FINA 2802G: Investments and Portfolio Analysis
Spring 2011
Instructor:
Office:
Phone:
E-mail:
Office Hours:
Dr. “Dragon” Yongjun Tang （汤勇军）
KKLeung 1005
2219-4321
yjtang@hku.hk
Tuesday & Thursday 2:00-3:00pm or by appointments
Meeting time: Tuesday 11:30-12:25 & Thursday 10:30-12:25
Classroom:
TT404
TA/Tutor:
Office:
Phone:
E-mail:
Website:
Office Hours:
Miss Grace YU Yatu
KKLeung 1026
To be informed by the TA
grace_yyt@hotmail.com
http://webct.hku.hk
To be arranged by TA
Course Description and Learning Objectives
Finance 2802 is an introductory investment course. The objective of this course is to provide the
foundation for the successful management of institutional and individual investment portfolios. Class
will focus on both the academic theories underlying the management of portfolios and the practical
aspects of portfolio management. The student will learn how to set investment goals and will learn
how to construct, manage, and evaluate an investment portfolio. This course will be very useful for
students who are interested in obtaining a securities license such as the NASD Series 7 for a General
Securities Representative or accreditation as a Chartered Financial Analyst (CFA).
Course Learning Outcomes
Upon completion of Finance 2802, students should be able to (1) describe the basic features of
financial securities and financial markets; (2) construct and manage an investment portfolio; (3)
evaluate stocks and bonds; (4) compare and contrast different investment management approaches
(e.g., passive vs. active); (5) identify and adapt to current investment trends.
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Alignment of Program and Course Learning Outcomes
Program Learning Outcomes
Course Learning Outcomes Assessment Modes
1, 3, 4, 5
Homework,
Test,
and skills in key functional areas
Project
2. Application of business knowledge to solve 2, 3, 5
Homework,
Test,
business problems
Project
3. Develop managerial leadership and inculcate 2, 4, 5
Homework,
Test,
professional ethics and competency in
Project
business
4. Developing global outlook
2, 4, 5
Homework,
Test,
Project
5. Mastering communication skills
1, 2, 4
Test, Project
1. Acquisition and internalization of knowledge
Teaching and Learning Activities/Study Guide
My teaching will be mainly based on my lecture notes, which will be available on WebCT. You are
responsible for everything I teach in class. Moreover, you need to read the assigned readings carefully.
The textbook is a very useful resource and I suggest you read every chapter at least twice. I also expect
your active participation in class discussion. If you want to do well, come prepared, speak up when you
have questions, and apply your best efforts. Besides what you are required to do, you should also do
the following:
1.
I always begin each class with a brief discussion of the current financial markets, often augmented
with preliminary analysis of specific stocks. You need to prepare for active participation of the
discussion.
2.
The class notes will be posted on the course website before each class. You need to print out your
own copy and preview it before come to class. In each class, I will explain the concepts and solve
some example problems.
3.
The chosen textbook is the best available and used by most top business schools. I suggest that
you read each chapter once before it is discussed in class and then read it again after the topic is
covered in class. (Do not cram right before an exam which usually results in confusion, anxiety,
and a lack of the big picture.) Reading the material beforehand will greatly assist in having
meaningful class discussions. If you are having trouble with a concept or problem, see me or the
TA during regular office hours as soon as possible.
4.
Review session is a critical part of your learning process. Sign up with the TA and attend all
sessions.
5.
Practice problems will be similar to the examples discussed in class and exam questions. You
should work out them very carefully. Although they will not be graded, they will help you
tremendously to understand the materials and improve your grade.
6.
You need to understand what you are studying, whether it be conceptual or analytical. When you
study, ask yourself such question as:
z What is the purpose of this concept or formula?
z Why is it important?
z How does the author demonstrate its importance?
z How does it “fit” with what you have studied so far? either in this class or in an earlier class.
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z
How to say it in my own words?
7.
Reading business news everyday is a must if you want to work in the investment industry. Staying
abreast of current events makes the course more interesting and will increase the retention of
information which you will find useful in your career. I strongly recommend reading Wall Street
Journal, The Financial Times, The Economist and Business Week. Find your favorite financial
website (mine is www.marketwatch.com) and check it out constantly.
8.
