BSAD 282
Security Valuation and Portfolio Selection
Fall, 2014
Kevin C.H. Chiang, Ph.D.
Office: 315 Kalkin, (802) 656-0515 (office)
E-mail: Kevin.C.Chiang@uvm.edu
Official Office Hours: MW 10:30-11:30 a.m.
Unofficial Office Hours: I have an open-door policy. You are invited to come by my
office any time you wish. If you prefer to schedule an appointment, please send me an email. If you find it inconvenient to come by my office, I invite you to send me an e-mail.
REQUIRED READING:
1. Chiang’s electronic notes. They are available on Chiang’s website:
http://www.uvm.edu/~kcchiang/ .
2. Equity Asset Valuation (EAV), 2nd Edition, by Pinto, Henry, Robinson, and Stowe,
2010, Wiley, ISBN 978-0-470-57143-9.
3. Managing Investment Portfolios: A Dynamic Process (MIP), by Maginn, Tuttle,
Pinto, and McLeavey, 2007, Wiley, 978-0-470-08014-6.
4. Assigned journal articles: A1 to A10.
RECOMMENDED READING:
Investment Science, 1st Edition, by D.G. Luenberger, 1998, Oxford, ISBN 0-19-5108094.
COMPUTER REQUIREMENTS:
Students are expected to be proficient with a microcomputer and Excel spread sheet. In
addition, students are expected to have a financial calculator. The default calculator for
the course and exams is Texas Instruments BAII Plus.
COURSE DESCRIPTION:
This course is intended as an introductory, yet rigorous treatment of investment science,
financial principles, asset pricing, asset allocation, and derivatives. The purposes of this
course are to provide you with an understanding of analytical tools.
EXPECTED STUDENT OUTCOMES:
At the end of this course, students should be able to:
1. Discuss the notion of market efficiency.
2. Use NPV and IRR as investment evaluation criteria.
3. Calculate the present value of a bond.
4. Understand immunization for a portfolio of bonds.
5. Calculate the intrinsic value of a share of stock under various conditions.
6. Understand asset allocation with the use of mean-variance portfolio theory.
7. Use asset pricing models for security selection and performance evaluation.
8. Discuss style investing and active management.
9. Calculate the value of a call option using binomial models.
GRADING:
90.00% - 93.33%; 93.34% - 96.66%; 96.67% - 100.00%
80.00% - 83.33%; 83.34% - 86.66%; 86.67% - 89.99%
70.00% - 73.33%; 73.34% - 76.66%; 76.67% - 79.99%
60.00% - 63.33%; 63.34% - 66.66%; 66.67% - 69.99%
Less than 60.00%
Final Grade
A-; A; A+
B-; B; B+
C-; C; C+
D-; D; D+
F
There will be one interim exam and a final exam, each worth 32.5% of your grade. There
will be a group research (GR) project, which worth 15% of your grade. 20% of your
grade is based on quizzes/attendance, paper presentation and discussion (A1 to A10, as
listed below), homework, mini-cases, and other projects.
If students fail to participate in a quiz/attendance or discussion for a university allowable
reason, students must provide legitimate documents within a week. This is the only way
that they can participate in a make-up quiz/attendance or discussion.
For the group research (GR) project and paper discussion (A1 to A10), 10 student groups
will be formed. The number of students in each group is four or five. Group members
should make it very clear to other group members at the onset how would one plan to
contribute to the group. A group cannot be subsequently subdivided into two or more
groups unless it is a consensus among all group members. If free-rider problems occur,
with evidence provided by other group members and my verification, the free-rider can be
expelled from the group and earns an F for the GR project or the paper discussion. In
general, the grading policy for the GR report is that if you thoroughly investigate the
research question and prepare a complete GR report without making obvious errors, you
earn a B. To earn an A for the GR, your group needs to do an excellent job. That is, I’d
like to see (1) your own points of view, (2) a clear line of reasoning, (3) analysis and
supporting evidence, and (4) exceptional efforts. A report that is not finished or
complete, is internally inconsistent, or uses false methodology will lead to an F for the
report. The GR report should be between 5 to 10 pages. You may choose a topic from
the following list, or something else that is of interest to you. Immediately after our first
week’s meetings, you must send me an e-mail listing (1) the names of group members
and (2) describing the GR topic your group has chosen. If you want to change your GR
topic during the course, you must send me an e-mail to notify me. I am available
throughout the semester to provide guidance on your GR. If we have time, I will ask a
few groups whose GR reports are particularly interesting to make in-class presentations at
the end of the semester.
