Unit 1: Foundations
Markets, securities, returns and funds. Change any number on the left of a tool and every result, chart and explanation updates at once. Each tool starts from a worked example in the lecture notes, so you can check it against your notes and the video, then try your own numbers.
Chapter 2. Investments, financial markets and market participants
An economy's wealth is its real assets: the land, buildings, machines, knowledge and people that produce goods and services. Financial assets, such as stocks, bonds and bank deposits, produce nothing themselves. They are claims on the income that real assets produce.
Real or financial asset?
For each item, decide whether it is a real asset (something that produces goods or services) or a financial asset (a claim on someone else's income). You see at once whether you are right, with a one-line reason.
Starts from Worked example 2.1 (video 02-1).
Chapter 3. Asset classes: stocks, bonds and money market securities
Bonds and bills promise fixed payments, but the way their yields are quoted can hide what you really earn. These tools convert quoted yields into numbers you can compare: after tax, and on the price you actually pay.
Taxable-equivalent yield
Interest on most municipal bonds ("munis", issued by states and cities) is free of federal income tax. To compare a muni with a taxable bond such as a Treasury note, ask what taxable yield would leave you with the muni's yield after paying tax.
Starts from Worked example 3.2 (video 03-3).
T-bill pricer and yield converter
A Treasury bill pays no coupon: you buy it below its face value and get the face value at maturity. Bills are quoted with a bank discount yield, an old convention that understates your true return. This tool turns the quote into a price and two more honest yields.
Starts from Worked examples 3.3 and 3.4 (video 03-4).
Chapter 4. Measuring investment returns and risk
How much did an investment earn, how do you compare returns over different horizons, and how do you describe the risk of returns you do not yet know?
Holding-period return and annualizing
The holding-period return (HPR) is what you made while you held an investment, as a fraction of what you paid. To compare a six-month return with a yearly one, you annualize it: either simply scale it up (the APR) or assume you reinvest and earn interest on interest (the EAR).
Starts from Worked examples 4.1 and 4.2 (video 04-1).
Arithmetic versus geometric average
Given several years of returns, the arithmetic average adds them up and divides by the number of years. The geometric average is the steady yearly return that would have produced the same ending wealth. The geometric average tells you what really happened to your money; the arithmetic average is the better estimate of next year's expected return.
Starts from Worked example 4.4 (video 04-1).
Expected return and risk from scenarios
You do not know what next year will bring, so you list a few possible states of the economy, how likely each one is, and what the investment would return in each. The expected return is the probability-weighted average; the standard deviation measures how far the outcomes spread around it.
Starts from Worked examples 4.6 and 4.8 (video 04-2).
Chapter 5. How securities are issued and traded; buying on margin; short selling
Buying on margin means borrowing part of the price of a stock from your broker; short selling means borrowing shares and selling them, hoping to buy them back cheaper. Both use borrowed money or shares, so both come with margin rules and the risk of a margin call.
Margin account simulator
You pay part of the purchase with your own money (your equity) and borrow the rest. The loan stays fixed while the stock price moves, so your equity absorbs every gain and every loss. If your equity falls below the maintenance margin, the broker makes a margin call.
Starts from Worked examples 5.3 to 5.6 (video 05-3) and 5.7 (video 05-4).
Short sale and margin call
A short seller borrows shares, sells them, and must later buy them back. The sale proceeds plus your own deposit sit in the account as cash. If the price rises, buying back costs more, your equity shrinks, and at some price the broker calls.
Starts from Worked example 5.10 (video 05-5).
Chapter 6. Stock market indices
A stock index summarizes how a group of stocks did with one number. How the stocks are weighted decides which stocks matter most, so the same stocks over the same period can give quite different index returns.
Index weighting lab
Enter each stock's price at the start (t = 0) and the end (t = 1) and its number of shares outstanding. The tool computes the price-weighted index (like the Dow), the value-weighted index (like the S&P 500) and the equal-weighted index, and shows how a stock split changes the divisor of a price-weighted index.
Starts from Worked examples 6.1 to 6.3 (video 06-1).
Chapter 7. Investment companies: mutual funds, ETFs, net asset value and fees
A fund pools investors' money into one portfolio. Its net asset value tells you what one share of the fund is really worth, and its fees decide how much of the portfolio's return you get to keep.
Fees over time
A load is a one-time sales charge, paid when you buy (front-end) or when you sell (back-end). The annual fees (operating expenses plus any 12b-1 fee, which together make up the total expense ratio) are charged every year on your whole balance. Compare funds with different fee structures and see which one leaves you with more money, and after how many years.
Starts from Worked examples 7.4 to 7.6 (video 07-3).
Chapter 8. Passive versus active funds
An index (passive) fund simply holds the market; an active fund pays analysts and trades to try to beat it. Before costs, the average active dollar earns the market return, so the question is how much skill it takes to cover the extra costs.
The active manager's hurdle
Both funds hold portfolios earning the same gross return. The active fund charges a higher fee and pays trading costs, so its manager must add extra return (called alpha) every year just to tie the index fund.
Starts from Worked example 8.1 (video 08-1).