Synergy/incentive/economies of scale can be produced if you combine the study of this course and
preparation of the CFA exam (presumably Level I). You are encouraged to do so. Check
out www.cfainstitute.org
9.
Supplementary reading. Business classics are strongly recommended for those who want to have a
Wall Street career. Some of my favorites are:
z Edwin Lefevre, Reminiscences of a Stock Operator
z Michael Lewis, Liar's Poker: Rising Through the Wreckage on Wall Street
z Burton G. Malkiel, A Random Walk Down Wall Street
z Jeremy J. Siegel, Stocks for the Long Run
z Peter L. Bernstein, Against the Gods: The Remarkable Story of Risk
z Jonathan A. Knee, The accidental Investment Banker
Computing Tools
Although you will need to use a financial calculator for the CFA exams or for your daily job, a
financial calculator is not required for this course. But you do need a pocket calculator with a xy
button. Laptop and Palmtop computers will not be allowed for the exams. I will ask you to use Excel to
solve some of your homework problems. If you do not know how to use Excel, you need to start
learning it. Tutorials will be posted on the website.
Student Feedbacks
I am here to facilitate your learning. I want to answer your questions. I would like to know how things
are going from the students' side. I also expect you have a lot to say about this course as we move on.
Feedbacks provided to the instructor or TA will be credited.
“It’s not what we don't know that prevents us from succeeding; it's what we know that just ain't so that
is our greatest obstacle.” --- Josh Billings
My Teaching Philosophy
My goal as an educator is to help students find their interests, realize their potentials, and develop their
critical thinking ability. I take responsibility when students do not understand the materials. I respect
my students and treat them fairly. I encourage team work and motivate independent thinking. The
financial world is complex, but I strive to explain complex ideas simply and accurately. I only teach
materials useful for students’ career and life.
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Prerequisites
Completion of Finance 1003 is required to enroll in Finance 2802. Additional requirement may be
specified by the school or university.
Materials
Required Materials:
z Investments, 2009, 8th international edition, by Zvi Bodie, Alex Kane, and Alan Marcus (McGrawHill Irwin).
z Subscription to Wall Street Journal or Financial Times is also required. Please read it every day.
Optional:
z A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers, 2009,
by Lawrence G. McDonald and Patrick Robinson (Crown Business).
z Capital Ideas: Improbable Origins of Modern Wall Street, 1993, by Peter L. Bernstein
(Touchstone Books).
z When Genius Failed: Rise and Fall of Long-Term Capital Management, 2001, by Roger
Lowenstein (Random House).
Lecture notes, homework assignments and solutions, exam solutions, announcements, and other course
materials will be posted on course website. Check the website often!
Topics Covered
1.
2.
3.
4.
5.
6.
Investment Tools (7 lectures)
Risk and Return (2 lectures)
Market Sense (3 lectures)
Stock Valuation (4 lectures)
Portfolio Theory (2 lectures)
Current Trends in Investment (3 lectures)
Course Evaluation
The course grade will be determined as follows:
Student Learning Objective:
End-of-Class Reflection Essay:
Homework & Case Analysis:
Exam I:
Exam II:
Portfolio Project Presentation:
Portfolio Project Report:
2%
3%
15%
20%
30%
10%
20%
Assignments will be handled by the teaching assistant. My only grading policy is to be fair so that
students will receive the best grades they deserve. I expect my students to do well and the vast majority
will receive A or B. D and F will be given only under unusual circumstances. Try not to focus entirely
on or worry too much about your grade, concern your efforts with learning the material. In the long run
you will find that the knowledge you gained far outweighs in importance the grades you received.
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Student Learning Objective: At the beginning of the class, I will ask you to briefly describe why you
take this course and what you want to learn from this course. Learning objective is important: you are
less likely to achieve your goal if you do not aim at your objective. This part counts 2% of the overall
grade.
End-of-Class Reflection Essay: In a maximum of 2 pages, retrospect what you have learned from this
class, judge which parts are useful and which parts are not, and contemplate how you would utilize the
knowledge in real life. You are encouraged to be creative (but don’t abuse your creativity). Reflection
essay is due at the beginning of Exam II. This part counts 3%.
