Finance & Investments for IBA
COURSE MANUAL
Course name
Finance & Investments for IBA
Course code
30J107-B-6
Number of credits
6 ECTS
Program
B.Sc. International Business Administration
Position in Program
Year 1, Semester 2
Academic Year
2022-2023
Language of instruction
English
READ THIS MANUAL THOROUGHLY BEFORE THE START OF THE COURSE
Minor changes are possible; these changes will be published on Canvas.
© 2023 Tilburg University, Gueorgui I. Kolev, Ph.D.
1
Contents
Course description .....................................................................................................................3
Teaching staff ............................................................................................................................3
Course learning outcomes .........................................................................................................4
Position in the program ..............................................................................................................4
Relation with international business ...................................................................................4
Relation with other courses in the program .......................................................................5
Course material..........................................................................................................................5
Assessment ...............................................................................................................................5
Study Load .................................................................................................................................6
Code of conduct .........................................................................................................................7
Course structure ........................................................................................................................7
Forms of tuition ...................................................................................................................7
Course schedule.................................................................................................................7
Lectures ................................................................................................................................
Tutorials ................................................................................................................................
2
Course description
In this introductory course, we will address some fundamental questions of finance. We will
try to understand how the tools of finance allow us to assess whether an investment is
worthwhile, how it might be improved, and how it might be funded. We will seek the answer
to several questions such as: Why and how do we make financial decisions? Why do we need
an investment of resources? How to allocate our wealth under uncertainty, and what if this
wealth is not yours but belongs to the others. How to manage the portfolios of the other people
not only rationally but also ethically and responsibly?
This course is the first of two basic courses in finance designed for students in International
Business Administration and Economics. In this course, students will acquire the fundamental
knowledge and insights of finance discipline at the introductory level. Students will develop
their analytical skills for making a financial decision and risk-return analysis, and learn & apply
the techniques to determine the price of a financial asset. At the end of the course, students
will become familiar with the main concepts of modern corporate finance such as financial
decision making and the law of one price, time value of money & interest rates, investment
decision rules, the basics of portfolio theory, CAPM, cost of capital and market efficiency.
Teaching staff
Name: Gueorgui I. Kolev, Ph.D.
Contact: G.I.Kolev@tilburguniversity.edu
Role in the course: Lecturer and Course Coordinator
Profile: Gueorgui has a Ph.D. in Economics, Finance and
Management from Universitat Pompeu Fabra (UPF),
Barcelona; and four Master’s degrees respectively from UPF;
CERGE-EI, Charles University, Prague; Akademia Istropolitana
Nova, Svaty Jur; University of National and World Economy,
Sofia.
Gueorgui is an applied econometrician and statistician, and
does empirical research in asset pricing, corporate finance, and
behavioural decision making.
Name: K. Korhan Nazliben, Ph.D.
Contact: K.K.Nazliben@tilburguniversity.edu
Role in the course: Lecturer
Profile: K. Korhan Nazliben is an lecturer of finance at Tilburg
University and an education committee member of TISEM (Tilburg
School of Economics and Management). He is also a research
fellow at CentER for Economic Research. His research focuses on
empirical asset pricing, portfolio choice theory and corporate
governance. (Link to academic profile)
3
For issues related to course organization write to Gueorgui Kolev. For academic issues write
to the teacher who taught the material. In particular, if you have questions regarding the
exercise sessions contact the TA that taught the respective material.
Course learning outcomes
Upon successful completion of the course, you will be able to understand and practice:
 the key concepts in finance and theories at the introductory level such as
o the concept of corporation and related business forms
o financial decision making and the Law of One Price
o time value of money and interest rates
o investment decision rules
o bond and stock valuation
o risk/return trade-offs
o portfolio theory
o Capital Asset Pricing Model
o estimating the cost of capital
o market efficiency and investor behavior
 the theories of international businesses
 how the tools of finance allow us to assess whether an investment is worthwhile, how
it might be improved, and how it might be funded
 the most important research fields of finance and their relations with each other (at
the very introductory level)
 the functioning of finance professionals
Position in the program
Relation with international business




