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 DEPARTMENT OF FINANCE

MCCOMBS SCHOOL OF BUSINESS

UNIVERSITY OF TEXAS AT AUSTIN

 

Finance 367 : Investment Management

 

Spring 2005

 

Monday & Wednesday 2:00-3:30, UTC 4.122, unique #02595

Monday & Wednesday 3:30-5:00, UTC 4.122, unique #02600

 

Professor: Paul Tetlock

CBA 6.258, 471-1509, tetlock@mail.utexas.edu

Office Hours:  Mondays 5:00-6:30 and by appointment

 

Teaching Assistants:

Shirley Birman

Jie Cao

CBA 5.324D, 471-1674

CBA 5.324D, 471-1674

shirley.birman@phd.mccombs.utexas.edu

jie.cao@phd.mccombs.utexas.edu

Office Hours: Fridays 1:30-3:00 and appt.

Office Hours: Weds. 5:30-7:00 and appt.

 

 

Course Description

 

Finance 367 is an introductory investment course.  The course is intended for students who want to become investment professionals, knowledgeable individual investors, or both.  The course covers the primary financial securities–bonds, stocks, and derivatives–and methods for combining these underlying assets into a portfolio.  Students will have an opportunity to apply the concepts learned in class through a group portfolio project.

 

First, we will cover the overall layout of U.S. financial markets and the financial instruments available in these markets.  After this quick overview (two classes), we will study fixed income securities (bonds).  Because bonds pay a fixed amount of interest on a set schedule to investors, the valuation and pricing of bonds is primarily an application of the time value of money concept. This concept should be familiar to students satisfying the central prerequisite to this course (FIN 357).  The first test (Wednesday, February 16) will cover both the general overview material and the bond material, with heavy emphasis on the bond pricing and bond risk measures developed in class and through homework problems and readings.

 

Following our work on fixed income securities, we will study equity securities (stocks).  Because stocks represent an ownership stake in a company, the cash flows to stockholders are generally more variable than the cash flows to bondholders.  The course will cover various valuation methods for stocks, focusing on dividend growth models but also discussing other valuation techniques.  Next, we will study portfolio theory, which tells us how to measure investment risk and how risk can be mitigated by combining financial assets into a portfolio.  The second test (Wednesday, March 30) will cover the material on stocks and the material on portfolio theory (everything after the first test).

 

After the second test, we will discuss derivative securities (options and futures) and investment mechanics.  The options material will include both an analysis of the uses of options to construct various payoff schemes and the valuation of options with the Black-Scholes model.  Finally, the course will conclude with the topic of investment mechanics. We will learn how the financial securities studied in this course are traded in real markets and how to judge investment performance.  The final exam will be cumulative, testing students’ knowledge on all of the material covered in the course.

 

 

Course Requirements and Grading

 

Grades will be based on the student’s performance on two in-class tests, one final exam, the portfolio project (group project), and class participation.  Each graded component will be curved such that roughly 20% of students receive grades below a “B”, 40% receive “B”s, and 40% receive “A”s. The exact curve for each component will depend on the level and shape of the score distribution. The weights on each component of the overall course grade are as follows:

 

                        First Test                      Wednesday, February 16         20%

                        Second Test                 Wednesday, March 30             25%

                        Final Exam                   TBA (To Be Announced)         35%

                        Portfolio Project           ongoing                                    15%

                        Class Participation        ongoing                                    5%

 

There will be no subjective curves applied to the weighted average of the component grades. In other words, your overall course grade is determined mechanically by the above weightings and the curved component grades.

 

Make-up exams are generally not possible.  There will certainly not be make-up versions of either the first or second test.  If you miss either the first test or the second test for a pre-approved reason, then the percentage of the missed test will be added to your final.  For example, if you miss the first test for a pre-approved reason, your final exam will count 55% (35% + 20%).  Likewise, if you miss the second test for a pre-approved reason, your final exam will count 60% (35% + 25%).  Do not miss the final.

 

What is a valid pre-approved reason for missing a test? 

If you develop a schedule conflict with the first test, then I must approve your reason for missing the first test no later than Wednesday, February 9.  If you develop a schedule conflict with the second test, then I must approve your reason for missing the second test no later than Wednesday, March 23.

