WARRINGTON COLLEGE OF BUSINESS ADMINISTRATION Spring, 2005 Finance 4504 EQUITY AND CAPITAL MARKETS David J. Nye, MBA, Ph.D. Professor of Finance and Insurance 329 Stuzin Hall * PO Box 117168 * Gainesville, FL 32611-7168 Voice: (352) 392-6649 * Fax: (352) 392-0301 * dnye@ufl.edu Web page: http://bear.cba.ufl.edu/nye/ Page 1 of 11 3/7/2016 CLASS MEETING TIME AND ROOM: Section 2833: Section 4767: T R 9-10 T R 7-8 MAT 103 MAT 16 OFFICE HOURS: Thursday: 10AM to 11AM or by appointment Objectives: To develop the student's knowledge and understanding of: (a) the structure and operations of securities markets. (b) various investment vehicles as well as techniques for their analysis (c) portfolio construction, management, and evaluation Required Readings: Bodie, Kane and Marcus, Essentials of Investments, 5th Edition, Solutions Manual for Bodie, Kane and Marcus The publisher provides a student on-line Learning Center at: http://www.mhhe.com/bkm/ This site provides a summary of each chapter’s contents as well as sample test questions. Please note: Since this is the Publisher's web site, I am unable to offer any support services in connection with this site. In previous semesters, errors in the correct multiple choice answers have been noted. If you don’t understand why an answer is “correct”, don’t spend a lot of time on it. Email the question, answer choices and “correct” answer to my TA (profnyeta@yahoo.com) with a copy to me and we will check it. Recommended Readings: The Wall Street Journal Grading: Exam I Exam II Exam III Total exam weight Semester Assignment Portfolio Project Stock Strategist Total Default Weight 25% 25% 25% 75% 10% 10% 5% 100% Elected Weight 20% - 30% 20% - 30% __GE 20% 75% Exam make-ups are not offered. Please visit my web site at http://bear.cba.ufl.edu/nye/fin4504/index.HTML and click on “Grading” for guidance on how the above activities will be graded. Weight elections for exams 1 and 2 MUST BE COMMUNICATED TO ME IN WRITING NO LATER THAN TWO (2) WEEKS PRIOR TO THE LAST CLASS OF THE SEMESTER. If no election is made within the allowed time period, the default weights will apply. FYI, you will have to make an exam weight decision for exam 3 with incomplete information since you will not have all of your assignment grades by the time you have to make your weight election. Course Activities: End-of Chapter Problems: Students are strongly encouraged to answer all End-of-Chapter questions and problems using the available Solutions manual to self-grade their answers. The knowledge gained from this activity should materially enhance your exam performance. Portfolio Project: Please see below for a detailed explanation of this activity. Semester Assignment Please see below for a detailed explanation of this activity. Specific assignments will be announced in class. Course Activities (continued): Stock Strategist: Page 2 of 11 3/7/2016 Please see below for a detailed explanation of this activity. Exams: A downloadable formula sheet is available. It may be used during the exam but may not be markedup prior to the beginning of the exam. Also, it must have your name on it and must be turned into the exam proctor at the end of the exam. Concept checks will form the basis of some exam questions and it is recommended you work each of these in preparation for the exam. Lectures: It is not possible to discuss every topic in class. Major concepts and themes will be covered in class but you are responsible for reading and learning all of the assigned material. Outside material introduced during lectures may also be included in the exam questions. Instructional Technique: The course format will be lecture and discussion. Student involvement is important - "One who never asks a question either knows everything or nothing", M. Forbes (Former Publisher). Retention: Class materials will be retained for 10 days after the exam 3 date. You must notify me in writing before the 10 day period expires if you wish your exam materials to be