All the guest lecturers come from multi-national companies. We also cover cases
belonging to such companies. In lectures, we have a comprehensive international
perspective.
Students are referred to international scientific literature and international business
magazines such as the Financial Times or the Economist.
The lecturer explains the corporation and financial markets as a separate chapter in a
highly international context.
All the lecturers and tutors of this course have an international background or/and
international business experience.
4
Relation with other courses in the program
This course initially aims to introduce the key concepts & terminology of finance and their
application. The course is related to several courses such as Financial Accounting and
Economics and also, no need to mention, with Finance-2 which is the continuation of Finance1. In addition to that, the students who successfully completed the Finance-1 course will obtain
sufficient background for some of the 3rd year elective courses such as Financial Management
and Risk Management.
As a research discipline, finance comprises two major subfields: asset pricing and corporate
finance (but also highly related to other disciplines such as banking, economics, econometrics,
even physiology). In Finance 1, we will introduce these two branches of the literature at the
introductory level, but more emphasis on asset pricing. Therefore, Finance-1 should be
considered as a mandatory background to understand any other field which deals with the
pricing of a security or a project.
Course material
To be purchased:

Jonathan Berk and Peter DeMarzo, Corporate Finance-Global Edition, Pearson,
5th Edition. (ISBN10: 1-292-30415-4; ISBN 13: 978-1292-30415-1)
o Chapters: 1, 3, 4, 5, 6, 7, 9, 10, 11, 12 and 13
Available via Canvas:



