University of Oklahoma
Michael F. Price College of Business
Investments FIN 4103 - 002
Spring 2008
Tuesday, Thursday 1:30 pm – 2:45 pm PH 2030
Office Hours: Tue, Wed. Office hours by appt. only
Evgenia(Janya)
Golubeva
Office AH252
325-7727 (phone)
325- 7688 (fax)
janya@ou.edu
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 today’s
financial markets. Those include stocks, bonds, options, forwards and futures, and 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.
Prerequisites You must have completed Finance 3303 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 me 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 (405) 325-3852 or TDD only (405) 325-4173.
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 will not check your attendance. You need NOT bring me an excuse note for
missing a class UNLESS you miss a quiz or a test. (Read on regarding my policy for missed
quizzes / tests.)
Textbook The textbook for this course is Investments, seventh edition by Bodie, Kane, and
Marcus. Your reading assignment sheet attached to this syllabus states which sections of book
chapters and which handouts you should read before each class.
Optional book Graham and Dodd, Security Analysis
Other materials I shall recommend extra reading from time to time. Access to the Wall Street
Journal and to the Internet is important. Although subscription is not required for this course,
you are encouraged to check out the student discount subscription options online at
http://www.WSJstudent.com
Grades The course grade will be determined based on the following:
Two homework projects (75 pts each)
Five Quizzes (20 pts each)
Term Project
Midterm I
Midterm II (Not comprehensive)
Final (Not Comprehensive)
TOTAL
150 points
100 points
150 points
200 points
200 points
200 points
1000 points
Letter Grades A = 90% or above; B=80-89%; C=70-79%; D=60-69%; F=<60%. No curve shall
apply.
Quizzes A total of six quizzes shall be given. A quiz missed for an unexcused reason will receive
a zero. A quiz missed for a valid reason will receive a score based on the next exam. For
example, you are excused from quiz #1 and you receive 160 points for Midterm 1. Then your
score for quiz #1 will become (160 / 200) * 20 = 16 points. At the end of the term, the lowest
positive of the six scores – except if missed for an unexcused reason – shall be dropped.
There will be no make-up quizzes.
Make-up Exams An exam missed for a valid reason may be made up within one week. You will
need to make arrangements with me regarding the time / location. If you miss the final exam and
cannot make it up before the course grades are due you will receive an “I” (for Incomplete),
pending your taking the final exam.
Homework Assignments are due before class on the due date. Late assignments shall not receive
any credit. Homework must be submitted electronically to my graduate assistant. Please save
your homework under the following name: ‘your last name _ your first name _ homework # .
extension’ (for example ‘smith_john_homework2.xls’).
Term Project The description of the project is at the end of this syllabus.
Bonus Participation We shall have a guest speaker who is a real-life investment practitioner.
The date of his visit is tentatively set to February 19. You have a chance to earn bonus points by
asking the speaker interesting questions. You are welcome to email your questions to me in
advance (preferred) and I will then pass them on to the speaker, to give him a better chance to
prepare. You are also welcome to ask questions directly in class during his visit. Either way,
each participating student will receive 10 points bonus credit, and the students whose questions
are selected by our quest as the most interesting will receive additional bonus credit.
Communication Please check your university email account regularly. The best way to reach
me is via email also.
Graduate Assistant My graduate assistant is Dong Hyun Kim, email donghyun@ou.edu
Class Schedule and Reading Assignments
FIN 4103 -002 Spring 2008
Class Topic
Readings (Bodie, Kane, and Marcus)
Handouts (on http://learn.ou.edu)
Jan 15
Introduction
No Assignment
Jan 15 - 17
Investing Environment
Chapters 2, 3
Jan 29
Quiz #1; Team / Stock selection Due
Jan 22 Jan 31
Risk and return; Mean-variance mathematics;
Diversification; Combining risky portfolio with
a default-free security; Sharpe ratio and CAL.
Feb 7
Quiz #2;
Feb 14
Homework #1 Due
Feb 5 - 12
CAPM; Asset pricing and Market Efficiency
Chapter 9
Handout 2
Feb 14
Financial Statements
Chapter 19
Feb 14
Quiz #3
Feb 19
Guest Speaker. Participation Bonus given
Feb 21
MIDTERM EXAM I, Chapters 2, 3, 6, 7, 9
Feb 26
Industry analysis
Chapter 17
Feb 29 Mar 6
Equity valuation
Chapter 18
Handout:
“free cash flow”
Mar 11
Mar 11 - 25
Chapters 6-7
(Skip 6.5; 7.5;
Appendices)
Handout 1
Quiz #4
Options (Introduction)
Chapter 20.1-20.3
Mar 18 – 20 SPRING BREAK
Mar 27 Apr 3
Arbitrage relationships
Determinants of option values
Chapter 20.4,
21.1-21.2, Handout 3
Mar 27
Quiz #5
Apr 8
MIDTERM EXAM 2, Chapters 9, 17, 18, 19, 20
Apr 10 - 17
Option pricing
April 17
Homework #2 Due
April 24
Term Paper Due
Chapter 21.3 (744746)
21.4 (750 – 757)
Handout 4 (optional)
Apri 22 –
April 29
Futures
Apr 29
Quiz #6
May 1
Reserve (review for the final if all material covered)
Chap. 22
Handout 5
FINAL EXAM: NOT COMPREHENSIVE; Chapters 18,20,21,22
As scheduled by the University – Tue May 6 1:30 pm – 3:30 pm, regular classroom
Spring 2008 FIN 4103 -002 Homework Assignment Sheet
Assignment 1: due Feb 14
Use the example on D2L as your guide in completing the assignment. Please do not use another
format – it delays grading.
