INVESTMENT MANAGEMENT & STRATEGY
An electronic version of this syllabus is available from
http://www.acsu.buffalo.edu/~keechung/courses.htm
Kee H. Chung
M&T Professor and Chairman
Department of Finance and Managerial Economics
State University of New York at Buffalo
(phone) 716-645-3262
(e-mail) keechung@buffalo.edu
http://www.mgt.buffalo.edu/faculty/keechung.shtm
OBJECTIVES
The primary purpose of this course is to provide you with a general understanding of the operation of capital
markets and basic analytical tools of investment management. Specifically, we will examine such topics as
Portfolio Theory, Capital Asset Pricing Model (CAPM), Arbitrage Pricing Theory (APT), Bonds and
Common Stocks Valuation, Efficient Market Hypothesis, Investment Management, and Option Pricing
Model (OPM). In addition, you will be (1) exposed to real-world investment environments through
Investment Project, (2) required to make investment decisions in real time, and (3) evaluated based on both
the rationale of your investment decisions and the performance of your investment portfolio.
PREREQUISITES: Introductory finance, microeconomics, and statistics course. Finance is mathematical
and you will need to utilize material developed in the prerequisite courses. If you have not taken these
courses, it is a virtual certainty that you will have great difficulty in this one.
TEXT: Investments, by Zvi Bodies, Alex Kane, and Alan Marcus, Richard D. Irwin, Inc., 2002 (5th
edition). Student resources are available from: http://highered.mcgraw-hill.com/sites/0072339160/
Class handouts, including PowerPoint slides of each chapter will be posted to my webpage. Most materials
are in Adobe Acrobat (PDF) or MS Word files. PDF files require the Adobe Acrobat viewer, which is freely
available for download at http://www.adobe.com. I will go over assigned homework problems in class.
GRADING POLICY
Two Mid-term Exams (20% each), Comprehensive Final Exam (30%), Investment Project (20%), Class
Participation and Attendance (10%).
There will be no make-up examination. For those who miss mid-term exam due to objectively verifiable
unavoidable situation, comprehensive final exam will be weighted heavily in the determination of final
grade.
ATTENDANCE on every class meeting is strictly required. If you miss more than five class meetings, you
will automatically receive “F” for the course.
EXPECTATIONS FOR STUDENTS
1.
Preparing thoroughly for each session in accordance with the instructor's requests;
2.
Arriving promptly and remaining until the end of each class meeting, except in unusual
circumstances;
3.
Participating fully and constructively in all classroom activities and discussions;
4.
Adhering to deadlines and timetables established by the instructor;
5.
Displaying appropriate courtesy to all involved in the class sessions.
CHEATING
In my teaching career, I have encountered few incidents involving students sharing information during inclass exams or changing answers on exam papers that have already been graded. With respect to cheating,
the standards of the faculty and your fellow students are very clear. If evidence of cheating comes to my
attention by any means, I will prosecute to the extent permitted under faculty guidelines.
ASSIGMNMENTS
I'll be assigning homework problems from the book. I choose problems that I think are "useful", in the sense
of helping you understand the material and prepare for exams. You should feel free to work on them in
groups. Most of these problems will be reviewed in class.
ANNOUNCEMENTS
You are responsible for knowing what goes on in class, which may include material not covered in the book,
modifications to the syllabus, and announcements concerning exams.
CALCULATOR
You will live or die in this course by your financial calculator. In addition to the usual arithmetic operations,
a financial calculator can compute means, standard deviations, exponentials, log functions, and present and
future values of simple sums and annuities. An ability to compute yield to maturity (YTM) and internal rates
of return (IRR) is useful.
Useful Websites
Links to various finance Websites:
http://highered.mcgraw-hill.com/sites/0072339160/student_view0/link_to_professional_resources.html
See also inside book covers.