Slides and handouts
Additional readings & academic papers
Mock Exam Questions & Exercises discussed during the tutorials (in addition to the
ones posted in the book).
Assessment
Graded summative
assessments
Mid-term exam
Final Exam
Re-sit Exam
Weight Date/periods for exams
or submission deadlines
Minimal
Pass
grade
Possibility
and
assessment
type for resit
30 %
Between March 23- April 3
No
No resit
possible
70 %
Between May 25-June 19
No
Yes resit
possible
100%
Between June 22-July 10
NaN
(Midterm
grade has NO
effect)
5
The ultimate course grade is a weighted average of the midterm (30%) and final exam (70%)
grade. No minimal grade per component is required. Note that the resit exam is different! The
resit counts for 100% for your ultimate grade. It implies that your mid-term exam will not have
any effect at the resit phase. This also implies that the students who did not attend the midterm
would still have a chance of passing the course with a high grade.
Midterm exam:
 All material discussed in Lectures 1-6
 Book Chapters 1, 3, 4, 5, 6 and 7
 Consists of about 35 multiple choice questions
 For the multiple-choice questions, a correction for guessing will be applied
 Example midterm questions will be communicated with the students
Final exam:
 All material discussed in all lectures
 Guest lectures
 Book Chapters 1, 3, 4, 5, 6, 7, 9, 10, 11, 12 and 13
 About 50 multiple-choice questions plus some open ended questions
 For the multiple-choice questions, a correction for guessing will be applied
 Example final exam questions will be communicated with the students
Resit exam:
 The students, who fail the course, will have a re-sit opportunity at the end of the
semester. The re-exam replaces both the mid-term and final exams. In this case, your
re-exam counts for 100% of your final score.
 The style, content, and distribution of the resit exam will be similar to the final exam.
Repeaters rule
Students who failed the course in 2021/2022 or earlier, need to redo the entire course. All
results obtained in previous years are not valid anymore.
Fraud and Plagiarism
Having unauthorized notes at your exam, cribbing from a fellow student, manipulating results
and copying text from others without references are examples of fraud. Once fraud is
suspected, the Examination Board will be informed accordingly.
https://www.tilburguniversity.edu/students/studying/regulations/fraud/economics
Study Load
Activity
Class hours
Assessed number of hours
54 hours (18 lecture+2 recap lecture +1
guest lecture + 6 tutorials)
6
Preparing lectures-tutorials/reading material
Preparation for exams
Total
68 hours
48 hours
168 hours
Code of conduct
Updates and announcements
Canvas will be used intensively for communication during the course. You can expect
announcements on e.g. short-term instructions for preparing a lecture, availability of slides,
changes in the program, grading, exam inspections, etc. It is, therefore, necessary to frequent
Canvas regularly.
Communication in English
 All instructions in class will be in English;
 Students should speak in English with the lecturer and with each other while being in the
classroom. (We always encourage socially inclusive international learning environment);
 E-mails to lecturers should be written in English;
 Speak English with each other when working on assignments as much as you can.
Behavior in class
 Be quiet during lectures! Because we are in a very large group, talking in class easily
leads to a lot of noise. Please avoid speaking and even whispering with your fellow
students.
 Follow up on the instructions of your lecturer or instructor. The lecturer can ask you to
take another seat, answer a question, put your electronic devices away, etc.
 Do not enter the classroom during lectures or tutorials when you are late, not even if you
had a train delay or flat tire. It disturbs many others. In such a case you will be accepted
by the lecturer or instructor. You can enter during the break.
 Do not leave the classroom during the lectures and tutorials, even when you have an
appointment elsewhere. It disturbs many others. You can leave during the break.
Communication with lecturers
During mid-class breaks and right after the lectures and tutorials, students can ask questions
to the lecturer. If it is needed you can communicate with the lecturers via Canvas message
option. If you do not receive a response to your e-mail within 5 working days, it means
that the answer to your question is already at Canvas. Regarding the chapter-end
questions, please do not communicate with your tutor via email. Instead, we encourage you to
join the intensive tutorial sessions and discuss your questions with your tutor face-to-face.
Course structure
Forms of tuition
In this course we use three types of tuition:
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Lectures (20) explain and clarify main finance concepts & theories and discuss short case
studies, anecdotes and/or academic papers. We follow the line of the textbook but we will not
present the content page-by-page in the lectures. This means that the book also contains
material that is not discussed during the lecture but is part of the exam. On the other hand, the
lectures also discuss material that is not part of the book.
Lecturers aim to post the slides of the lectures one day in advance so that you can print them
and bring them to class. Make sure to take notes during the lectures, because not everything
that is discussed or reflected on the slides. The lecturer may add some notes to the slides to
elaborate on the topics.
Tutorials (6)
In the tutorials, you will deepen your knowledge by applying the finance concepts & theories
yourselves. The tutorials help you to practice for the exam. Participation is not mandatory but
highly recommended.
You should prepare the tutorial questions in advance. The tutorial questions are listed at the
end of this document.
There will be intensive and extensive tutorials. The students must choose and register one
of the options depending on their needs.
In an intensive tutorial (IWC), you are in a small group of students. The exercises will be
discussed plenary based on the input and questions from the group. The group will be actively
involved in the discussion of the exercises. This implies that you are expected to actively
participate in the tutorial, and preparing the tutorial exercises at home is mandatory. It is ok if
you are not able to solve the exercises at home, this can provide input for the discussion in
the tutorial. Note that if you didn’t have any preparation, you are not allowed to join
intensive training sessions; but you are always welcome at the extensive training
sessions even if you are unprepared.
In an extensive tutorial (EWC), the group of students is larger. You prepare the exercises at
home. During the tutorial, the exercises will be discussed by the teacher. As the extensive
tutorials are taught to a larger group of students at the same time, there is less opportunity for
individual questions than in the intensive tutorial. In brief, an extensive tutorial is a classic form
of instruction taken place in large halls and orchestrated by the instructors.
At the beginning of the semester, you choose which type of tutorial you want to attend. You
do NOT need to subscribe to the tutorials in advance. You can find the corresponding time
slots and lecture rooms in your schedule. First-year students are supposed to go the tutorial
of their own group (e.g. if you are in IBA-01 and you want to attend the IWC, you go to the time
slot and lecture room that is indicated for the IWC of IBA-01). Repeaters can join a tutorial
group of their choice, as long as the teacher agrees that the group is not too crowded. There
will always be enough space in the extensive tutorial.
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.If the attendance rate is low at intensive sessions in the first and second weeks, some groups
can be merged later. In such a case, a new schedule would be communicated with the
students.
Course schedule
The course schedule can be checked in https://rooster.uvt.nl/schedule.
General
Course Flow
I-Money and
Time
Chapter 1, 3, 4, 5 & 6
III-Risk and
Return
II- Projects
and Firms
Chapter 7 & 9
Chapter 10, 11, 12 & 13
Lecture Outline*
* There may be small changes in the lecture plan due to unforeseeable reasons. Any change in the lecture
plan will be communicated with the students via Canvas.
I-
First Chunk: Money and Time
Lecture 1: The Corporation and Financial Markets (Chapter 1):
Preparation: Read the following topics from the textbook before the class:
 The Four Types of Firm
 Ownership versus Control of Corporation
 The Stock Market
9
After this lecture, you will be able to
 List and define the four major types of firms; describe major characteristics of each
type, including the means for distributing income to owners.
 Distinguish between limited and unlimited liability, and list firm types that are subject
to each type of liability.
 Describe the taxation consequences for C and S corporate forms.
 Discuss the division of corporate ownership into shares of stock; evaluate the
implications of that division for corporate decision making.
 Explain how corporate bankruptcy can be viewed as a change in firm ownership.
 Compare and contrast the characteristics of shares that are publicly traded and those
that are not.
 Describe the major changes that stock markets have gone through in the last
decade.
 Differentiate between trading on an exchange and trading in a dark pool.
Lecture 2: Financial Decision Making and Law of One Price (Chapter 3):
Preparation: Read the following topics from the textbook before the class:
 Valuing Decisions
 Interest Rates and Time Value of Money
 Present Value and the NPV Decision Rule
 Arbitrage and the Law of One Price
 No Arbitrage and Security Prices
 Appendix: The Price of Risk
 After this lecture, you will be able to
After this lecture, you will be able to