Go to http://finance.yahoo.com and download the weekly adjusted close stock prices for Apple,
Inc. (ticker symbol is AAPL) and Schlumberger Limited (SLB) for the period December 31,
2006 through December 31, 2007. You will have 54 weekly prices. (Please make sure all dates
download correctly. Sometimes Yahoo will not download one or more of the observations.)
I
II
III
IV
V
VI
VII
VIII
Use the weekly prices to calculate weekly returns for each of the stocks.
Calculate returns as log price ratios, that is, Rt = ln(Pt / Pt-1). You will have
53 weekly returns.
For each of the stocks, find the average weekly return and standard
deviation of returns using the functions AVERAGE and STDEV in
Microsoft Excel.
Find the correlation coefficient between AAPL and SLB using the
function CORREL in Microsoft Excel.
Annualize the average returns and standard deviations found in step II.
Annualized average return = Weekly average return * 52. Annualized
standard deviation = Weekly standard deviation * SQRT(52). The
correlation coefficient need not be annualized. From this point onward,
you will be working with the annualized numbers only. You will use
the annualized numbers as input data for the following steps.
Calculate the expected return, standard deviation, and Sharpe ratio for
each of the following thirteen allocations between AAPL and SLB: (-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 the
portfolio opportunity set.
Assuming the risk-free rate is 5% per year, use Excel Solver to solve for
the optimal portfolio of AAPL and SLB. That is, assuming that ω is the
fraction allocated to AAPL, and (1 – ω) is the fraction allocated to SLB,
find ω* such that the allocation (ω*, 1-ω*) has the highest Sharpe ratio
among all possible allocations between AAPL and SLB.
Find the expected return and standard deviation of the optimal portfolio.
Mark the risk-free asset, the optimal portfolio, and show the Capital
Allocation Line for the optimal portfolio on the chart that you built in step
V.
End-of-chapter problems: 3.9, 3.10 (a, b)
Assignment 2: due April 17
Use the example on D2L to complete this assignment.
For this assignment, you need to locate stock and option prices and T-bill quotes in the Wall
Street Journal.
If you have online access: go to http://online.wsj.com/documents/mktindex.htm (that is the web
link to Markets Data Center of the Wall Street Journal online). Once on the Markets Data Center
page, look for stock and option quotations under “US Stocks”, and for Treasury quotes under
“Bond Markets.” To access WSJ online from the PCB lab, you need to login by typing
sooner\4+4 as username. Please consult a lab assistant if you have problems logging in.
If you do not have access to the WSJ, you are welcome to use the data provided on D2L for this
assignment. The data is old so working with it is less exciting than working with the most recent
data; but this exercise is hypothetical anyway.
Design three different types of arbitrages with stock options:
- Arbitrage exploiting a put-call parity violation, using Index Options;
- “Immediate Exercise” arbitrage exploiting a lower bound violation for American Put
or American Call, using Listed Options on individual stocks;
- “Holding until expiration” arbitrage exploiting a lower bound violation for American
Call, using Listed Options on individual stocks.
Each of your three strategies should involve trading a “round lot,” that is, should be for 100
shares or for options on 100 shares. For each violation, identify the violation, and record each of
the transactions necessary to produce an arbitrage profit. Show what will happen to your
position in all possible states of the world.
Use T-Bill rates to find the price of risk-free borrowing and lending. Buy bills at the asked price
and sell them (or sell them short) at the bid price. The T-Bill bid-asked spread will be the only
transaction cost you must consider in your trades. Assume that all of the reported closing prices
are correctly reported and are available contemporaneously. Assume that no dividends are paid.
End-of-chapter problems: 20.17, 21.2
Spring 2008 FIN 4103 -002 Term Project
You will form teams (five students per team). Each team will select a stock and perform a fairly
detailed security analysis leading to an analyst recommendation (buy, hold, or sell). Each team
should analyze a different stock, so the choice will be on a first come – first serve basis. The
objective of the project is to apply the theoretical knowledge on equity valuation and to prepare
you better for the Student Investment Fund class. The project will involve all major aspects of
security analysis; however it need not be extremely elaborate to receive full credit. I am looking
for your ability to identify major risk / growth factors that affect the value of your stock; for your
ability to select comparable firms in the same industry and make an educated comparison; and
for your ability to estimate intrinsic value at the basic introductory level. Look at the industry
issues as well as the firm-specific issues that are relevant to your analysis. Remember that there
is not a “right” number for the firm value. I look mainly at how well you are able to justify your
assumptions and conclusions.
Team list and stock selection for your project is due January 29. The final paper is due on April
24. Not meeting a deadline will result in a penalty of ten points per team member per deadline.
Each due item should be submitted electronically to me at janya@ou.edu
The length of the final paper should be between ten and 15 double-spaced pages, excluding
exhibits.
My grading will be based on the following:
- content and relevance to the material covered in class
- accuracy and clarity of quantitative analysis
- support of your assumptions and projections
- logic and consistency of your arguments
- professionalism and quality of writing