Course: Investments Instructor: Ashish Makrani

ITM University MBA 3rd Trimester

Course Overview The focus of this course is on the financial theory and empirical evidence that are useful for investment decisions. The topics covered in this course can be broadly categorized into five groups Syllabus Financial Theories This includes portfolio theory, the capital asset pricing model and the arbitrage pricing theory, all of which have become an integrated part of the decision-making in investments. Empirical Evidence in the Equity and Equity Options Markets This includes patterns in cross-sections of stock returns, and further empirical evidence from the equity options market, futures and commodity derivatives Introduction to Fixed-Income and Credit Sensitive Instruments This includes default-free as well as default-able bonds, yield curve analysis, , fixed-income derivatives such as swaps, swaptions. Market Efficiency and "Active" Investments We start with the efficient market hypothesis, which is a useful framework for modeling financial markets. Like any model, the efficient market hypothesis is not a perfect description of reality: some prices are almost certainly "wrong". Hence there are reasons to believe that active management can have effective results. Topics in active investments include security analysis, active portfolio management, and risk management issues. Course Objectives A sound investment decision requires in-depth knowledge of the financial markets, rigorous analytical thinking and precise mathematical derivation. The objective of the course is to teach students about the various financial instruments available in the market and how to analyze and use those instruments to build a profitable portfolio. The project work will impart an empirical learning by teaching students applications of financial theories and models in the real world. In addition they will also gain an understanding of creating and maintaining a portfolio. Text

Frank K. Reilly and Keith C. Brown; Investment Analysis and Portfolio Management; 10th edition, South Western Cengage Learning Bodie, Kane and Marcus; Investments, 9th edition, TMH

Recommended Readings Student Solutions Manual for Investments, Zvi Bodie, 9th edition, TMH Essentials of Investments, Bodie, Kane and Marcus, 8th edition, Irwin, 2010 Modern Portfolio Theory and Investment Analysis Martin J. Gruber, Stephen J. Brown, William N. Goetzmann Edwin J. Elton, 8th edition, Wiley John Schaum's Outline of Investments, Jack Clark Francis, Richard L. Taylor, Francis Jac, 2001 TMH Other Readings- On daily basis 1. The Wall Street Journal 2. Business Week 3. Economic Times

Lecture Plan
Session 1 2 Topic Introduction Basics of Investment; ROA Bonds - Fundamentals of bond valuation; Interest rates and yield curve Bonds - Term structure of interest rates Readings BKM Chapter 1-4 BKM Chapter 9 Learning Objectives To understand investment environment To calculate bond prices and yields To learn term structure of bond

BKM Chapter 10 Harvard Management Co. and Inflation-Protected Bonds

4 5

Bond - Bond portfolio management strategies Stock Analysis - Fundamentals of stock valuation Stock Analysis - Economics, industry and firm analysis Derivatives - Introduction

BKM Chapter 10 Suggested Problems 1-7, 9,11,24 Reilly Brown chapter 13. StockMarket Analysis Reilly Brown chapter 14,15 BKM Chapter 14 Suggested Problems 1,2,4,5,9,10,17, 20,21, 25,26 Foreign Exchange Hedging Strategies at General Motors: Competitive Exposures BKM Chapter 15 Suggested Problems 1,2,4,5,9,10,17, 20,21,25,26 BKM chapter21 BKM Chapter 8 Suggested Problems 1-5, 7,8,17,23 BKM 12.4 BKM Chapter 7 Suggested Problems 1-4,7,16-18, 20 Case:Alex Sharpe's Portfolio Colette Southam BKM Chapter 7 BKM Chapter 6 Suggested Problems 2, 4, 5, 9, 10-13, 16 BKM Chapter 7 BKM Chapter 17

How to manage bond portfolio Analyze the macro-economy

6,7 8

Industry life cycle and performance evaluation Basic concepts of derivatives

Option market - Introduction Web: Visit http://www.optionprice.com/index.php Option Valuation Efficient Market hypothesis Random Walk Anomalies 1 CAPM - Capital Asset Pricing (CAPM) and beta; Applications of the CAPM

Basics of option and option strategies

10,11 12

To learn binomial and Black Scholes option valuation Focus on application of financial theory How anomalies affects the market To analyze and compare market portfolios

13 14

15 16

Arbitrage Pricing Model Portfolio Theory Introduction to Risk & Risk Aversion

Earning profit through arbitrage strategies To identify and measure asset risk and portfolio risk