Assess the relative merits of two-period projects using net present value.

Define the term “competitive market,” give examples of markets that are competitive
and some that are not, and discuss the importance of a competitive market in
determining the value of a good.

Explain why maximizing NPV is always the correct decision rule.

Define arbitrage, and discuss its role in asset pricing. How does it relate to the Law of
One Price?

Calculate the no-arbitrage price of an investment opportunity.

Show how to value additivity can be used to help managers maximize the value of the
firm.

Describe the Separation Principle.

Calculate the value of a risky asset using the Law of One Price.
10

Describe the relationship between a security’s risk premium and its correlation with
returns of other securities.

Describe the effect of transaction costs on arbitrage and the Law of One Price.
Lecture 3: Time Value of Money (Part-1; Chapter 4)
Preparation: Read the following topics from the textbook before the class:
 The Timeline
 The Three Rules of Time Travel
 Valuing Stream of Cash Flow
 Calculating the Net Present Value
 Perpetuities and Annuities
After this lecture, you will be able to

Draw a timeline illustrating a given set of cash flows.

List and describe the three rules of time travel.

Calculate the future value of
a. A single sum
b. An uneven stream of cash flows, starting either now or sometime in the future
c. An annuity, starting either now or sometime in the future
d. Several cash flows occurring at regular intervals, which grow at a constant rate each
period

Calculate the present value of
a. A single sum
b. An uneven stream of cash flows, starting either now or sometime in the future
c. An infinite stream of identical cash flows
d. An annuity, starting either now or sometime in the future
e. An infinite stream of cash flows that grow at a constant rate each period
f. Several cash flows occurring at regular intervals that grow at a constant rate each
period
Lecture 4: Time Value of Money (Part-2; Chapter 4)
Preparation: Read the following topics from the textbook before the class:
 Non-Annual Cash Flows
 Internal Rate of Return
 Appendix: Solving the Number of Periods
After this lecture, you will be able to

Given four out of the following five inputs for an annuity, compute the fifth: (a) present
value, (b) future value, (c) number of periods, (d) periodic interest rate, and (e) periodic
payment.
11

Given three out of the following four inputs for a single sum, compute the fourth: (a)
present value, (b) future value, (c) number of periods, and (d) periodic interest rate.