Homework (& Case Analysis): The purpose of homework is to help you better understand the materials
lectured and apply to practical issues. During review sessions, the teaching assistant will distribute
homework assignments, collect your solutions and grade them. Subsequently, homework solutions will
be discussed during review sessions and posted on WebCT course website. You are encouraged to
work in groups but each student must turn in his/her typed individual solutions. (Homework solutions
need to be typed and printed out because that’s what you will need to do for you job.) You must turn in
the homework in time. Late homework will NOT be accepted. Tentatively, there will be a total of 5
homework assignments, worth 3 points each. Homework counts 15% of the course grade.
The TA will also give practice problem sets from the textbook and work some of them out during
review sessions. Since the solutions manual is available to you, you do not need to turn them in but I
assure you the benefit of doing those practice problems.
Exam I: The tentative exam date is Monday, March 7 (6:00pm - 9:00pm at Avenue TBA). It will be a
180-minute long, closed-book, closed-notes in-class exam. Exam I will cover topics 1, 2, and 3 (before
the reading week). Exam I counts 20%.
Exam II: The tentative exam date is Wednesday, April 27 (6:00pm – 9:00pm at Avenue TBA). It will
be a 180-minute long, closed-book, closed-notes in-class exam. Approximately 80% of Exam II
contents will be from topics 4, 5, 6 (after the reading week), the other 20% from the worst performing
portions of Exam I. (This structure will be explained further and become more clear after Exam I.)
Exam II counts 30% of your course grade.
Exam Policy: The exam questions will be similar to homework and practice questions (True or False,
Multiple Choice, Short Answer, and Problem Solving). A Formula Sheet will be provided for the
exams. Extra office hours will be given prior to each exam. Alternative exam dates cannot be given.
Any conflict must be brought to my attention in writing by January 25. If you miss ONE exam with a
legitimate, written excuse, the instructor will transfer 90% of the other exam score to the missed exam.
Students miss all two exams will receive zero for both exams.
Portfolio Project: You are required to form groups and manage a portfolio of stocks, bonds,
derivatives, mutual funds, etc. The purpose of the project is to facilitate your learning and provide an
opportunity of utilizing the techniques such as short-selling, buy on margin, etc. we learn in class.
Your trading platform is www.stocktrak.com. Below is the timeline for the portfolio project:
1.
Familiarize yourself with stock-trak. Surf the website and read the trading rules.
2.
Submit group names to the TA by January 20. Account numbers will be assigned.
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3.
Open your account by January 25. There is a registration fee of US$28.95 for the account to be
paid by all group members. Accounts must be opened by this deadline, any delay must be brought
to my (or the TA’s) attention or will be penalized (one point per day!).
4.
Trading period is January 25-April 15. Trading constraints: (1) your beginning hypothetical cash
position is $1,000,000; (2) you can do a maximum of 200 transactions (you may be able to add
more by paying extra); (3) you are allowed to day trading; (4) you can have at most 10% of your
portfolio in one security.
5.
Presentation of your trading practice on 4/21 (about 5/10 minutes in class presentation). Your
presentation skills are to be evaluated. You should think of as pitching your investment strategy to
potential investors. Sign up the presentation slot with the TA.
6.
Submit project report by May 8 (one report per group). Your report should first outline your
trading philosophy and strategy, then provide detailed analysis on select trades (the reason you
make that transaction and the cause for the results, etc.). More specifically, you need to: (1) track
the weekly performance of your portfolio, (2) analyze the macroeconomic, financial market and
stock-specific news events that may have affected the risk and return performance of your
portfolio, and (3) evaluate statistically the relative and absolute performance using various tools
and techniques. Note that your grade is determined by the quality of the report, and is not related
to the investment performance (so you can experiment different strategies and see which “works”).
Moreover, based on your own investment experience, you need to answer the following questions:
(1) are you subject to any behavioral biases we discussed in class? (2) what is your view on the
market efficiency debate, and (3) how has your view affected your portfolio management? There
is no page limit, but I suggest 5-10 pages.(double-spaced, single-sided, 12-point font), not
including various exhibits, figures and graphs to support the analysis.
The project counts 30%. Your project score is based on the presentation (10%) and final report and
peer evaluation (20%). We will form a Dartboard Portfolio together in class (also called “Monkey
Portfolio” or the “Professor Portfolio”). There are three bonuses for the trading game:
• Each weekly champion will receive 1 bonus point; champion is determined by the return over the
week.
