of University Oklahoma Michael F. Price College of Business Investments FIN 5103-900
Fall 2006 Thursday 6:30 9:20 pm, Price Hall 3040 Office Hours: Thursdays by appointment
Evgenia(Janya) Golubeva Office AH252 325-7727 (phone) 3257688 (fax) [e-mail]
Course Overview The Investments course focuses on financial decisions of individual market participants trying to maximize the returns / minimize the risks of their investment portfolio. The course covers several major types of financial instruments, all of which are actively traded in todays financial markets. Those include stocks, bonds, options, forwards and futures, and (if time permits) swaps. The goal of this course is to introduce you to these securities and discuss their properties and their use, as well as their valuation methods. This course consists of three parts. The first part will begin with a discussion of the relationship between the risk of a security and its return and the idea of market efficiency. We will briefly review the concept of a risk-free interest rate and learn how to determine current and future interest rates from the quoted prices of government bonds. We will discuss and practice portfolio diversification. Finally, we will discuss several models that relate the risk of a security to its required rate of return, including the empirical evidence on these models and their application in investing such as mutual fund performance evaluation. We will use statistical tools to evaluate real-life mutual funds against various benchmarks. The second part of the class will focus on security analysis. We will cover financial statement analysis and the use of financial ratios. We will also discuss several popular equity valuation models. In our discussion, we will briefly relate the valuation of an individual company to the issues regarding the economy as a whole. The third major topic in the class is derivatives. We will examine options and futures contracts. We will define these securities, examine pricing models for the securities, and discuss how they can be used to manage financial risks. You will have the opportunity to investigate some of the theories and pricing models discussed in class first-hand through portions of problem sets and the trading game. You will need access to security prices (including stocks, options, treasury bills) to complete those assignments. Prerequisites You must have completed Finance 5043 and have a permission by Graduate Programs to receive a grade for this class. Special Accommodations: Any student in this course who has a disability that may prevent him or her from fully demonstrating his or her abilities should contact the instructor personally as soon as possible so we can discuss accommodations necessary to ensure full participation and facilitate
your educational opportunities. The University of Oklahoma is committed to providing reasonable accommodations for all students with disabilities. Students with disabilities who require accommodations in this course are requested to speak with the professor as early in the semester as possible. Students with disabilities must be registered with the Office of Disability Services prior to receiving accommodations in this course. The office of Disability Services is located in Goddard Health Center, Suit 166, phone [phone] or TDD only [phone]. Religious Holidays It is the policy of the University to excuse absences of students that result from religious observances and to provide without penalty for the rescheduling of examinations and additional required class work that may fall on religious holidays. Academic Integrity The University policy on academic integrity will be strictly followed. The information about the policy on academic misconduct is located on the following website: http://www.ou.edu/provost/integrity Attendance I shall not check your attendance, and you need not bring me a written note for missing a class (unless it is a scheduled exam see below). Please note however that attendance and paying attention in class is crucial for your successful completion of this course. Class notes are not posted anywhere, and you are not guaranteed to make up for the missed lecture time by reading the textbook and the handouts. Materials (1) The required reading for this course is Investments, sixth edition by Bodie, Kane, and Marcus, and Handouts posted on http://learn.ou.edu or distributed in class. Your reading assignment sheet attached to this syllabus states which sections of book chapters and which handouts you need to read for each topic. Note that you are not responsible for chapter Appendices unless otherwise stated. (2) Whartons Online Trading and Investment Simulator (OTIS) access kit. You will need one account per team of three to four students. (3) Access to the Wall Street Journal and to the Internet is important. Free copies of the Wall Street Journal are available through the Price College as well as online. (4) Other materials are posted on http://learn.ou.edu, such as homework guides, practice tests, etc. Grades The course grade will be determined by your performance on one midterm exam, the final exam, four problem sets, and the trading game. Because I would like to grade and return assignments promptly, it is important that you turn in assignments on the scheduled date. The point distribution will be the following. Four homework projects (50 pts each) Midterm points Trading game points Final Exam (Not Comprehensive) TOTAL 200 points 300 200 300 points 1000 points
I shall grade on the curve at the end of the semester, to adjust for the difficulty of the course.
Make-up Exams Everybody must take the exams on the scheduled dates unless you have an emergency. Should an emergency occur please provide me with a written proof such as doctor / counselor note, a letter from work, etc. In case you have missed an exam due to an emergency, I shall arrange for you to make up the exam. Trading Game This is a team project. Each team will receive a hypothetical initial endowment and trade online in real time. You need OTIS access kit (one account per one team of three to four students) for the game. The game will begin on September 1 and end on November 21. The written team reports are due on Sunday December 3 at the end of day (midnight). The trading game requirements will be announced separately at the beginning of the game. Homework The homework assignment sheet is attached to this syllabus. Homework is due at the end of the due date (midnight) as mentioned in the syllabus. I shall accept late homework up to one week after the due date with 15 points late penalty (each homework assignment is worth 50 points). Later assignments shall not receive credit. You may not turn your homework as a team product. The homework assignments are not designed as team projects. You must work on them individually even though you may consult with each other while completing your homework. All your assignments must be typed up and submitted electronically. Please save your homework under the following name: your last name _ your first name _ homework # . extension (for example smith_john_homework2.xls) and email this file as an attachment to my graduate assistant (see name / address below).You must show all your work and not just the answer. For example, if you use Microsoft Excel for your calculations save your file as .xls to make sure all your formulas show up in the formula bar. If I see the final answer only and no formula, no credit shall be given, even if the answer is correct (this applies to exams also). The homework that does not satisfy these format requirements shall be returned to you for correction with no late penalty provided you turned it on time to begin with. Communication Should you need to reach me and I am not in my office, please leave a voice mail message. If you me send a fax please put my name on it. Should I need to notify you of any event (such as a change in the syllabus, illness, etc.), I shall make the announcement in class and/or via email. IT IS EXTREMELY IMPORTANT THAT YOU CHECK YOUR UNIVERSITY EMAIL ACCOUNT REGULARLY. Graduate Assistant The graduate assistant is Hamed Bagherpour, [e-mail]. Hamed will assist me with grading and will be available to help you with homework questions. Please email your completed homework as well as all homework-related questions to the graduate assistant. If you email them to me I do not guarantee a timely response. Hamed may substitute for me on occasion.