Given cash flows and present or future value, compute the internal rate of return for a
series of cash flows.
Lecture 5: Interest Rates (Chapter 5)
Preparation: Read the following topics from the textbook before the class:
 Interest Rate Quotes and Adjustments
 Applications: Discount Rates and Loans
 The Determinants of Interest Rates
 Risk and Taxes
 The Opportunity Cost of Capital
 Appendix: Continuous Rates and Cash Flows
After this lecture, you will be able to

Define effective annual rate and annual percentage rate.

Given an effective annual rate, compute the n-period effective annual rate.

Convert an annual percentage rate into an effective annual rate, given the number of
compounding periods.

Describe the relationship between nominal and real rates of interest.

Given two of the following, compute the third: nominal rate, real rate, and inflation rate.

Describe the effect of higher interest rates on net present values in the economy.

Explain how to choose the appropriate discount rate for a given stream of cash flows,
according to the investment horizon.

Discuss the determinants of the shape of the yield curve.

Explain why Treasury securities are considered risk free, and describe the impact of
default risk on interest rates.

Given the other two, compute the third: after-tax interest rate, tax rate, and before-tax
interest rate.
Lecture 6: Valuing Bonds (Part-1, Chapter 6)
Preparation: Read the following topics from the textbook before the class:


Bond Cash Flows, Prices, and Yields
Dynamic Behavior of Bond Prices
After this lecture, you will be able to

Identify the cash flows for both coupon bonds and zero-coupon bonds, and calculate
the value for each type of bond.

Calculate the yield to maturity for both coupon and zero-coupon bonds, and interpret its
meaning for each.
12
Lecture 7: Valuing Bonds (Part-2, Chapter 6)
Preparation: Read the following topics from the textbook before the class:




The Yield Curve and Bond Arbitrage
Corporate Bonds
Sovereign Bonds
Appendix: Forward Interest Rates
After this lecture, you will be able to

The given coupon rate and yield to maturity, determine whether a coupon bond will sell
at a premium or a discount; describe the time path the bond’s price will follow as it
approaches maturity, assuming prevailing interest rates remain the same over the life
of the bond.

Illustrate the change in bond price that will occur as a result of changes in interest
rates; differentiate between the effect of such a change on long- versus short-term
bonds.

Discuss the effect of coupon rate on the sensitivity of a bond price to changes in
interest rates.

Define duration, and discuss its use by finance practitioners.

Calculate the price of a coupon bond using the Law of One Price and a series of zerocoupon bonds.

Discuss the relation between a corporate bond’s expected return and the yield to
maturity; define default risk and explain how these rates incorporate default risk.

Assess the creditworthiness of a corporate bond using its bond rating; define default
risk.
II-
Second Chunk: Projects and Firms
Lecture 8: Investment Decision Rules (Chapter 7)
Preparation: Read the following topics from the textbook before the class:
 NPV and Stand-Alone Projects
 The Internal Rate of Return Rule
 The Payback Rule
 Choosing Between Projects
 Project Selection with Resource Constraints
After this lecture, you will be able to

Define net present value, payback period, internal rate of return, profitability index, and
incremental IRR.
13

Describe decision rules for each of the tools in Objective 1, for both stand-alone and
mutually exclusive projects.

Given cash flows, compute the NPV, payback period, internal rate of return, and
profitability index for a given project, and compute the incremental IRR for a pair of
projects.

Compare each of the capital budgeting tools above, and tell why NPV always gives the
correct decision.

Discuss the reasons IRR can give a flawed decision.

Describe situations in which the profitability index cannot be used to make a decision.
Lecture 9 (Instruction): Complete Chapter 7 (if not completed yet) + Exam
Preparation.
(In your e-calendar, you will see this lecture as “instruction”)
Preparation: Solve the sample midterm questions before the class (Sample mid-term exam
Questions will be communicated via Canvas)
After this lecture, you will have a general idea about the style of the midterm exam
Lecture 10: Valuing Stocks (Part-1; Chapter 9)
Preparation: Read the following topics from the textbook before the class:
 The Dividend-Discount Model
 Applying the Dividend-Discount Model
After this lecture, you will be able to

Describe, in words, value for a common stock according to the Law of One Price,
including the discount rate that should be used.