retained after that date. Grade Reviews: Occasionally you may have a question about the grade you received on an assignment or exam. Questions or concerns about a grade you received must be communicated to me in writing within one week of the assignment or exam grade being announced or made available for pick-up. Questions or concerns received beyond that date cannot be considered and no grade adjustments will be made. Attendance: Attendance is not taken and is not an explicit factor in determining the course grade you earn. If you are unable to remain in class continuously for the entire class due to appointments, personal reasons, etc. then it is preferred that you not attend at all since early departure from class is disruptive. Cell Phones: Cell phones must be turned off during class, i.e., the power should be turned off. Assistance: There may be circumstances where you don’t know how to complete a required assignment and ask the instructor for assistance. I will provide as much help as I can without compromising the integrity of the assignment as a measurement tool. Assignment results affect your grade. If the instructor tells you how to find an answer, you have lost the opportunity to learn by doing your own work and I have lost the opportunity to measure how well you know the material. My web site provides guidance on completing certain assignments as well as the basis for grading. Assignment Submission: A hard copy of each assignment should be turned in at the beginning of class on the date it is due. Emailed assignments will not be accepted. Page 3 of 11 3/7/2016 CLASS SCHEDULE TOPIC READ Elements Of Investments Introduction Chapter 1 Global Financial Instruments Chapter 2 (Sections 2.3-2.5) How Securities Are Traded Chapter 3 Dow Index: http://www.cbot.com/cbot/pub/cont_detail/0,3206,1560+17407,00.html Mutual Funds and Other Investments Portfolio Theory Risk and Return: Past and Prologue Chapter 4 Chapter 5 EXAM 1 Efficient Diversification Capital Asset Pricing and APT Efficient Market Hypothesis Security Analysis Economy and Industry Analysis Equity Valuation Chapter 6 Chapter 7 (Limited APT coverage – skip from the bottom of page 244 to the top of page 247)1 Chapter 8 Chapter 11 Chapter 12 EXAM 2 Derivatives Options Markets Option Valuation Futures Markets Chapter 14 Chapter 15 Chapter 16 Active Investment Management Investors and the Investment Process Taxes, Inflation and Investment Strategy Behavioral Finance and Technical analysis Chapter 17 Chapter 18 Chapter 19 EXAM 3 1 Coverage is limited to the concept of APT and how it should work. You are not responsible for the equations and numerical work. CHAIRMAN: Dr. Mike Ryngaert, 321 Stuzin Hall, 392-0153 Page 4 of 11 3/7/2016 PORTFOLIO PROJECT An investment company will be formed; each company will consist of a team of 2 students and it will receive $1,000,000 to manage.1 Initially, you will construct an equity portfolio consisting only of unmargined, long positions in stocks. Subsequently, you will be permitted to develop a hedge fund under which margin, short and derivative positions are allowed. Set up a spreadsheet for your portfolio using Excel, or some other program. The format provided must be followed exactly – points will be lost if this format is not followed. I recommend you check your work before turning it in for a grade. Periodically you will turn in an updated spreadsheet and a graph for your portfolio. Valuation should be as at the close of trading on the Friday before the due date. Record pertinent data for all transactions at the bottom of your spreadsheet in the order in which they take place. The final spreadsheet should display all cash entries and all transactions for the entire term. Along with the spreadsheet, turn in a graph showing the daily dollar value of your portfolio and the dollar equivalent value of the S&P 500 index. Use as a starting date the close on January 4, 2005. The calculation of the equivalent dollar value of the S&P 500 