Class Schedule and Reading Assignments Finance 5103-900 Fall 2005 Class Topic Readings (Bodie, Kane, and Marcus) Handouts (on Blackboard)
1.Risk and Return: The Fundamental Tradeoff in Finance
Aug 24 Aug 31 8.4
Institutional detail Diversification; Portfolio analysis
Chapter 2, 3 Chapter 6 Chapter 7.1 7.3 Chapter 8.1 (Skip Example 8.3) Handout 1
Sep 1 Sep 7
Trading Game begins CAPM and Beta; Index Model Chapter 9.1 (Skip 2nd half of p.285) Chapter 10 Handout 2 Chapter 24
Sep 14 Sep 21
Asset pricing and market efficiency: Evidence (brief overview) Portfolio Performance Evaluation
2. Security Analysis Sep 28 Oct 5 Oct 12 Financial statement analysis Equity valuation models MIDTERM EXAM Chapter 19 Chapter 18
3.Derivatives
Oct 19
Options
Chapter 20
Class Schedule and Reading Assignments continued Class Topic Marcus) Handouts (on Blackboard) Oct 26 Options (continued) Chapter 21 Handout 3 Handout 4 (optional) Finish Chap. 21 Chapter 22 Handout 5 Chapter 23 Chapter 23 Handout 6 (optional) Handout 7 (optional) Nov 21 Nov 23 Nov 30 Dec 3 Trading Game Ends THANKSGIVING BREAK Review / Trading Game insights Written Team Reports Due Readings (Bodie, Kane, and
Nov 2
Options (continuted) Forwards and Futures Forwards and Futures (contd) Forwards and Futures (contd) Exchange rate swaps (?)
Nov 9 Nov 16
FINAL EXAM As scheduled by the University Thursday, Dec 7, 6:30 9:20 pm In the regular classroom
Fall 2005 Fin 5103-900 Homework Assignment Sheet Assignment 1: due Sep 14 Use hwk1 example.xls and optimal risky portfolio.xls to guide you. Use hwk1 data.xls as a template to complete the assignment. Please do not use another format it delays grading. Find the provided weekly adjusted close stock prices for Exxon Mobil (ticker symbol is XOM), Chesapeake Energy Corp (CHK), and Southwest Airlines (LUV) for the period January 3, 2005 through January 3, 2006. Use the prices to calculate weekly returns. 1.For each of the three stocks, find the annualized average return and annualized standard deviation of returns. Note that the handouts use daily returns, while you will be using weekly returns. Thus you need to use 52 (number of weeks in one year) instead of 252 (number of trading days) when annualizing. 2.Find the correlation coefficient of XOM and LUV; then find the correlation coefficient of XOM and CHK. State the likely reason for the difference in the two coefficients. 3.Use your answers from (I) and (II) to calculate the annualized return and annualized standard deviation for each of the following allocations between LUV and XOM: (-1, 2); (-0.75, 1.75); (-0.5, 1.5); (-0.25, 1.25); (0, 1); (0.25, 0.75); (0.5, 0.5); (0.75, 0.25); (1,0); (1.25, -0.25); (1.5, -0.5); (1.75, -0.75); (2, -1). Chart your results as a set of volatility-return possibilities. 4.Assuming the risk-free rate is 3.5% per year, use Excel Solver tool to solve for the optimal portfolio of LUV and XOM (the one with the highest Sharpe ratio). If you cannot use Excel Solver, iterate the weights in 0.01 increments and identify the optimal portfolio approximately. End-of-chapter problems: 3.3, 3.9, 3.14 (a, b), 7.5, 8.10 Assignment 2: due Oct 1 Use fund performance evaluation.xls and t_bill_data.xls for this assignment. Collect monthly adjusted prices for Artisan Small Cap Value mutual fund (ARTVX) and for S&P 500 (^SPX) over the period Dec 31, 1996 Dec 31, 2004. Use the prices to calculate monthly returns in percent. You should have 84 monthly return observations. You need not annualize the monthly returns for this assignment. 1. Find the average monthly return and the standard deviation of monthly returns for the mutual fund and for S&P 500. 2. For each month, calculate the excess monthly returns for the fund and for the market index. Note that the t-bill data is provided as annualized return in percent. Because the monthly returns on the fund and the market are not annualized, you need to de-annualize the t-bill return as well. Make sure also that all returns are measured in percent.
3. Using Index Model, run a linear regression of ...