17 18

Portfolio Theory Capital Allocation Portfolio Theory Performance Evaluation

To allocate capital- risky and risk free asset To learn diversification and portfolio risk

Group Project Asset allocation project This is a group project. Each group will consist of at most five students with group formation completed by the first week of the course commencement. Although I will allow you to form your own groups, I reserve the right to change/modify groups. I will provide you with some data on stock markets. Using that plus some additional data and information you might want to collect, you need to come up with portfolio and each week you have to submit your weekly report. In the first week each group will be provided virtual currency of INR 1,000,000 Students will choose maximum 10 scripts to create their portfolios and will maintain a spreadsheet of the portfolio They will submit a weekly profit/loss status Trading cycle is Mon-Friday of every week. Students can change the portfolio at the end of the trading cycle by providing the reasons behind the changes. Grading in the project will be based on how effectively students incorporate class teachings in their portfolio.

Cases

Teaching Note

Alex Sharpe's Portfolio

Educator Copy

Colette Southam
Publication Date: Jul 11, 2008 Discipline: Finance Source: Richard Ivey School of Business Foundation Product number: 908N20-PDF-ENG Length: 4p English PDF

show details

description

Alex Sharpe's Portfolio provides an introduction to the Capital Asset Pricing Model (CAPM), portfolio diversification and risk management. Sharpe currently holds the Vanguard 500 Index Fund, but is considering a more active management strategy. Students must assess the risk of the two stocks she is considering adding to her portfolio. Students are provided with monthly stock returns and must calculate the standard deviations of the individual stocks and of the portfolios when one of the stocks is added to it. Students must calculate the stock's beta using regression and will learn that beta is the appropriate measure of risk to use in decision making since riskaverse investors do not hold stocks in isolation.
learning objective:

This case will allow students to: Understand and quantify the risks associated with individual stocks and portfolios. Calculate beta using linear regression. Understand the relationship between risk and return and the Capital Asset Pricing Model (CAPM). This case is intended for an introductory finance class in the unit on risk and return.
Cases

Harvard Management Co. and Inflation-Protected Bonds

Luis M. Viceira
Teaching Note Educator Copy
Revision Date: Feb 15, 2007 Publication Date: Oct 31, 2000 Discipline: Finance Source: Harvard Business School English PDF $ 6.95 English Product PDF number: 201053PDF-ENG Length: 13p

description

In March 2000, the board of The Harvard Management Co. (HMC) approved significant changes in the policy portfolio determining the long-run allocation policy of the Harvard University endowment. These changes included a sharp reduction of the allocation to U.S. equities and U.S. nominal bonds and a significant investment in the new U.S. Treasury Inflation-Protected Securities (TIPS). This case focuses on the analysis that led HMC management to recommend such changes to the board.
learning objective:

To provide students with ample opportunities to discuss historical versus portfolio analysis, the Capital Asset Pricing Model, nominal and inflation-indexed bonds, the role of long-term bonds in the portfolio of long-horizon investors, and the organization of investment companies (benchmarking, compensation, external versus internal management, etc.).
subjects covered:

Bonds; Financial instruments; Investment management; Investments; Portfolio management

setting:

Geographic: Massachusetts Industry: Higher education Event Year Begin: 2000 Event Year End: 2000

oreign Exchange Hedging Strategies at General Motors: Competitive Exposures

Mihir A. Desai, Mark F. Veblen

Teaching Note Educator Copy

Revision Date: Mar 31, 2006 Publication Date: Mar 09, 2005 Discipline: Finance Source: Harvard Business School English PDF description

English Product PDF number: 205096PDF-ENG Length: 9p

$ 6.95

How can a multinational firm analyze and manage currency risks that arise from competitive exposures? General Motors has a substantial competitive exposure to the Japanese yen. Although the risks GM faces from the depreciating yen are widely acknowledged, the company's corporate hedging policy does not provide any guidelines on managing such competitive exposures. Eric Feldstein, treasurer and vice-president of finance, has to quantify GM's yen exposure and recommend a way for GM to manage the risks that arise from its competitive exposure. Students must analyze the impact of a yen depreciation on GM sales and profits. A rewritten version of an earlier case.
learning objective:

To analyze competitive exposures and appropriate hedging policies.

subjects covered:

Competition; Currency; Derivatives; Exchange rates; Financial management; Hedging; International finance; Multinational corporations; Risk management
setting:

Geographic: New York Industry: Automotive Company Employee Count: 365,000 Company Revenue: $177.3 billion revenues Event Year Begin: 2001 Event Year End: 2001