 

If you fail to show up for either test without telling me beforehand, then you must present a doctor’s note stating that you were too sick to take the test.  Other personal reasons may be considered valid at my discretion.  If you miss either test without a valid reason, then you will receive a zero on the missed test.  Again, do not miss the final.

 

Your class participation grade will be determined in large part by your attentiveness in class, your willingness to answer questions when they are directed to you, and your willingness to speak up when questions are directed to the class as a whole. To improve your participation grade, you may wish to read publications such as the Wall Street Journal regularly. If you point out to me an interesting recent article with direct relevance to the course, then your participation grade will increase.

 

There is no opportunity in this course to do “extra-credit” work.  Your grade will be determined solely by the components listed above.

 

Problems from the text will be assigned and occasionally discussed in class, but will not be graded.  The problems assigned will be particularly useful as study guides for the examinations.  A solutions manual accompanying the text, containing solutions to the problems in the text, is available for purchase at the Co-op bookstore.  There may be errors in the solutions manual; I will try to alert you to the errors as I find them.  If you suspect there is an error in the solutions manual, please bring it to my attention.

 

 

Course Materials

 

Both course textbooks are available at the Co-op. The required text for the course is:

           

Essentials of Investments, Bodie, Kane, and Marcus, 5th ed., 2004, McGraw-Hill.

 

A recommended, but not required, book for the course is the solutions manual entitled:

 

Solutions Manual for Use with Essentials of Investments, Bodie, Kane, Marcus.

 

Reading assignments will include textbook chapters and a series of short, online articles (see the schedule below). All required readings should be completed prior to the class meeting for which they are assigned. The official course web site, available through the UT Blackboard system, will serve as a mechanism for distributing the assigned online articles and other course materials:

 

https://courses.utexas.edu/webapps/login

 

Optional, supplementary materials will be posted on Professor Tetlock’s home page:

 

http://www.mccombs.utexas.edu/faculty/paul.tetlock/

Finally, students will need a financial calculator capable of calculating present values, solving for yields, and performing other basic time value calculations.  Time value tables will not be distributed with the tests in this class.  Students bear the responsibility for learning to operate their calculators proficiently.  Programmable calculators must be cleared before each test; and there is no sharing of calculators during the test.  

 

 

Portfolio Project

 

For the portfolio project, student teams of five members will invest a fictitious $100,000 in five stocks and five bonds, with $10,000 invested in each of the 10 financial assets chosen.  I will put together the teams with some input from students.  The deliverables for the portfolio project are as follows:

 

1)      Wednesday, February 9. Submit team portfolio selections.  The portfolio selection memo will contain the team’s picks – five stocks and five bonds – and a short explanation (one to two paragraphs) of each of the ten picks justifying why the team expects the stock or bond will perform well over the next two months.  The portfolio selection memo will be no longer than ten pages.  (5 points for selection memo)

2)      Every Other Wednesday, starting on February 23. Submit three-page memo describing:

¨      Portfolio performance over the past two weeks (percentage and dollar gain or loss for the two weeks and since inception); (An Excel spreadsheet for calculating and presenting the results will be available online for copying and adapting to your own portfolio.)

¨      Explanation of the results (what was the cause of the portfolio’s performance?);

¨      Evaluation of last memo’s expectations (performance occurred as expected, or, performance deviated from expectations and why);

¨      Expectations for the upcoming two weeks.  (5 points total for memos)

3)      May 2. Make a presentation to the class explaining portfolio performance over the semester.  The presentation will replicate a professional presentation with team members using PowerPoint slides. (5 points for presentation)

4)      May 2 (the presentation date). Each student will submit a one-page memo to me grading their fellow team members on a scale of 1 to 5 (5 = excellent team member, exceeded required duties, pleasure to work with, had great ideas, etc.; 1 = provided no help, difficult to work with, contributed no ideas or analysis, didn’t show up to meetings, etc.), with a brief explanation of any score of 1 or 2.  (0 points for feedback)

General and Miscellaneous Policies

 

  • Although attendance will not be taken, you are responsible for everything covered or assigned in class.  The lectures may depart significantly from the material assigned and it is important that you review the assigned readings prior to the class session.

 

  • The use of laptop computers is permitted during lectures solely for the purposes of taking notes and obtaining course materials. E-mail and the Internet may not be accessed during lectures except to visit the course web sites listed in the syllabus.

