FINA 3103:

Intermediate Investments
Lecture 1 Review of the Syllabus & Course Overview,
& A Classroom Simulation of Investments

Yingying LI
Sep 2, 2016
 Outline of Todays Lecture
Review of the Syllabus

Course Overview

A Classroom Simulation of Investments

2
 Outline of Todays Lecture
Review of the Syllabus

Course Overview

A Classroom Simulation of Investments

3
 What Will You Do With $1,000?
Imagine one day you wake up and find that you are
$1,000 richer

What will you do?

Invest?
Consume?

4
 Investments
What is an investment?

Current commitment of money (or other resources)

Expect to reap future benefits

Current vs. future:

Sacrifice now and get something back later
Expectation:
The future benefits are uncertain

5
 This Course: FINA 3103
How to invest wisely in an uncertain environment
(Not how to predict the future!)

Fundamental aspects of investments

Asset classes and financial markets
Money allocation
Determination of the fair price of a security
Evaluating portfolio managers

6
 Course Outline
Main Topics

1. The Basics: Asset classes and financial markets

2. Money Allocation: Allocate across assets/securities
3. Asset Pricing: Determine the fair price
4. Market Efficiency & Portfolio Evaluation
5. Other securities: Bonds and derivatives

7
 1. The Basics
Financial Assets
Equity
Fixed-income securities
Derivatives (futures and options)

Financial Markets
Why do we need financial markets?
How do we trade securities?

8
 2. Money Allocation
Money allocation across different assets/securities
How to invest money wisely
The risk-return relationship:
High expected return, high risk
Not how to get rich quickly the fastest way is
gambling, which also is the fastest way to lose
Prof. Harry
Diversification to Markowitz,
reduce risk Nobel
Laureate
1990
9
 3. Asset Pricing
Determine the fair price of a security
An important concept:
Arbitrage

Prof. William Sharpe, Prof. Eugene Fama

Nobel Laureate 1990 Nobel Laureate 2013
10
 3. Asset Pricing: Arbitrage
Free lunch
A zero-risk, zero-net investment strategy that still
generates profits

How to make arbitrage profits?

Buy low, sell high!

What will happen?

Prices will converge and arbitrage profits disappear

11
 4. Market Efficiency
Example
HSBC is trading at $ 37.20 (Closing price on Sep 1)
Suppose you know the true price is $50.
What should you do?
Buy HSBC!
What will happen?
HSBC share price will increase to $50

In an efficient market, prices reflect all available

information
12
 4. Portfolio Evaluation
We will see that financial markets are not 100% efficient
Some investors could earn higher returns because of
their information/skills
But high returns could be due to luck as well

The important issue here is to separate luck and skill

Luck or skill? An octopus correctly guessed the results
of 8 World Cup matches

13
 5. Other Securities
Fixed-income securities
Government bonds
Corporate bonds
A portfolio of fixed-income securities

Derivatives
Futures
Options

Prof. Merton & Prof. Scholes,

Nobel Laureates 1997 14
Course Intended Learning Outcomes
Once you have completed this course, you should be able to:
Allocate money across different asset classes in a scientific
manner.
Price financial securities on the basis of fundamental financial
principles.
Determine whether a portfolio manager is doing a good job.
Manage a portfolio consisting of fixed-income securities.
Price, trade, and use derivative securities (futures and options).
Perform financial analysis using Microsoft Office Excel and the
REUTERS financial database.

15
 Outline of Todays Lecture
Review of the Syllabus

Course Overview

A Classroom Simulation of Investments

16