is illustrated by the following example: Starting day of the project 1 Closing Value of S&P 258.49 Equivalent Dollar Value of the S &P * $1,000,000 2 260.71 1,008,585 = (260.71/258.49) * 1,000,000 3 254.36 984,023 = (254.36/260.71) * 1,008,585 4 252.41 976,479 = (252.41/254.36) * 984,023 Include with your graph a table showing both the daily dollar values and the daily percentage rate of return for your portfolio and the S&P 500 index. One-half of your portfolio project grade is earned by turning in properly formatted, error free, quality spreadsheets. If not received in class on the date due, the spreadsheet will be considered late and will receive no credit. The remaining 50 percent of your grade is earned by submitting at the end of the semester an analysis (one page or less) of the risk-reward performance of your portfolio compared to the S&P 500 index. Do this by calculating the mean and sample standard deviation of the daily percentage return on both portfolios as well as the return per unit of risk for both portfolios. Also calculate the Rho squared between the two daily percentage return series and interpret the result. All of these calculations should be made for three time periods: the entire period as well as for the unmargined and margined sub-periods. Attach a spreadsheet showing the raw data for the two portfolios used to calculate the returns, variances and RHO squared, i.e., show the calendar date and the dollar value for each portfolio for each date. NOTE: An important factor affecting your grade on this project is the quality of your spreadsheet and report. Both should be considered a professional work product and therefore overall appearance is critical. A maximum grade of 89 percent is possible if your work is complete and accurate. A grade of 90 percent or better will be earned only if your work product is complete, accurate AND of professional quality. 1 I suggest you choose your team members but I will assign teams if necessary. At the beginning of the semester, come to an equitable agreement on sharing the workload and then follow through. If disputes arise, I expect the team members to resolve it themselves. Page 5 of 11 3/7/2016 Finance 4504 Portfolio Project - Unmargined Positions Name: (insert date) Valuation as of: Long Positions: Number Asset of Shares 1 2 Cash 106,250 ABC 15,000 DEF 6,000 GHI 5,000 JKL 8,000 MNO 5,000 Account Value (AV) Price 3 $1.0000 $15.7500 $23.5000 $16.3750 $43.0000 $29.8750 Cash Div Value per share 4=3*2 5 $106,250 $236,250 $0.50 $141,000 $0.25 $81,875 $1.36 $344,000 $2.12 $149,375 $1.25 $1,058,750 EPS 6 Beta 7 $0.48 $0.12 $3.25 $2.98 $2.00 0 0.65 0.90 2.75 1.00 1.60 1.028 Current Weight P/E Yield 8=4/AV 9=3/6 10=5/3 10% 22% 33 3.17% 13% 196 1.06% 8% 5 8.31% 32% 14 4.93% 14% 15 4.18% 100% 3.68% Items in bold, italic format are weighted averages Cumulative Cash Journal Date Debit Credit Balance $1,000,000 9/5/2005 $893,750.00 $106,250.00 Enter a debit or credit on new transactions here as they occur. The amount of your trading activity will determine how many entries are recorded here. Cumulative Transactions Journal Date Number of Shares Action 9/5/2005Bought 9/5/2005Bought 9/5/2005Bought 9/5/2005Bought 9/5/2005Bought 15,000 6,000 5,000 8,000 5,000 Amount Comment $243,750.00I love their new after shave $126,000.00Technical support at this level $75,000.00Value line recommends $304,000.00New CEO appointed $145,000.00New tax law will help $893,750.00 Enter new transactions here as they occur. The amount of your trading activity will determine how many entries are recorded here. Page 6 of 11 ABC DEF GHI JKL MNO Price $16.2500 $21.0000 $15.0000 $38.0000 $29.0000 3/7/2016 Daily Dollar Values and Daily Rate of Return Date (exclude weekends and days when the market is closed) My Portfolio S&P 500 Index Dollar Value Daily Return Mo/day/yr Mo/day/yr Mo/day/yr Mo/day/yr Mo/day/yr Mo/day/yr Mo/day/yr Mo/day/yr Mo/day/yr Mo/day/yr Mo/day/yr Mo/day/yr Mo/day/yr Mo/day/yr Mo/day/yr Mean