INVESTMENT MANAGEMENT: Spring 2015
Professor: Dr. Paul Irvine
E-Mail: p.irvine@tcu.edu
Professor: Dr. Ronnie R. Shah
E-Mail: Ronnie.shah@mccombs.utexas.edu
Teaching Assistant:
Course Objectives
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Introduce the concepts and theories of modern investment finance
Understand how to apply these theories to real world finance
Review market efficiency and academic challenges to market efficiency
Expand the student’s knowledge of security analysis, concentrating on models of the intrinsic value of
securities
Provide an overview of best practices for portfolio management and implementation
Text
Investment Analysis & Portfolio Management by Reilly and Brown. Cengage Learning, 10th Edition.
ISBN
Course Structure and Grading
The course consists of lectures, projects, class case discussions, midterm and a final exam.
Lectures: The lectures are designed to provide an understanding of the major elements of investment finance
research. The emphasis is on the logic underlying each concept, on how each concept is used in finance, and
on how the concepts are interrelated. The lectures are not note taking drills; rather, they are dynamic sessions
in which information is presented by the instructor via visual aids and through direct interaction with the class.
Case Discussions: No written analysis will be required to be turned in but you should have prepped the case
before class and be prepared to discuss your analysis of the case. Instructors may cold call students to give
their analysis of the case. You may work with your study group in preparing the case analysis.
Stock Trak Project (100 Points):
Case Studies (50 Points Each):
Midterm Exam (200 points):
Final Exam (300 Points):
Class Participation (100 Points):
Financial Calculator for Exam: For this course, you will need a financial calculator. It will be primarily be
used for exams so you do not need to buy anything elaborate - just the basics. Any financial calculator that
has at least the keys of "FV, PV, PMT, N, and I" will suffice. These keys stand for FV Future Value, PV
Present Value, PMT Payment, N Number of Periods, and I Interest Rate. While the specific type of calculator
is up to you, one suggested calculator from is the BA II Plus from Texas Instruments (TI) that has been popular
due to its fairly straight forward instructions. Prices generally run from $20 USD and up from sources such as
EBay.
Session 1: Irvine
February 7 (Afternoon)
Financial Markets and Financial Assets
The course will begin with an overview of the different financial instruments that are often classified
into asset classes. What are the rates of return on these asset classes? How do financial securities
trade? Mutual Funds
Professor Irvine’s Guide to Personal Investing: An overview of investment assets and asset returns
Reilly and Brown Chapters 2, 3
February 8 (Morning)
Mutual Funds, Hedge Funds, Professional Investing
We will discuss the various forms of mutual funds and hedge funds and their relative success in
financial markets.
SSRN (Irvine), Case on Jeff Vinik and Fidelity Magellan
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=458080
Reilly and Brown Chapters 16, 24
Assign Stock Trak Project: Initial Portfolio
Set up an initial well-diversified Stock Trak portfolio in your investment group.
Session 2: Shah
Saturday February 21 (Afternoon)
Efficient Capital Markets and Modern Portfolio Theory
How efficient is the market? Is there any evidence that the market is not efficient? Does this evidence
represent a profit opportunity for investment managers? The concept of mean-variance efficiency and
the efficient frontier. Forming the efficient portfolio from a list of assets. Diversification.
Reilly and Brown Chapters 6, 7
Haugen: Finance from a New Perspective
Stock Trak check-in: Benchmark performance, Sharpe ratio performance.
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Session 3: Shah
Friday March 6 (Evening)
The Market Price of Risk
The Capital Asset Pricing Model. We will talk about conclusions that can be drawn from tests of the
Capital Asset Pricing Model and discuss alternative models.
Reilly and Brown Chapters 8, 9
Dimensional Case Study
Stock Trak check-in: Purchase a firm or set of firms based solely on its characteristics. Evaluate performance
relative to S&P 500 next Shah class.
Saturday February 7 (Morning)
Financial Statement Analysis
Understanding financial reporting and how information from financial statements can be used to estimate
future earnings. Discussing the function of security analysts in the stock market.
Reilly and Brown Chapter 10
Numeric Investors Case Study
Session 4: Shah
Friday March 13(Evening)
Security Valuation
We will look at a number of valuation models including the dividend discount model, comparable multiple
valuation, Free Cash Flow to Equity and the Ohlson model.
Reilly and Brown Chapter 11
Guest Lecturer
Stock Trak check-in: Purchase a firm or set of firms based on your financial analysis and valuation. Evaluate
performance relative to S&P 500 next Shah class. Assignment: Discuss which was the best performing style.