Calculate the total return of a stock, given the dividend payment, the current price, and
the previous price.

Use the dividend-discount model to compute the value of a dividend-paying company’s
stock, whether the dividends grow at a constant rate starting now or at some time in the
future.

Discuss the determinants of future dividends and growth rate in dividends and the
sensitivity of the stock price to estimates of those two factors.

Given the retention rate and the return on new investment, calculate the growth rate in
dividends, earnings, and share price.

Describe circumstances in which cutting the firm’s dividend will raise the stock price.

Assuming a firm has a long-term constant growth rate after time N + 1, use the
constant growth model to calculate the terminal value of the stock at time N.
Lecture 11: Valuing Stocks (Part-2; Chapter 9)
14
Preparation: Read the following topics from the textbook before the class:



Total Payout and Free Cash Flow Valuation Models
Valuation Based on Comparable Firms
Information Competition, and Stock Prices
After this lecture, you will be able to

Compute the stock value of a firm that pays dividends as well as repurchasing shares.

Use the discounted free cash flow model to calculate the value of stock in a company
with leverage.

Use comparable firm multiples to estimate stock value.

Explain why several valuation models are required to value a stock.

Describe the impact of efficient market hypothesis on positive-NPV trades by
individuals with no inside information.

Discuss why investors who identify positive-NPV trades should be skeptical about their
findings unless they have inside information or a competitive advantage. As part of that,
describe the return the average investor should expect to get.

Assess the impact of stock valuation on recommended managerial actions.
III-
Third Chunk: Risk and Return
Lecture 12: Capital Markets and Price of Risk (Part 1; Chapter 10)
Preparation: Read the following topics from the textbook before the class:





Risk and Return: Insight from 92 Years of Investor History
Common Measures of Risk and Return
Historical Returns of Stocks and Bonds
The Historical Tradeoff Between Risk and Return
Common Versus Independent Risk
After this lecture, you will be able to

Define a probability distribution, the mean, the variance, the standard deviation, and
the volatility.

Compute the realized or total return for an investment.

Using the empirical distribution of realized returns, estimate expected return,
variance, and standard deviation (or volatility) of returns.

Use the standard error of the estimate to gauge the amount of estimation error in the
average.

Discuss the volatility and return characteristics of large stocks versus large stocks and
bonds.

Describe the relationship between volatility and return on individual stocks.
15
Lecture 13 Capital Markets and Price of Risk (Part 2; Chapter 10)
Preparation: Read the following topics from the textbook before the class:



Diversification in Stock Portfolios
Measuring Systematic Risk
Beta and Cost of Capital
After this lecture, you will be able to

Define and contrast idiosyncratic and systematic risk and the risk premium required
for taking each on.

Define an efficient portfolio and a market portfolio.

Discuss how beta can be used to measure the systematic risk of a security.

Use the Capital Asset Pricing Model to calculate the expected return for risky security.

Use the Capital Asset Pricing Model to calculate the cost of capital for a particular
project.

Explain why, in an efficient capital market, the cost of capital depends on systematic
risk rather than diversifiable risk.
Lecture 14: Guest Lecture (to be announced)
After this lecture, you will be able to
Lecture 15: Optimum Portfolio Choice and CAPM (Part 1; Chapter 11)
Preparation: Read the following topics from the textbook before the class:





The Expected Return of a Portfolio
The Volatility of a Two-Stock Portfolio
The Volatility of a Large Portfolio
Risk versus Return: Choosing and Efficient Portfolio
Risk-Free Saving and Borrowing
After this lecture, you will be able to

Given a portfolio of stocks, including the holdings in each stock, and the expected
return in each stock, compute the following:
a. Portfolio weight of each stock (equation 11.1)
b. Expected return on the portfolio (equation 11.3)
c. The covariance of each pair of stocks in the portfolio (equation 11.5)
d. The correlation coefficient of each pair of stocks in the portfolio (equation 11.6)
e. The variance of the portfolio (equation 11.8)
f. The standard deviation of the portfolio
16

Compute the variance of an equally weighted portfolio using equation 11.12.