Yahoo Finance: http://finance.yahoo.com
Finance Site List at OSU: http://www.cob.ohio-state.edu/dept/fin/journal/jofsites.htm
Social Science Research Network: http://www.ssrn.com/
NYSE website: http://www.nyse.com
Nasdaq website: http://www.nasdaq.com/
Head Trader: Head Trader simulates the experience of a Nasdaq Market Maker buying and selling stocks
in a screen-based market environment. It puts you in the shoes of a professional trader.
http://www.academic.nasdaq.com/headtrader/
To learn more about Nasdaq, read: Smith, J., Selway, J., McCormick, T., The Nasdaq stock market:
historical background and current operation. Working paper 98-01, NASD.
http://www.academic.nasdaq.com/docs/wp98_01.pdf
Electronic journals
Financial Analysts Journal: http://www.aimrpubs.org/faj/home.html
Review of Financial Studies: http://rfs.oupjournals.org/ (all published and forthcoming papers)
Journal of Financial Economics:
http://www.elsevier.com/homepage/sae/econworld/econbase/finec/frame.htm
AFA & Journal of Finance: http://www.afajof.org/ (all published and forthcoming papers)
Journal of Financial and Quantitative Analysis: http://depts.washington.edu/jfqa/ (See below)
Journal of Financial Markets:
http://www.elsevier.com/homepage/sae/econworld/econbase/finmar/frame.htm
CLASS SCHEDULE
(Notes)
LN denotes “lecture note”
RQ denotes “required readings” and RC denotes “recommended readings”
FAJ denotes Financial Analysts Journal
JPM denotes Journal of Portfolio Management
Topic 1
Introduction & History of Returns (Chapter 5)
Homework problems: 5:2,3(a)(b)(c),4,7,9
Topic 2
Risk Analysis (Chapter 6) & Capital Allocation (Chapter 7)
Homework problems: 6:1,3-12; 7:1,3-10,18-23
(LN) Risk and Return
http://www.acsu.buffalo.edu/%7Ekeechung/CU%20Lecture%20Notes/Chapter%206%20%20Risk%20and%20Return.doc
(LN) Three Steps in Investment Decisions
http://www.acsu.buffalo.edu/%7Ekeechung/CU%20Lecture%20Notes/Chapter%207%20%20Three%20Steps%20in%20Investment%20Decisions.doc
Topic 3
Optimal Portfolios (Chapter 8) & CAPM (Chapter 9)
Homework problems: 8:1-5,7,9,15-17; 9:1,3,4-14
(LN) Minimum Variance Portfolio and Optimal Risky Portfolio
http://www.acsu.buffalo.edu/%7Ekeechung/CU%20Lecture%20Notes/Chapter%208%20%20MVP%20and%20P%20Numerical%20Examples.doc
(LN) Economic Intuition of CAPM
http://www.acsu.buffalo.edu/%7Ekeechung/CU%20Lecture%20Notes/Chapter%209%20%20Economic%20Intuition%20Behind%20the%20CAPM%20(SML).doc
Excel Application
http://highered.mcgraw-hill.com/sites/0072339160/student_view0/excel_applications.html
Topic 4
Index Models (Chapter 10) & APT (Chapter 11)
Homework problems: 11:2,3,4(a), 5-8,11-19
(LN) Single Factor Model
http://www.acsu.buffalo.edu/%7Ekeechung/CU%20Lecture%20Notes/Chapter%2010%20%20Factor%20Model.doc
(LN) Economic Intuition
http://www.acsu.buffalo.edu/%7Ekeechung/CU%20Lecture%20Notes/Chapter%2011%20%20Economic%20Intuition%20Behind%20the%20APT.doc
(LN) Multi-Factor Model
http://www.acsu.buffalo.edu/%7Ekeechung/CU%20Lecture%20Notes/Factor%20Model.doc
Excel Application
http://highered.mcgraw-hill.com/sites/0072339160/student_view0/excel_applications.html
(RQ) R. Roll and S. Ross. "The Arbitrage Pricing Theory Approach to Strategic Portfolio
Planning." FAJ (May-June 1984), pp. 14-26.
http://www.acsu.buffalo.edu/~keechung/Collection%20of%20Papers%20for%20courses/ARBI
TRAGE%20PRICING%20THEORY%20APPROACH%20TO%20STRATEGIC%20PORTF
OLIO%20PLA.pdf
Midterm Exam I
Topic 5
Behavioral Finance
(RQ) R. Fuller. “Behavioral Finance and the Sources of Alpha.”