Possible GR topics (but not limited to these topics):
1. Evaluate an investment strategy, e.g., the momentum strategy.
2. Evaluate the Morningstar mutual fund rating system. Is it a good system? Can
one manipulate the system?
3. Replicate the empirical results of a journal article.
4. Evaluate the performance of a mutual fund.
5. Evaluate the evidence about an alleged speculative bubble. Was there a housing
bubble?
6. Use the mean-variance portfolio theory to design an asset allocation plan for an
institutional investor.
Students are required to submit typed reports for the mini-cases, the GR project,
assignments, and other projects. The actual due dates for these reports will be announced
in the class; that is, the due dates listed on the syllabus are subject to change. The reports
will be collected in the class on the due dates. I do not accept late reports. If students fail
to bring in their assignments, with my permission, they have 2 hours after the class to
submit their reports to my office. In general, I do not accept electronic submissions of the
reports.
Reports and exams will be graded and returned to students as soon as possible. It is
students’ responsibility to attend all classes and receive their graded reports and exams
when their reports and exams are handed back in the class. If a student fails to show up
and receive his/her report/exam in the class, he/she must come to my office to pick it up
within a week; after that, I will not keep student reports any longer. Students must keep
all the graded, returned reports and all the graded, returned exams. If there is any
inconsistency and dispute between my record book and students’ statements about report
submissions and the scores earned, I will revise my student record book only if students
are able to provide concrete evidence, i.e., graded, returned reports and exams.
For paper discussion (A1 to A10), each student group is responsible for presenting one
topic. For example, if your group is asked to present A1: Market Efficiency, then you
would need to study the topic (i.e., market efficiency), the Stein paper, and other related
materials. The presentation should have at least two components: (1) a general
introduction and discussion of the topic, and (2) an executive summary of the assigned
paper (e.g., the Stein paper). You have 20 minutes to present the topic. The other student
groups also need to meet, study the same topic (e.g., A1), and be prepared to ask at least
one good question when I ask you to do so.
A1 (Market Efficiency): Stein, 2009, Presidential address: Sophisticated investors and
market efficiency, Journal of Finance, available at
http://www.economics.harvard.edu/files/faculty/57_Sophisticated%20Investors%20and%
20Market%20Efficiency.pdf, or just google the title of the paper.
A2 (Active Management): Sharpe, 1991 (Jan./Feb.), The arithmetic of active
management, Financial Analysts Journal, @ UVM library.
A3 (Fundamental Value): Campbell and Shiller, 1998, Valuation ratios and the long-run
stock market outlook, Journal of Portfolio Management, available at
http://www.econ.yale.edu/~shiller/online.htm.
A4 (Corporate Social Responsibility and Value): Di Giuli and Kostovetsky, 2014
(forthcoming), Are red or blue companies more likely to go green? Politics and corporate
social responsibility, Journal of Financial Economics, @ UVM library.
A5 (Financial Crisis): Titman, 2013, Presidential Address: Financial markets and
investment externalities, Journal of Finance, @ UVM Library, or just google the title of
the paper.
A6 (Style Investing): Barberis and Shleifer, 2003, Style investing, Journal of Financial
Economics, available at http://badger.som.yale.edu/faculty/ncb25/#researchpapers2.