Std Dev Rho 2 Page 7 of 11 1,000,000 1,000,000 1,000,000 1,000,000 1,058,750 971,444 968,569 970,486 975,689 979,254 981,256 986,274 945,879 987,194 1,027,634 0.00% 0.00% 0.00% 0.00% 5.88% -8.25% -0.30% 0.20% 0.54% 0.37% 0.20% 0.51% -4.10% 4.37% 4.10% 0.25% 3.45% 13.85% Index Value Dollar Value 258.49 260.71 254.36 252.41 255.12 258.23 259.00 258.34 257.14 255.78 255.89 253.87 251.99 261.43 270.85 1,000,000.0 1,008,588.3 984,022.6 976,478.8 986,962.7 998,994.2 1,001,973.0 999,419.7 994,777.4 989,516.0 989,941.6 982,127.0 974,854.0 1,011,373.7 1,047,816.2 Daily Return 0.00% 0.86% -2.44% -0.77% 1.07% 1.22% 0.30% -0.25% -0.46% -0.53% 0.04% -0.79% -0.74% 3.75% 3.60% 0.35% 1.69% 3/7/2016 Finance 4504 Portfolio Assignment - Margined Positions Names: Team: (close of trading the previous Friday) Valuation as of: Long Positions: Number Dividend Asset of Shares Price Value 1 2 3 4=3*2 Per Share 5 Current EPS Beta Weight P/E Yield 6 7 8=4/AV 9 10 Cash 2,500,063 $1.000 $2,500,062.50 0.00 160.3% ABC 45,000 $15.750 $708,750.00 $0.50 $0.48 0.65 45.4% 32.8 3.17% DEF 24,000 $23.500 $564,000.00 $0.25 $0.12 0.90 36.2% 195.8 1.06% GHI 20,000 $16.375 $327,500.00 $1.36 $3.25 2.75 21.0% 5.0 8.31% JKL 37,000 $43.000 $1,591,000.00 $2.12 $2.98 1.00 102.0% 14.4 4.93% MNO 22,000 $29.875 $657,250.00 $1.25 $2.00 1.60 42.1% 14.9 $6,348,562.50 2.89 407.1% ($2,660,000) 0 -170.6% Total Assets 4.18% 10.37% Liabilities: Loan Short Position: PQR 30,000 $15.000 ($450,000) $1.00 1.05 -28.9% -6.67% STU 45,000 $22.750 ($1,023,750) $0.75 2.3 -65.6% -3.30% VWX 24,500 $26.750 ($655,375) $1.35 Total Liabilities Account Value Margin = [5% GE MARGIN LE 15%] 0.45 -42.0% -5.05% ($4,789,125) -2.00 -307.1% -6.21% $1,559,438 0.89 100.0% 4.16% 24.56% Cumulative Cash Journal Date Debit Credit Balance $1,000,000.00 9/5/2005 10/5/2005 $893,750.00 $106,250.00 $2,665,625.00 ($2,559,375.00) 10/5/2005 $2,660,000.00 $100,625.00 10/7/2005 $2,399,437.50 $2,500,062.50 Borrowed $2.66 million Cumulative Transactions Journal Number Date of Shares Price Amount Action Symbol Comment 9/5/2005 15,000 $16.250 $243,750.00 Bot ABC I love their new after shave 9/5/2005 6,000 $21.000 $126,000.00 Bot DEF Technical support at this level 9/5/2005 5,000 $15.000 $75,000.00 Bot GHI Value line recommends 9/5/2005 8,000 $38.000 $304,000.00 Bot JKL New CEO appointed 9/5/2005 5,000 $29.000 $145,000.00 Bot MNO New tax law will help $893,750.00 10/5/2005 30,000 $17.000 $510,000.00 Bot ABC margined account 10/5/2005 18,000 $20.500 $369,000.00 Bot DEF margined account 10/5/2005 15,000 $14.375 $215,625.00 Bot GHI margined account 10/5/2005 29,000 $36.000 $1,044,000.00 Bot JKL margined account 10/5/2005 17,000 $31.000 $527,000.00 Bot MNO margined account $2,665,625.00 10/7/2005 30,000 $18.500 $555,000.00 Sold PQR 10/7/2005 45,000 $22.000 $990,000.00 Sold STU 10/7/2005 24,500 $34.875 $854,437.50 Sold VWX short sale short sale short sale $2,399,437.50 Page 8 of 11 3/7/2016 SEMESTER ASSIGNMENT Using two publicly traded companies; various analyses will be performed that apply what we discuss in class. The two selections for this semester are: Regeneration Technologies (RTIX) and Merck (MRK). A. ELEMENTS OF INVESTMENTS 1. For the period 7/1/04 through 12/31/04 collect the “adjusted” weekly closing share price for the 2 companies, the Dow-Jones 30 Industrials and the yield on 13 week T-Bills. Use the following web site to obtain 13 week historical T Bill yields: http://wwws.publicdebt.treas.gov/AI/OFAuctions?form=phase1&typesec=bills&searchtype=auct ion Do not collect all yields – just choose one yield per month to report in your data set. 2. If the company pays a cash dividend, divide the quarterly dividend by three and use the resulting number for the monthly dividend. 3. Calculate a monthly price-weighted index and a value-weighted index for the 2 stocks for the time period for which you have collected data. The first month’s value for the valueweighted index is arbitrarily set to100. B. PORTFOLIO THEORY 1. Calculate the monthly holding period return (HPR) for the 2 companies, Dow 30 and TBills. 