Describe the contribution of each security to the portfolio.

Use the definition of an efficient portfolio from Chapter 10 to describe the efficient
frontier.

Explain how an individual investor will choose from the set of efficient portfolios.

Describe what is meant by a short sale, and illustrate how short selling extends the
set of possible portfolios.

Explain the effect of combining a risk-free asset with a portfolio of risky assets, and
compute the expected return and volatility for that combination.
Lecture 16: Optimum Portfolio Choice and CAPM (Part 2; Chapter 11)
Preparation: Read the following topics from the textbook before the class:




The Efficient Portfolio and Required Returns
The Capital Asset Pricing Model
Determining Risk Premium
Appendix: The CAPM with Different Interest Rates
After this lecture, you will be able to

Illustrate why the risk-return combinations of the risk-free investment and a risky
portfolio lie on a straight line.

Define the Sharpe ratio, and explain how it helps identify the portfolio with the highest
possible expected return for any level of volatility and how this information can be
used to identify the tangency (efficient) portfolio.

Calculate the beta of investment with a portfolio.

Use the beta of a security, expected return on a portfolio, and the risk-free rate to
decide whether buying shares of that security will improve the performance of the
portfolio.

Explain why the expected return must equal the required return.

Use the risk-free rate, the expected return on the efficient (tangency) portfolio, and the
beta of a security with the efficient portfolio to calculate the risk premium for an
investment.

List the three main assumptions underlying the Capital Asset Pricing Model (CAPM).

Explain why the CAPM implies that the market portfolio of all risky securities is the
efficient portfolio.

Compare and contrast the capital market line with the security market line.
Define beta for an individual stock and for a portfolio
Lecture 17: Estimating Cost of Capital (Part 1; Chapter 12)
Preparation: Read the following topics from the textbook before the class:
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



The Equity Cost of Capital
The Market Portfolio
Beta Estimation
The Debt Cost of Capital
After this lecture, you will be able to

Estimate a company’s cost of capital using the CAPM equation for the Security
Market Line.

Describe the market portfolio and how it is constructed in practice.

Discuss the attributes of a value-weighted portfolio.

Describe common proxies for the market return and the risk-free rate.

Define alpha and beta and explain how they are generally estimated.

Compare the use of average return versus beta and the SML to estimate the cost of
equity capital.

Estimate the cost of debt, given a company’s yield to maturity, probability of default,
and expected loss rate.

Discuss the difference between the yield to maturity and the cost of debt when there
is low versus high default risk.
Lecture 18: Estimating Cost of Capital (Part 2; Chapter 12)
Preparation: Read the following topics from the textbook before the class:




A Project’s Cost of Capital
Project Risk Characteristics and Financing
Final Thoughts on Using the CAPM
Appendix: Practical Considerations When Forecasting Beta
After this lecture, you will be able to

Calculate the cost of debt given a company’s debt beta, the risk-free rate, and the
market risk premium.

Illustrate the use of comparable companies’ unlevered betas or unlevered cost of
capital to estimate the project cost of capital.

Discuss the advantages of using several companies’ betas to estimate a project beta.

Define operating leverage and discuss its influence on project risk.

Calculate the weighted average cost of capital.

Discuss the strengths and weaknesses of the CAPM.
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Lecture 19: Investment Behavior Capital Market Efficiency (Part 1; Chapter 13)
Preparation: Read the following topics from the textbook before the class:




Competition and Capital Markets
Information and Rational Expectations
The Behavior of Individual Investors
Systematic Trading Biases
After this lecture, you will be able to

Compute a stock’s alpha using equation 13.2.

Explain how investors’ attempts to “beat the market” should keep the market portfolio
efficient.

Describe the effect of homogeneous expectations on a security’s alpha.

