investment

  • investment (BU.232.731)- The johns hopkins university- carey business school FALL 2009/spring 2010

    COURSE OBJECTIVES

    Course Description

    This course is designed to provide the student with both the theoretical understanding of how investment decisions are made under uncertainty and the practical applications of this theory. Specific attention is focused on the risk reduction strategies in the formation of investment portfolios. Lectures, readings in the text and class assignments are designed to provide the student with the skills needed to understand the theoretical framework of financial economics which underlie investment analysis and portfolio management as well as the practical understanding of how these theories are used by professional investment managers and corporations (as well as by individual investors). While emphasis will be placed on the development of the investment and portfolio theory and its applications, the student will also be exposed to the limitations of theory. The major goal is to enable the student to think like a professional investment analysis and to communicate effectively his or her understanding.

    The topics covered in the class will include the organization of securities markets, modern portfolio theory, asset pricing models, efficient market theory, the pricing of fixed income securities, security analysis, and an introduction to derivatives. While most of the course will be focused on domestic (US) financial markets, some of the concepts will be illustrated using international and emerging markets.

    Two items require particular emphasis. First, class attendance is important. Considerable material will be covered each week and the class builds rapidly on materials. It will be difficult for a student to keep up without attending all of the classes. Second, it is important that the student carefully read each assignment and workout the problems and quizzes at the end of each chapter. While selected problems will be assigned it is recommended that the student read through all problems and understand how they should be approached.

    Students need to have access to the Internet and to Excel, as some assignments will use real data. These are available on the university computer labs.

    Learning Goals

    This course acquaints MBA students with the theoretical and more practical aspects of investment analysis, for security selection and portfolio management purposes. The goal is to expose students to material that any participant in the investments industry – from private investor to pension fund consultant to portfolio manager – will find useful. Logically, the study of investment pricing techniques and of the institutional background in which investment professionals operate should precede the study of how these professionals do or ought to behave. The course, which consists of six main parts, is organized accordingly.

    After an introduction and a brief review of general finance concepts, Part I of the course presents the institutional environment in which portfolio managers operate. We discuss participants; instruments and their markets; and the way that securities are traded.

    Parts II and III deal with portfolio management. Part II is short. It starts with the basic elements of modern portfolio theory: return (both nominal and real), risk, and the trade-off that risk-averse investors must make between the two. It then covers portfolio mechanics. Part III tackles “top-down” portfolio management as well as the major pricing models for financial assets. Among those, we first study the CAPM (“capital asset pricing model”), building on and significantly extending the notions learned in previous finance courses. We then explain how to use the CAPM in practice, i.e., how to implement index pricing models and (time permitting) multi-factor models and hedge fund strategies.

    Parts IV and V analyze the two categories of financial instruments that nowadays account for most trading activity: fixed income assets and interest-rate derivatives securities. Part IV deals with securities that provide fixed periodic income, such as municipal and other local government bonds, US Treasury Bills, Notes and Bonds, and mortgage-backed securities. The material includes the computation of bond yields, and the measurement of the term structure of interest rates. Part V discusses portfolio-management techniques that are specific to fixed-income securities. Topics include overviews of interest-rate risk measurement (including duration and convexity) and management, and credit risk (including credit spreads and credit crunches). Time permitting, yield-curve and spread-convergence trading techniques and bond-portfolio hedging shall be discussed. Credit derivatives and hedging techniques shall be introduced.

    Part VI then presents the key elements of fundamental analysis for equities. The main items discussed in this part of the course are the elements of a “top-down” analysis of a firm’s prospects, from macroeconomic and industry analysis to company-specific items. Practitioners rely on three main methods to value individual equities: ratio analysis, discount models and “comparables.” We shall revisit dividend discount models, and cover in detail price/earnings ratio analysis.

    Learning Outcome

    Students attending this class will learn

    1. Modern portfolio theory;
    2. Fixed income securities;
    3. Term structure of interest rate;
    4. Interest rate risk measurement and management;
    5. Fundamental analysis of for equities.

    Required Texts

     

    We will use only parts of the following text.