http://www.acsu.buffalo.edu/~keechung/Collection%20of%20Papers%20for%20courses/Beha
vioral%20Finance%20and%20Sources%20of%20Alpha.pdf
(RQ) M. Statman. “Lottery Players/Stock Traders.” FAJ (January/February 2002), pp. 14-21.
http://www.acsu.buffalo.edu/~keechung/Collection%20of%20Papers%20for%20courses/lotter
y%20players%20and%20stock%20traders.pdf
(RQ) K. Fisher and M. Statman. “A Behavioral Framework for Time Diversification.” FAJ
(May-June 1999), pp. 88-97.
http://www.acsu.buffalo.edu/~keechung/Collection%20of%20Papers%20for%20courses/A%2
0Behavioral%20Framework%20for%20Time%20Diversification.pdf
Topic 6
How Securities Are Traded (Chapter 3)
(LN) Topics Covered
http://www.acsu.buffalo.edu/%7Ekeechung/CU%20Lecture%20Notes/Chapter%203%20%20Topics%20Covered.doc
(LN) Market Structure
http://www.acsu.buffalo.edu/%7Ekeechung/CU%20Lecture%20Notes/Chapter%203%20%20Market%20Structure.xls
(LN) Trading of Securities
http://www.acsu.buffalo.edu/%7Ekeechung/CU%20Lecture%20Notes/Chapter%203%20%20Trading%20of%20Securities.doc
(LN) Margin Trading
http://www.acsu.buffalo.edu/%7Ekeechung/CU%20Lecture%20Notes/Chapter%203%20%20Why%20do%20investors%20buy%20securities%20on%20margin.doc
Going Public and Listing on the U.S. Securities Markets
(RC) http://www.nasdaq.com/about/going_public.stm
The NASDAQ/NYSE/Amex Listing Requirements
(RC) http://www.nasdaq.com/about/appa.pdf
Trading Costs: NYSE vs Nasdaq
(RC) http://papers.ssrn.com/sol3/papers.cfm?abstract_id=277817
(RQ) Nasdaq Controversy
W. Christie and P Schultz. “Why DO NASDAQ Market Makers Avoid Odd-Eighth Quotes?”
Journal of Finance (December 1994), pp. 1813-1840.
http://www.acsu.buffalo.edu/~keechung/Collection%20of%20Papers%20for%20courses/Col
lusion%20paper%20JF%201994.pdf
(LN) Collusion Hypothesis
http://www.acsu.buffalo.edu/~keechung/Lecture%20Notes%20(MGF633)/COLLUSION%2
0HYPOTHESIS-Lecture%20note.doc
Topic 7
Efficient Market (Chapter 12)
Homework problems: 12:1-18
(RQ) R. Haugen. "The Seven Mysteries of the Stock Market." Beast on Wall Street
(Prentice Hall,1999).
http://www.acsu.buffalo.edu/~keechung/Collection%20of%20Papers%20for%20courses/SEVE
N%20MYSTERIES%20OF%20THE%20STOCK%20MARKET.pdf
(RQ) C. Beard and R. Sias. “Is There a Neglected-Firm Effect? FAJ (Septermber/October
1997), pp. 19-23.
http://www.acsu.buffalo.edu/~keechung/Collection%20of%20Papers%20for%20courses/IS%2
0THERE%20A%20NEGLECTED-FIRM%20EFFECT.pdf
(RC) P. Dennis, S. Perfect, K. Snow, and K. Wiles. "The Effects of Rebalancingon Size and
Book to Market Ratio Portfolio Returns." FAJ (May-June 1995), pp. 47-57.
http://www.acsu.buffalo.edu/~keechung/Collection%20of%20Papers%20for%20courses/EFFE
CTS%20OF%20REBALANCING%20ON%20SIZE%20AND%20BOOK%20TO%20MARK
ET%20RATIO.pdf
Topic 8
Empirical Evidence (Chapter13)
(RQ) R. Ibbotson and A. Patel. “Do Winners Repeat with Style? SSRN (February 2002)
http://papers.ssrn.com/sol3/delivery.cfm/SSRN_ID292866_code020109590.pdf?abstractid=292
866
(RQ) K. Grundy and B. Malkiel. "Reports of Beta's Death Have Been Greatly Exaggerated."