 

  • During lectures, you should always be prepared to answer questions. I will address questions to individuals and to the class as a whole at my discretion.

 

  • Academic dishonesty will not be tolerated.  Your responsibilities with regard to scholastic dishonesty are described in detail in the Policy Statement on Scholastic Dishonesty for the McCombs School of Business.  In particular, it is expected that the work on your examinations will be entirely your own and that you will provide a level and quality of work on your group projects commensurate with your colleagues.  Failure in these regards may result in failure on the examination, projects, or course.

 

  • The University of Texas at Austin provides upon request appropriate academic accommodations for qualified students with disabilities.  For more information, contact the Office of the Dean of Students at 471-6259.

Course Schedule

 

MTG

DAY

DATE

TOPIC

CHAPTER

 

 

 

 

 

1

Weds

19-Jan

INTRODUCTION - Schedule, Grading, Portfolio Project, Class Policies

 

2

Mon

24-Jan

OVERVIEW - Financial Instruments and Players
Hand out group assignments for portfolio project

1

3

Weds

26-Jan

OVERVIEW - Financial Markets and Instruments

2

 

BONDS

 

4

Mon

31-Jan

BONDS - Institutional Details and Definitions

9

5

Weds

2-Feb

BONDS - Yield and Pricing Calculations

9

6

Mon

7-Feb

BONDS - Yield Curve and Credit Spreads

9

7

Weds

9-Feb

BONDS - Interest Rate Risk: Duration and Convexity
Portfolio Selection Memo DUE

10

8

Mon

14-Feb

BONDS - OC and LTCM Cases

Discuss Articles as Time Permits

Online Article(s)

9

Weds

16-Feb

TEST 1 : BONDS + Overview material

 

 

STOCKS

 

10

Mon

21-Feb

STOCKS - Definitions and Valuation Models

12

11

Weds

23-Feb

STOCKS - Valuation Models (DCF)

Portfolio Memo Due

12

12

Mon

28-Feb

STOCKS - More Valuation Methods

11, 13, 19

 

PORTFOLIO THEORY

 

13

Weds

2-Mar

RISK AND RETURN -  Expected Return and Variance; E(Rp), Asset Allocation

5

14

Mon

7-Mar

DIVERSIFICATION - Portfolio E(R) and Variance Math (Stats)

6

15

Weds

9-Mar

DIVERSFICATION - Optimal Risky Portfolios

Portfolio Memo Due

6

 

Mon

14-Mar

Spring Break – No Class

 

 

Weds

16-Mar

Spring Break – No Class

 

16

Mon

21-Mar

CAPM and APT -  Theory and Evidence

7

17

Weds

23-Mar

EMH - Efficient Markets Hypothesis:
Theory and Evidence

Portfolio Memo Due

8

18

Mon

28-Mar

EMH - The Possibility of Market Inefficiency: Arbitrage Strategies

Online Article(s)

19

Weds

30-Mar

TEST 2 : STOCKS and PORTFOLIO THEORY

 

 

OPTIONS and FUTURES

 

20

Mon

4-Apr

OPTIONS - Instruments, Markets, Definitions, and Payoffs

14

21

Weds

6-Apr

OPTIONS - Valuation: Black-Scholes

Portfolio Memo Due

15

22

Mon

11-Apr

FUTURES - Markets and Instruments

16

23

Weds

13-Apr

HEDGING - Risk Management and Arbitrage

Online Article(s)

 

INVESTMENT MECHANICS

 

24

Mon

18-Apr

MECHANICS - Market Microstructure: How Securities Are Traded

3

25

Weds

20-Apr

MECHANICS - Informed Trading: Theory and Evidence

Portfolio Memo Due

Online Article(s)

26

Mon

25-Apr

PERFORMANCE - Investment Manager Performance Evaluation

20

27

Weds

27-Apr

PERFORMANCE - Investment Manager Performance Evaluation

Online Article(s)

28

Mon

2-May

Portfolio Project Team Presentations

 

29

Weds

4-May

Last Day of Class
Course Wrap-Up & Course Evaluations

 

30

TBA

TBA

FINAL EXAM : EVERYTHING

Date, Time, and Room Will Be Announced

All of the Above