Which was the most comfortable to use (i.e. did you trust style-only valuation).
Saturday March 14 (Morning)
Midterm Exam: TBD
Personal Finance and Portfolio Management
We will better understand how both professional investors and individual investors build financial portfolios.
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Reilly and Brown Chapters 2, 16, 19
Stock Trak check-in: Information Ratio performance.
Session 5: Irvine
Saturday March 28 (Morning)
Futures and Options
This section is intended to introduce the students to the futures and options. We cover the basic
contracts and how to apply them. This year we will cover introductory derivatives pricing.
Reilly and Brown Chapters 20. 21. 22
Stock Trak Check-in: Option Trades.
Session 6: Irvine
Friday April 10 (Evening)
Fixed Income Securities
This section moves beyond basic bond valuation to more advanced topics in fixed income. The term
structure of interest rates, duration and convexity will be covered.
Reilly and Brown Chapter 16, 24
Or
Analysts and Earnings
The importance of earnings reports as cash flow indicators. How the market responds to earnings
reports. Estimated expected earnings. Analysts estimation of expected earnings. Sell-side analyst
job function and place in the capital markets. Post earnings announcement drift strategies. Dealing
with negative earnings. Earnings management and manipulation.
Numeric Investors Case Study. As earnings momentum is one of their major investment
strategies, we can revisit this case here if necessary.
Reilly and Brown Chapter 14. Particularly 14.5.
Saturday April 11 (Morning)
Performance Measurement
What is the difference between active management and passive investing? How do we use benchmark
portfolios to evaluate portfolio manager performance and compensation?
Reilly and Brown Chapter 16, 24
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Or
Valuation II – Other Equity Valuation Techniques
This section discusses how to get estimates of the discount rate, the growth rate and security pricing by
comparable ratios. How do we build a Free Cash Flow to Equity model? We apply some of the knowledge
gained in Session 3 to popular investment strategies and explore some alternative valuation techniques.
Reilly and Brown Chapter 14.
Session 7: Irvine/Shah
Saturday April 25 (Afternoon)
Final Exam: 1 PM – 4 PM
References
1. Haugen “Finance from a New Perspective” Financial Management, Vol. 25. No. 1, Spring, 1995.
2. Esty, B. C. "What Determines Comparability When Valuing Firms with Multiples." Journal of Financial
Education 26 (Fall 2000): 24-33.
Useful Web sites
1. www.stocktrak.com
You can also go to www.stocktrak.com and register manually.
Students with Disabilities
Any student with a documented disability who requires academic accommodations should contact Services for
Students with Disabilities at 512-471-6259 (voice) or 1-866-329-3986 (Video Phone) as soon as possible to
request an official letter outlining authorized accommodations. For more information, please visit the Division
of Diversity and Community Engagement website http://www.utexas.edu/diversity/ddce/ssd.
Religious Holidays
By UT Austin policy, you must notify your instructor of your pending absence at least fourteen days prior to
the date of observance of a religious holy day. If you must miss a class, an examination, a work assignment,
or a project in order to observe a religious holy day, you will be given an opportunity to complete the missed
work within a reasonable time after the absence.
Academic Dishonesty
The University Honor Code states: "The core values of the University of Texas at Austin are learning,
discovery, freedom, leadership, individual opportunity, and responsibility. Each member of the University is
expected to uphold these values through integrity, honesty, trust, fairness, and respect toward peers and
community". A fundamental principle for any educational institution, academic integrity is highly valued and
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seriously regarded at The University of Texas at Austin. More specifically, you and other students are expected
to maintain absolute integrity and a high standard of individual honor in scholastic work undertaken at the
University http://deanofstudents.utexas.edu/sjs/acint_student.php. At a minimum, you should complete any
assignments, exams, and other scholastic endeavors with the utmost honesty, which requires you to:
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Acknowledge the contributions of other sources to your scholastic efforts
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Complete your assignments independently unless expressly authorized to seek or obtain assistance in
preparing them
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Follow instructions for assignments and exams, and observe the standards of your academic
discipline
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Avoid engaging in any form of academic dishonesty on behalf of yourself or another student
For the official policies on academic integrity and scholastic dishonesty, please refer to Chapter 11 of the
Institutional Rules on Student Services and Activities
http://deanofstudents.utexas.edu/sjs/downloads/InstitutionalRules1112.pdf.
The instructor of this class will not tolerate any kind of dishonesty. If there is evidence of such kind of
inappropriate behavior, he will make sure that it is disciplined to the maximum extent possible.
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