Explain why holding the market portfolio does not depend on the quality of an
investor’s information or trading skills.

Understand what the CAPM requires about investors’ expectations.

Evaluate under what conditions the market portfolio would be inefficient.

Explain diversification bias and familiarity bias.

Discuss why uninformed investors trade too much.

Assess how uninformed investors’ behavior deviates from the CAPM in systematic
ways.

Explain the disposition effect.

Review why investors, on average, earn negative alphas when they invest in
managed mutual funds.

Assess the strategy of an investor “holding the market.”
Lecture 20: Investment Behavior Capital Market Efficiency (Part 2; Chapter 13)
Preparation: Read the following topics from the textbook before the class:




The Efficiency of the Market Portfolio
Style-Based Techniques and the Market Efficiency Debate
Multifactor Models of Risk
Methods Used in Practice
VIDEO (In courtesy to Chicago Booth Faculty): Watch the debate between two Nobel
laureates Eugene F. Fama and Richard H. Thaler. How markets behave (and misbehave)
Do market prices generally reflect all available information? (Link)
After this lecture, you will be able to

Discuss the size effect.
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
Describe the momentum trading strategy.

Explain how the choice of the market proxy may lead to non-zero alphas.

Discuss how systematic behavioral biases may affect the efficiency of the market
portfolio.

Assess how a preference for stocks with a positively skewed return distribution would
impact the market portfolio’s efficiency.

Describe the Arbitrage Pricing Theory using equation 13.4.

Discuss the expected return on a self-financing portfolio using equation 13.5.

Discuss the Fama-French-Carhart model using equation 13.6.
Lecture 21: RECAP & Instruction-Exam Preparation (Sample final exam questions will be
communicated in advance)
Preparation: Solve the sample midterm questions before the class (Sample mid-term exam
Questions will be communicated via Canvas)
After this lecture, you will have an idea about the style of the final exam.
Lecture 22: Reserve Lecture (subject to possible cancelation; scheduled extra)
Tutorials:
Prepare the following list of the questions before coming to the tutorial. If you didn’t make
any preparation in advance, you should participate in extensive tutorial sessions rather than
interactive intensive sessions. (The instructor has right to not accept you to the intensive
sessions if you didn’t make any preparation)
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Tutorials
Date
Tutorial 1
3-7 Feb
Tutorial 2
Tutorial 3
Tutorial 4
Tutorial 5
Tutorial 6
17-21 Feb
9-13 Mar
13-17 Apr
27 Apr-1
May
11-15 May
Mandatory Homework
Questions (prepare for
tutorials)
Chapter-1: 4,6,8,14 and16
Self-study Questions
Chapter-3: 1, 6, 10, 13, 16, A4,
A5
Chapter-4: 4,8,12,14,20,22, 32,
41, A1
Chapter-5: 7,8,14,25,35 and 39
Chapter-3: 3, 7,11, 14, 17, A3 and A6
Chapter-6: 3,11, 23, 30,35 and
A2
Chapter-7: 5, 13, 21, 24 and 34
Chapter-6: 4, 8, 22, 31, 34 and A1
Chapter-9: 2, 11, 19, 25 and 31
Chapter-9: 3,7,17,26 and 32
Case Discussion: Kenneth
Cole Productions-What
Happened?
Chapter-10: 2, 7, 16, 20, 23
and 33 and 35
Chapter-11: 2, 5, 6, 19, 22, 36,
40, 44, 46, 49,
Chapter-12: 2 ,4, 10, 16, 18
and 25
Chapter-13: 2, 9, 12, 14, 17
and 19.
Chapter-1: 7,11,17 and19
Chapter-4: 3, 5,9,23,26,48,A2
Chapter-5: 3,5,15,27,37 and 40
Chapter-7: 6, 15, 23 and 33
Chapter-10: 3, 4, 11, 17, 22, 27, 31 and 37
Chapter-11: 1, 11, 20, 27, 34, 41, 47 and 50
Chapter-12: 1, 5, 11, 17, 20 and 27
Chapter-13: 3, 8, 13, 15, 18 and 22
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