    • Zvi Bodie, Alex Kane, Alan Marcus (2009), Investments, 8th Edition, McGraw-Hill (hereafter, BKM).
    • Burton Malkiel (2007), A Random Walk Down Wall Street, 9th Edition, W.W. Norton & Company. (hereafter, BM)
    • Carmen Reinhart and Kenneth Rogoff (2009) This Time is Different: Eight Centuries of Financial Folly, 1st Edition, Princeton University Press. (hereafter, RR)

    Recommended Readings

    Investments is an especially dynamic area, and students are urged to follow current developments in the press. This includes reading the following papers: The Wall Street Journal, The Economist (weekly, www.economist.com, mostly pay site) or The Financial Times. Barron’s, Euromoney and Value Line’s Investment Surveys are some of the other good sources of investment news. Other newspapers may also be useful for the purpose of the class, but often lack significant amounts of relevant information.

    Assignments

    Discussion and exams will reward those who prepare in advance. The exams will draw heavily on the homework assignments, which are not going to be graded, given throughout the semester. Grading will be based on Reflection and Analysis Assignments (10 percent), reading from Random Walk Book (10 percent), two group assignments (30 percent), a midterm exam (25 percent) and a cumulative final exam (25 percent). Exams are take-home and open book. All homework should be typed and submitted to me by e-mail not later than specified due date (homework sent in late will not be accepted). For programming assignments, you should submit a working program file. For analytic and algebraic exercises, I prefer to receive them as a LaTeX format but also accept PDF files.

    Reflection and Analysis Assignments (due each week by Monday evening 11:59 PM):

    Every week, you will be required to submit two page review of an article related to investments or portfolio management found in the professional press (Wall Street Journal, Financial Times, Economist, standard business publications). Beyond a summary of the article, the student should critique based on readings and materials covered in class. Some weeks a specific article will be assigned for review. Be sure to provide a complete reference to the article (publication, author if available, title, date) and a brief summary (one paragraph) of the article. Include in your discussion the following 4 points. The assignment should be no more than 2 pages (with normal font and margins).

    1. What did you learn (most significant points)?
    2. What did it connect with that you knew previously and/or with what you have learned in this class?
    3. What questions does the article raise in your mind (e.g., what is unresolved)?
    4. How would this information impact you as an investor (either personally or professionally)?

    Group Assignments

    Since we wish to emphasize practical skills, students shall complete two sets of numerical problems that use actual asset returns. To reflect how most companies conduct business, students shall form groups to handle this assignment. Groups shall comprise four students -- no fewer, no more. Groups shall e-mail their composition to me by February 1 at the latest. Once groups have been formed, their composition is not allowed to change. I reserve the right to handle any and all group-related problems. Each group is to return an e-mail with its written answers and the supporting Excel spreadsheets by:

    • Assignment #1 (group): by Monday, March 1 at 6 PM;
    • Assignment #2 (group): by Monday, March 15 at 6 PM

    Reading from A Random Walk Down Wall Street (due every other week by Monday evening 11:59 PM, only if your group is assigned to review the relevant chapters)

    Each group will also be asked to review the following chapters of A Random Walk Down Wall Street. The review should be no more than 15 pages (with normal font and margins). Be sure to provide a brief summary (no more than five pages) of the relevant chapters. Then provide answers to the following questions:

    1. What did you learn (most significant points)?
    2. What did it connect with that you knew previously and/or with what you have learned in this class?
    3. What questions does the article raise in your mind (e.g., what is unresolved)?
    4. How would this information impact you as an investor (either personally or professionally)?

    Book

    Chapters

    Due Date

    Groups

    BM

    1-7

    2/ 15/2010

    Group 1,2,3

    BM

    8-11

    3/ 1/2010

    Group 4,5,6

    BM

    12-15

    3/ 15/2010

    Group 7,8

  • Students should have an account on Blackboard to access the class web-site and to obtain class handouts. To get an account, go to Blackboard login page, http://bb.carey.jhu.edu and follow the instructions.