2. Calculate the mean HPR, sample standard deviation of HPR, covariance of HPR and the correlation of HPR between the 2 companies, Dow 30 and T-Bills. This will produce a 4X4 matrix of covariances and correlations. Do not prepare your answer by hand – use Excel or an equivalent product. 3. Calculate the weights of the minimum variance portfolio for the 2 companies: then calculate the E(r) and standard deviation of return for the Minimum Variance Portfolio. 4. Calculate the expected return and standard deviation of return for a portfolio consisting of the two companies’ stocks using the weight range shown below. Report your results in a table as well as in a graph of expected return and standard deviation of the portfolio. Do not prepare the table or graph by hand – use Excel or an equivalent product. Portfolio Weight Range (Note the weights will always sum to one) Co. 1 -1.00 -0.75 -0.50 -0.25 0.00 0.25 0.50 0.75 1.00 1.25 1.50 1.75 2.00 Co. 2. 2.00 1.75 1.50 1.25 1.00 0.75 0.50 0.25 0.00 -0.25 -0.50 -0.75 -1.00 Page 9 of 11 3/7/2016 5. Estimate the characteristic line for each of the two companies. Your answer should consist of a table showing a scatter gram of the monthly excess returns, the regression line intercept and slope and a graph of the characteristic line. Do not prepare the table or graph by hand – use Excel or an equivalent product. 6. Partition the total risk of the two companies into their systematic and unsystematic components. Page 10 of 11 3/7/2016 STOCK STRATEGIST Purpose This exercise will teach you how to use macro capital market data to build a portfolio; you will also learn how to track down data that is contained in the Wall Street Journal. The knowledge you acquire will be useful to you in analyzing the current portfolios of family and friends and, perhaps more importantly, building your own portfolio after you graduate. Work on this project is to be done individually and a report is to be submitted by each student. Identical work product or identically formatted spreadsheets will be presumed to be duplicates and will receive a grade of zero. Required Data (see Clements article referenced below for details on how and where to find this data): 1. 10 year Treasury Note yield 2. S&P 500 earnings forecast (top-down and bottom-up) 3. S&P index closing value. 4. A historical chart of the S&P 500 price-earnings ratio 5. Yield on money market mutual funds 6. Yield on TIPS (10 year maturity or closest to a 10 year maturity) 7. Yield on Junk Bond mutual funds (not single issues) The date to look up data in the Wall Street Journal is ___/___/___. The source of all data must be footnoted in the report (Section number and page number). The data you gather will be collected and graded for completeness and accuracy. Analysis Analyze the data you collected to form a conclusion about which asset classes are relatively more attractive based upon their current rates of return. Report Format Your report is limited to one-half page in length (reasonable font size – with the Professor as judge of “reasonable”) and must be typed (attachments to provide supporting data are fine). Your report will be graded on the basis of: a) reporting the correct required data (items 1 through 7 above) (5 points) b) the correctness of your conclusions about which assets classes are attractive based upon the relative returns for the different asset classes examined (3 points) c) overall quality of the report as measured by visual appearance, completeness, organization, grammar and sentence construction. (2 points) Reference: “Becoming a Stock Strategist without Any Formal Training”, Jonathon Clements, Wall Street Journal, January 8, 2002. If you have an online subscription, this can be accessed at: http://online.wsj.com/search/aggregate If you experience difficulty in obtaining a copy of this article, let me know and I will supply a copy. Page 11 of 11 3/7/2016