Introduction
based on: INVESTMENTS | BODIE, KANE, MARCUS
General information
Dr. Thomas Schmid
schmid@hku.hk
3917 – 7766
Room 827, KK Leung (please write an e-mail to make appointment)
Lecture framework
All lecture slides will be available on Moodle
The lecture is offline with no Zoom option
Recordings of the lecture will be available on Moodle during add/drop period
Required Textbook:
Investments, 12th Edition, by Bodie / Kane / Marcus
Assessment:
Final exam (50%) + Term Project (25%) + Midterm (20%) + Tutorial Participation (5%)
The preliminary date for the midterm exam is Friday, March 17, from 19.00 to 20.00
We will confirm whether the midterm is online or offline closer to the date
In case you have any time clash, please let us know
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General Information
Teaching Assistant
Jason Tse
jasontch@hku.hk
Tutorial
Starts from Feb 6 (Monday) in week 3
Review of the key concepts of the lecture
Possibility to ask questions if time remains
Discussion of tutorial exercises
Tutorial Exercises in the Tutorial
Tutorial Exercises with qualitative and quantitative questions
Discussion of Tutorial Exercises aims to apply and reinforce the understanding of key
concepts and will not contribute to the final grade
Tutorial Enrollment
Tutorial schedule (subject to change) and enrollment information are shown in our course
Moodle page.
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Schedule
Thursday
Week #
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Date
19.1
26.1
2.2
9.2
16.2
23.2
2.3
9.3
16.3
23.3
30.3
6.4
13.4
20.4
27.4
Remark
Lunar New Year
Reading Week
University Holiday
Q&A
Friday
Week
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Date
20.1
27.1
3.2
10.2
17.2
24.2
3.3
10.3
17.3
24.3
31.3
7.4
14.4
21.4
28.4
Remark
Lunar New Year
Reading Week
Good Friday
Q&A
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Term Project
analyst reports can look different
valuation part is the most difficult
common approach: valuation model
-> challenging to make sure every figure is correct
price is above/ below?
-> depends on assumptions
-> read analyst reports
Topic
Your task will be to act as equity analyst!
You will analyze one industry in one country
Within this industry, you will focus on three different companies
Group work
Please form groups of five students
Results
1) Analyst report: Written analyst report for each company of about 4 pages
Report must be handed in on or before Sunday, April 16, 23:59
2) Presentation of your reports
Please try to present the bottom line of your three reports
Assume that the audience consists of investors and give them an investment advice
are more interest about the big
Each group member must take part in the presentationaudience
picture (the core)
The presentation will take part in your tutorial sessions (plus extra slots) in the
second last week of the semester (from April 17 until April 21).
Intention
Show that you can apply your academic knowledge in a real-world challenge!
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Term Project – Organization
Assessment
Grading is based on the group’s performance (adjustments are possible)
Procedure
Please form groups until February 12
→ Send an email to the TA with your group members and your preferred topic
To avoid overlapping topics, coordinate your preferred country/industry with the TA
Each country/industry combination is available once
→ Thus, please try to be creative when choosing the industry and country
Upon approval, you can choose three companies in your country/industry and start
working on it!
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Term Project – Analyst Report
Basic idea
• An analyst report tries to give investors an overview of a company
• At the end, analyst reports try to evaluate whether a company is over- or undervalued
• Based on this, reports normally suggest a “buy”, “neutral”, or “sell” for the stock
marked prices are too high/ low
Possible sections of an analyst report
• Overview on the company (industry, business model, location, history, ...)
• Key financials and their development over time (EBIT, revenue, cost, dividends, ...)
• Description of recent key developments (e.g., increased costs) and their reasons
• Business risks (upside and downside risks)
• Past stock price development, volatility, ...
• Beta (also provide details on its calculation for the readers)
• Comparison with industry peers
• Valuation (e.g., dividend discount model or multiples valuation)
• Summary
At the end, try to come up with a Buy/Sell/Neutral recommendation which is as
convincing as possible! Explain to investors why you recommend which company of the
three!
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Term Project – Presentation
Basic idea
• The presentation of the analyst report should give investors a quick overview
• At the end, investors are interested in whether they should buy or sell a stock
What to present?
• It’s not necessary to present everything you did in the report in detail
• Rather, please focus on a few aspects which you consider most important and refer to
the report for others
• Please explain what you did in some detail for those aspects (for instance, explain
how you applied a specific valuation model, how you calculated beta, ...)
• Finish with a clear recommendation for the investors
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Course Content
Overview of units
Unit 1: Fundamental knowledge
a) Investment Environment (Chapter 1)
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Financial Assets
The Investment Process
b) Asset Classes (Chapter 2)
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Money Market
Capital Market
c) How to Trade Securities (Chapter 3)
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Trading Places for Securities
Different Types of Transaction Orders
Buying Stock on Margin
Short Sale
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Course Content
Unit 2: Portfolio Theory I/II
a) Portfolio Statistics (Chapter 5)
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Expected Return
Standard Deviation and Variance of Return
Covariance and Correlation Coefficient
Calculation and Interpretation
Sample Estimates from Historical Price Data
b) Capital Allocation to Risky Portfolios (Chapters 6)
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Risk Aversion and Utility Values
Utility functions
Mean-Variance Criterion
The risk free asset
Portfolios of One Risky Asset and a Risk-Free Asset
Risk and Return of Portfolios formed by one Risky Assets and one Risk-free Asset
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Course Content
Unit 3: Portfolio Theory II/II
a) Optimal Risky Portfolios (Chapter 7)
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Risk and Return of Portfolios formed by 2 Risky Assets and a Risk-free Asset
Risk and Return of Portfolios formed by N Risky Assets and a Risk-free Asset
Construction of Capital Allocation Line
Construction of Minimum Variance Frontier
Construction of Efficient Frontier
Construction of Tangency Portfolio (T)
Optimal Portfolio Choice
Restrictions on Lending and Borrowing
Differential between Lending Rate and Borrowing Rate
b) Index Model (Chapter 8)
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Single factor Model
Multi-factor Model
Market Model
Security Characteristic Line (SCL)
Parameter Estimation for “Market Model” - Market Beta estimation
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Course Content
Unit 4: Capital Market Equilibrium I/II
a) CAPM (Chapter 9)
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Concept of Market Equilibrium
Required Assumptions for CAPM
Derivation of CAPM
Capital Market Line and Security Market Line
Applications & Interpretation
Zero Beta CAPM (Black’s CAPM)
b) Application: Equity Valuation (Chapter 18)
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Bond and Equity Valuation
Limitations of Valuation Models
Dividend Discount Model
Free Cash Flow Valuation
Introduction to Multiples Valuation
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Course Content
Unit 5: Capital Market Equilibrium II/II
a) APT (Chapter 10)
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Arbitrage Argument
Required Assumptions for APT
Derivation of one-factor APT
Applications & Interpretations
Comparison between CAPM and APT
b) Market Efficiency (Chapter 11)
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Three Forms of Efficiency Market Hypothesis
Event studies
Market Anomalies
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Course Content
Unit 6: Practical Aspects of Investing
a) Mutual Funds and other Investment Companies (Chapter 4)
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Investment Companies
Mutual Funds
Costs of Investing in Mutual Funds
ETFs
b) Portfolio Evaluation (Chapter 24)
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Sharpe Ratio
Treynor Ratio
Jenson’s Alpha
Information Ratio (Appraisal Ratio)
Calculation, Interpretation, and Limitations
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