    Evaluation and Grading

    Assignment

    Learning Outcome

    Weight

    Reflection and Analysis Assignments

     

    10%

    Reading from A Random Walk Down Wall Street

     

    10%

    Group Assignment  1

    1

    15%

    Group Assignment  2

    2,3,4

    15%

    Mid-term Exam

    1

    25%

    Final Exam

    All

    25%

    Grading Scale

    Percentage

    Grade

    93+

    A

    90-92

    A-

    87-89

    B+

    83-86

    B

    80-82

    B-

    77-79

    C+

    73-76

    C

    70-72

    C-

    <70

    F*

    Course Calendar

    Exams will not presume knowledge of the optional articles, except to the extent that they have been explicitly discussed in class. New articles may be added to the list during the course. The following is a tentative outline. Circumstances may arise which result in more or less material being covered.

    Week

    Lecture and Lecture Notes

    Reading

    Due

    Before Class

    Investment Environment and Financial Instrument

    BKM Ch 1-4

     

    1,2

    Measurement of risk and return Risk aversion and investment allocation

    BKM, Ch 5-6

     

     

    3

    Diversification and the formation of simple portfolios

    BKM 7, 8

     

     

    4

    Asset Pricing Models: Their uses and their limitations

     

    BKM 9, 10

     

     

    5

    Efficient market hypothesis Criticism of asset pricing models – Behavioral finance and empirical evidence

    BKM 11,12,13,

     

    Assignment 1

    Midterm Exam

    Is given on 2/26/2010

    Due in class

    6

    Introduction to fixed income securities

    BKM 14, 15, 16

     

    7

    Security Analysis

    BKM 17,18,19

    Assignment 2

    8

    Portfolio Performance Evaluation

     

    BKM 24,25,26,27

    Final Exam

    Is given on 3/19/2010

    Due in class

     

    Academic Integrity and Ethical Conduct

    Carey Business School students assume an obligation to conduct themselves in a manner appropriate to The Johns Hopkins University's mission as an institution of higher education and with accepted standards of ethical and professional conduct. Students must demonstrate personal integrity and honesty at all times in completing classroom assignments and examinations, in carrying out their fieldwork or other applied learning activities, and in their interactions with others. Students are obligated to refrain from acts they know or, under the circumstances, have reason to know will impair their integrity or the integrity of the university. Violations of academic integrity and ethical conduct include but are not limited to cheating, plagiarism, unapproved multiple submissions, knowingly furnishing false or incomplete information to any agent of the university for inclusion in academic records, violation of the rights of human and animal subjects in research, and falsification, forgery, alteration, destruction, or misuse of official university documents or seal. Students are also expected to abide by the Student Code of Conduct (see pages 40-42).

    http://carey.jhu.edu/catalog/academic-policies/academic-standards/

    Disability Services

    If you are a student with a documented disability who requires an academic adjustment, auxiliary aid, or other accommodations, please contact Jennifer Smith in the Disability Services office at least four weeks prior to the beginning of the first class meeting:

    Statement of Diversity and Inclusion

    Johns Hopkins University is a community committed to sharing values of diversity and inclusion in order to achieve and sustain excellence. We believe excellence is best promoted by being a diverse group of students, faculty and staff who are committed to creating a climate of mutual respect that is supportive of one another’s success.

    Testing Center

    The Testing Center provides testing-related services including:

    • Administration of make-up exams
    • Accommodation for special testing needs due to a documented disability through Disability Services
    • Referrals for tutoring

    Contact the center by phone at 410/516-9750 or email: onestop.testing@jhu.edu to inquire about testing needs.

    Attendance Policy

    Attendance and participation are part of your course grade. Full attendance and active participation are required for you to succeed in this course. One class, either excused or unexcused, may be missed without penalty. Beyond this one absence, your participation grade will be dropped ten points for each absence. Three absences, whether excused or not, result in a failing grade for the course. For an absence to be excused, you must have contacted the instructor prior to the class meeting, and you must provide a valid, legitimate, substantiated excuse at the next class session.

    Syllabus in pdf format