JPM (Spring 1996), pp. 36-44.
http://www.acsu.buffalo.edu/~keechung/Collection%20of%20Papers%20for%20courses/REP
ORTS%20OF%20BETA'S%20DEATH%20HAVE%20BEEN%20GREATLY%20EXAGGE
RATED.pdf
(RC) W. Bauman and R. Miller. "Can Managed Portfolio Performance Be Predicted?" JPM
(Summer 1994), pp. 31-40.
http://www.acsu.buffalo.edu/~keechung/Collection%20of%20Papers%20for%20courses/CAN
%20MANAGED%20PORTFOLIO%20PERFORMANCES%20BE%20PREDICTED.pdf
Midterm Exam II
Topic 9
Equity Valuation (Chapter 18)
Homework problems: 18:1,2,3,5-8,10,11,12,17,19,20
(RQ) R. Shiller. "Theories of Aggregate Stock Price Movement." JPM (Winter 1984), pp. 2837.
http://www.acsu.buffalo.edu/~keechung/Collection%20of%20Papers%20for%20courses/THE
ORIES%20OF%20AGGREGATE%20STOCK%20PRICE%20MOVEMENT.pdf
Topic 10
Analysts’ Earnings Forecasts and Stock Recommendations
(RQ) S. Stickel. "The Anatomy of the Performance of Buy and Sell Recommendations.” FAJ
(September-October 1995), pp. 25-39.
http://www.acsu.buffalo.edu/~keechung/Collection%20of%20Papers%20for%20courses/ANA
TOMY%20OF%20THE%20PERFORMANCE%20OF%20BUY%20AND%20SELL%20REC
OMMENDATIONS.pdf
(LN) Recommendation of Security Analysts
http://www.acsu.buffalo.edu/%7Ekeechung/CU%20Lecture%20Notes/Special%20Topic%20%20Analyst%20Recommendation.doc
(RQ) K. Chung. Marketing of Stocks by Brokerage Firms: The Role of Financial Analysts.
Financial Management (Summer 2000), pp. 35-54.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=248008
Topic 11
Options Market (Chapter 20)
Topic 12
Option Pricing (Chapter 21)
Excel Application
http://highered.mcgraw-hill.com/sites/0072339160/student_view0/excel_applications.html
Topic 13
Bond Analysis I (Chapter 14)
(LN) Bond Pricing Illustration
http://www.acsu.buffalo.edu/~keechung/Lecture%20Notes%20(MGF633)/bond%20pricing.xls
Homework problems: 14:1,2,3,5,6,7,14-18
Topic 14
Bond Analysis II (Chapters 15,16)
Homework problems: 15:1-8,11,12,17; 16:1,2,3
Topic 15
Process of Portfolio Management (Chapter 26)
Homework problems: 26: 7, 8.
Final Exam
*This is a tentative schedule and thus subject to modification if any such need emerges during the course.
All changes will be announced in class. Students not attending class are responsible for obtaining this
information.
Investment Project
with STOCK-TRAK
STOCK-TRAK is a Website that can help you to learn about the workings of the stock exchange and
investment in general. Learning about the stock exchange from a book can be difficult, because it lacks the
aspect of timing that is so important in exchanges. STOCK-TRAK provides the solution to this problem. It
is software that uses real, time-delayed market information to simulate real-world stock portfolio
performance. It allows you to learn in a time-dependent educational environment, without the high cost of
mistakes in the real environment.
1. Group formation: Each group consists of X students and one of them serves as the group
representative. You can form your own group and let me know who are your group members and
group representative. For those who do not belong to any group will be assigned to a group by me.
2. Sign up for STOCK-TRAK at http://www.stocktrak.com/
Each group representative signs up for STOCK-TRAK and group members share the cost equally.
You will need a credit card number to sign up.
3. Each group shall make collective investment/trading decisions.
4. Each group submits and presents the investment performance report during the last week of
class.
The report will be evaluated and graded based on the following four criteria:
a.
b.
c.
d.
Investment performance = Trading profits – Number of trades x $10
Rationale for investment (trading) decisions
Quality of in-class presentation
Quality and thoroughness of the report