Lecturers
Dan Daugaard
Email: Dan.Daugaard@mafc.mq.edu.au
Anne Cooper
Email: Anne.Cooper@mafc.mq.edu.au
Steve Christie
Email: Steve.Christie@mafc.mq.edu.au
1.
Scope
This unit covers the key building blocks required when studying many of the other Masters units. It focuses on the
tools and techniques necessary to understanding investment markets and constructing investment portfolios. The
unit contains an analysis of the risk and return characteristics of debt and equity markets, an overview of modern
portfolio theory, as well as asset pricing models and performance measurement techniques. Attention is given to
both the use of theory to make decisions as well as the limitations of finance theory in many real life situations.
2.
Texts and References
Text:
Bodie, Kane and Marcus, Investments, McGraw Hill, 8th edition, 2009 (BKM)
Additional readings are included in the unit notes and will be placed in the download area of the Investments
web page. Assume these readings are examinable unless otherwise advised.
Useful References:
Bernstein and Damodaran, Investment Management, Wiley
Bodie, Kane and Marcus, Investments
Damodaran, Investment Valuation, Wiley
Solutions
Manual,
McGraw
Hill,
8th
Edition
2009
Elton, Gruber, Brown & Goetzmann, Modern Portfolio Theory and Investment Analysis, Wiley
3.
Assessment
Final grades will be based on:
Case Study
Mid-semester examination (covering Part 1)
Final examination
20%
20%
60%
All examinations are closed book. A study sheet is permitted. You must pass the combined examinations part of the
assessment to achieve a final grade of Pass Conceded (and a Standardised Numerical Score of 45) or better.
If you have extenuating circumstances that prevent you from submitting your assignment by the due date please
make arrangements with your lecturer prior to the due date. Unless prior arrangements have been made any late
submission of assignments will automatically be penalised. Late submission of your assignment without an agreed
prior extension from the lecturer will receive a zero mark, in the absence of special circumstances.
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4.
Mathematical content
Finance has a high level of numerate content. Consequently this unit is, in parts, mathematical and arithmetical.
Investment decision making and the application of valuation tools extends beyond the simple calculation of
mathematical equations, however, it will be necessary to have some background knowledge to understand the
models and techniques encountered during the unit.
In relation to the algebra, students should be able to solve the following problem:
Solve for w:
4.5w 27(1 w) 12
Occasionally the unit dips into the differential calculus. As an indication of the level of calculus required, students
should be able to interpret the following equation:
D
(1 y) dP
P dy
A further indication of the level of financial arithmetic required is available in the form of topic zero from the Financial
Instruments unit notes.
5.
Calculators
A financial calculator that can handle logs, power functions and time value of money calculations is required. The
Hewlett Packard calculator HP17BII is recommended.
6.
Computer access
Access to a computer with word processing and spreadsheet capability (e.g., Excel) is assumed. Also assumed is
access to a Web browser (e.g., Internet Explorer or Firefox) and e-mail software and your own connection to an
Internet service provider.
7.
Participation requirements
You are expected to participate in class discussion, to work systematically through the end of chapter problems set
for each topic, and to read the relevant chapters of the text and unit notes before each class. Answers, but not
worked solutions, to set problems are provided in the lecture notes. Please refer to the Bodie, Kane and Marcus,
Investments Solutions Manual for worked solutions.
8. Investments course forum
The Investments course forum is an important resource that you should familiarise yourself with. It can be found by
going to the Applied Finance Centre’s homepage (at www.mafc.mq.edu.au), clicking on CourseWeb, then on
Investments, and then on Course Forum.
9.
Case Study
Case study questions and data will be placed in the Investments Course Forum. If you do not hand in a case study
you will receive zero for that part of your assessment.
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Detailed Outline
Part 1
1.
Valuation and asset returns (2 sessions)
Topics:
Asset markets
Valuation approaches
Risk and return
A review of useful statistical concepts
Readings: BKM 1 (skim), 2, 4 (skim), and 5
Damodaran, Chapters 1, 2 (attached);
Amram and Kulatilaka, Real Options, Chapter 1 (attached)
Problems: BKM 2 :1, 9,10 and 19; BKM 5 :5, 7 and 11
2.
Portfolio construction (2 sessions)
Topics:
Risk and risk premium
Risk aversion and utility
Capital allocation line
Risk tolerance and asset allocation
Optimal risky portfolio
Asset Allocation with Stocks, Bonds and Cash
Readings: BKM 6 and 7
Sortino and Van der Mer: Downside risk (attached)
Problems: BKM 6: 13-19, CFA 1-3; BKM 7: 17-19, CFA 9
3.
Asset pricing models (2 sessions)
Topics:
A Simple Asset Pricing Model
The Capital Asset Pricing Model
Multifactor models
Arbitrage pricing theory
Readings: BKM 8, 9, 10
Grinold and Kahn: Active Portfolio Management, Chapter 2 (Attached)
Problems: BKM 8: 6, 7 and 8; BKM 9: 5 and 7-12; BKM 10: 5 and 10
4.
Security returns and market efficiency (1 session)
Topics:
Market efficiency
Empirical evidence of asset pricing models
Readings: BKM chapters 11 and 13
Problems: BKM 11: 1, 6, 7, 8, 9 & CFA 9
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Part 2
5.
Fixed income securities (2 sessions)
Topics
Bond prices and yields
The term structure of interest rates
Fixed income portfolio management
Readings: BKM 14, 15, 16
Dattatreya and Fabozzi, Active total return management of fixed income portfolios, Chapter 2 (attached)
Problems: BKM 14: 1-7 & CFA 2; BKM 15: 1-3, 10, 12 & CFA 2; BKM 16: 12 & CFA 8
6.
Security analysis (2 sessions)
Topics:
Equity valuation models
Financial statement analysis
Readings: BKM 18, 19
Fukuda, Dividend changes and earnings performance in Japan (attached)
Problems: BKM 18: 4, 5, 7, 9, 10, 14; BKM 19: 3, 4, 5, 6
7.
Portfolio management (1 session)
Topics:
Passive management
Active management
Security selection — the Treynor-Black model
Summary
Readings: BKM 27
8.
Performance evaluation (1 session)
Topics:
Measurement of return
Adjusting for changes in capital
Traditional measures of portfolio performance
Fama’s analysis
Performance attribution
Summary
Readings: BKM 24
Gallagher, Do active funds deliver (attached)
Problems: BKM 24: 4-10 & CFA 7-10
9.
International diversification (1 session)
Topics:
Foreign exchange quotes
Parity relationships
Risk and return in foreign investments
International diversification
Readings: BKM 25
Solnik, International Investments, Chapter 2 (attached)
Problems: BKM 25: 3-8 & CFA 1-3 & 4 parts (a) & (b)
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