albert Schwartz • Department of Finance • University of Michigan • Business School Lecture Notes Finance 319

  2. Investment History Video: what have we learned? 1. Market efficiency. Does it hold? 2. Diversification: What is that and when it works? 3. Risk and return: How do they relate? 4. How does 3. connected to 1.? How The Really Smart Money Invests: A Brief History of Investing Lecture Notes Finance 319

  3. Investment History Video: producer’s goals 1. Have you noticed any contradictions? 2. How can you explain them? 3. What role does Ken (the market addict) play? [i.e. why do we see him in the plot?] 4. Producer’s goal and his means: what, how & whether the goal was reached successfully? How The Really Smart Money Invests: A Brief History of Investing Lecture Notes Finance 319

  4. Today’s plan: Empirical evidence: to trust or not? • short run & long run: how long? • Real Income [ & neutrality of money] • Real vs Nominal: how precise? • PPP empirical evidence and real life • risk management • location choice for profit maximization • Next time: starting the IRP chapter: • forward premium & forward discount • covered interest rate arbitrage [covered against what?] Lecture Notes Finance 319

  5. Short run & long run • How long does it take to get to a long run equilibrium? • Depends on what we are looking • price of gasoline • stock market prices • government bonds prices • exchange rate [i.e. dollar price in terms of..] Lecture Notes Finance 319

  6. Real Income • Levich, p. 106 • Question: Is real income a well defined concept? • Neutrality of money • a definition • is neutrality easy to prove or disprove? • does it hold? Lecture Notes Finance 319

  7. Empirical problems • What are we trying to measure {and why}? • Production costs: home and abroad • Exchange rate risks • we face them no matter what • have to hedge! Lecture Notes Finance 319

  8. Next Lecture: Interest Rate Parity • Interest Rate Parity = IRP • To read: Levich, Ch. 4 & 5 • Rogoff, Kenneth, (1996), “The Purchasing Power Parity Puzzle,” Journal of Economic Literature, Vol. 34, No. 2. , pp. 647-668. (S) Lecture Notes Finance 319

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