A7 (Discount Rates): Cochrane, 2011, Presidential address: Discount rates, Journal of
Finance, available at
http://faculty.chicagobooth.edu/john.cochrane/research/papers/AFA_pres_speech.pdf .
A8 (An Application of Asset Pricing): Chiang, Kozhevnikov, Lee, and Wisen, 2008,
Further evidence on the performance of funds of funds: the case of real estate mutual
funds, Real Estate Economics, available at http://lenny.uvm.edu/files/kcchiang/.
A9 (Socially Responsible Investing): Hong and Kostovetsky, 2012, Red and blue
investing: Values and finance, Journal of Financial Economics, @UVM Library.
A10 (Bubble): Griffin, Harris, Shu, and Topaloglu, 2011, Who drove and burst the tech
bubble? Journal of Finance, available at http://www.afajof.org/afa/forthcoming/4501.pdf.
ACADEMIC HONESTY:
All students are expected to understand what constitutes a violation of the academic
honesty codes at UVM, especially cheating and plagiarism. Honesty codes are available
at UVM’s website.
Some of the material in this course has been used before. When preparing assignments
and project reports, you should not consult with my previous students. Any such
consultation obviously constitutes plagiarism.
SUGGESTIONS AND POLICIES:
1. Students are responsible for attending all classes and participating in quizzes.
You are responsible for information provided in class, including any handouts,
(changes in) assignments and their due dates, changes in grading scheme and class
policies, test dates, and test coverage.
2. Students are responsible for making sure that homework and project reports are
actually delivered and received.
3. The exams must be solely an individual effort. The university policy on academic
dishonesty is strictly enforced. Academic dishonesty will not be tolerated and will
result in the grade of “F” for the course.
4. There is a grace period of only 1 week for you to effectively contest about the
grades that you receive on your exams, homework, or projects. Keep all the
returned exams, homework, and reports until you receive your final grade.
5. There will be no individual bonus assignments or projects.
6. Please utilize my office hours; you will find it beneficial.
Week 1
Aug. 25, 27, 29
Introduction; Ethics;
Professional Standards
Week 2
Week 3
Week 4
Sep. 03, 05
Sep. 08, 10, 12
Sep. 15, 17, 19
Market Efficiency
Fixed-Income Securities
Free Cash Flow Valuation
Week 5
Sep. 22, 24, 26
Residual Income Valuation
Week 6
Week 7
Week 8
Sep. 29; Oct. 01, 03
Oct. 06, 08, 10
Oct. 13
Present-Value Relations
Mean-Variance Portfolio Theory
Asset Allocation
Oct. 15, 17
First Exam
Week 9
Oct. 20, 22, 24
Equity Portfolio Management
Week 10
Oct. 27, 29, 31
Week 11
Nov. 03, 05, 07
Week 12
Nov. 10, 12, 14
Week 13
Week 14
Nov. 17, 19, 21
Thanksgiving
Recess
Dec. 01, 03
The CAPM and Performance
Evaluation
Factor Models and Style
Investing
Corporate Social Responsibility
and other non-financial screens
Socially Responsible Investing
Week 15
Behavioral Finance
EAV Chapter 1; MIP
Chapter 5 (5.1-5.5); GR
e-mail (Aug. 29)
Notes
Notes; A1 (Sep. 12)
EAV Chapter 4; A2 (Sep.
19)
EAV Chapter 5; A3 (Sep.
26)
Notes; A4 (Oct. 03)
Notes; A5 (Oct. 10)
MIP Chapter 5 (5.6-5.9)
MIP Chapter 7; A6 (Oct.
24)
Notes; A7 (Oct. 31)
MIP Chapter 12; A8
(Nov. 07)
Notes; A9 (Nov. 14)
Notes; A10 (Nov. 21)
Notes; GRP report due
(Dec. 03)
Dec. 05 (F), 1:30Final Exam
4:15 p.m.
Note: The due dates are approximate. Class policies, course topics,
assignments/projects and their due dates, exam days/times, and grade weighting
scheme are subject to change.