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/
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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:
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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.
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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
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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.
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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.
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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
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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%
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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
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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
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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.
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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.
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