• Groups outperform the Monkey Portfolio at the end (April 15 close) will receive 1 bonus point
• Also at the end of the semester, the group with the highest (second-highest) Sharpe ratio (if you do
not know this word, find it out! 1 ) will get a 2% (1%) bonus.
Note: You need to form groups of 3-4 (with a maximum of four) members to work on the portfolio
project (and probably also homework). All group members are expected to contribute. A peer
evaluation will be conducted at the end of the semester and grades to individual group members will
be assigned accordingly.
Instruction on Portfolio Project: This project provides a very important learning experience. You can
also participate in some online trading challenge (more information to be provided later) and compete
for a $$$ cash prize (and publicity, fame, etc.). I will introduce financial instruments in the first few
classes so that you will be able to trade all kinds of securities all over the world. (Note that
StockTrak’s coverage of Asian stocks is rather limited, so you will have to trade more U.S. and
European stocks.) You are asked to meet and discuss portfolio strategies at least once a week. You
need to monitor your portfolio every day. Read financial news every day and anticipate forthcoming
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It is the ratio of average portfolio return in excess of risk-free rate over standard deviation of portfolio returns.
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financial data release, announcements, and commentaries. The main part of your portfolio will likely
be stocks, although you need to be tactical with asset allocation. You can feel free to trade other
securities such as corporate bonds, options, warrants, futures, etc.
Bonus Points Opportunities
I give bonus points to student extra effort, which has the following components:
• Class presentation on stock recommendation: A student can receive 3% for presenting analysis and
recommendation on specific stock (or a sector).
o Each student has one opportunity subject to time availability.
o Please sign up with the TA to secure a presentation slot. First come, first booked.
o No make-up for cancelled presentation.
o Students not getting a presentation slot can prepare for substitute.
• Student feedbacks: Any constructive feedback to the instructor or TA can add 1%.
o Each student has three opportunities.
o Please make sure the instructor and TA get your name when you give feedbacks.
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Tentative Class Schedule (All readings refer to Bodie, Kane, and Marcus, 2009, Investments, 8th edition.)
Date
1/11
1/13
1/18
1/20
1/25
1/27
2/1
Topic
Reading
Introduction
Financial Securities
Financial Securities
Securities Trading
Securities Trading
Delegated Investment
Delegated Investment
Chapter
Chapter
Chapter
Chapter
Chapter
Chapter
Chapter
1
2
2
3
3
4
4
Chapter
Chapter
Chapter
Chapter
Chapter
5
6
11
12
12
Chapter
Chapter
Chapter
Chapter
Chapter
Chapter
Chapter
Chapter
18
18
19
17
9
7
26
27
Assignment Due
Learning Objectives
Homework #1 *
2/3 No Class (Chinese New Year)
2/8 No Class (Chinese New Year)
2/10
2/15
2/17
2/22
2/24
3/1
3/3
3/7
3/8
3/10
3/15
3/17
3/22
3/24
3/29
3/31
4/5
4/7
4/12
4/14
4/19
4/21
4/27
5/8
Risk and Return
Capital Allocation
Market Efficiency
Behavioral Finance
Technical Analysis
Homework #2 *
No Class (Reading Week)
No Class (Reading Week)
Exam 1
Equity Valuation
Equity Valuation
Financial Statement Analysis
Macroeconomy and Investment
Asset Pricing Theory
Optimal Investment Portfolio
Hedge Fund
Active Strategy
Homework #3 *
Homework #4 *
No Class (Ching Ming)
Performance Evaluation
Performance Evaluation
Chapter 24
Chapter 24
Current Topic
Overview and Review
Presentation (class time and evening)
Homework #5 *
Exam 2
Reflection Essay
Portfolio Report
This schedule is subject to change at the instructor’s discretion.
* Homework arrangements (both quantity and due days) are entirely suggestive and will be determined
by the TA during review sessions.
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Course Policies
1.
Course evaluation rules are strictly followed. Make-up or unsolicited extra work to improve your
grade is not possible. The final grade in the course, once assigned, will not be changed except in
the event of a recording error.
2.
All examinations materials, including a formula sheet and scratch paper, will be provided. You
need to bring pens or pencils and a pocket calculator to the exam session.
3.
I take cheating in any form very seriously. Any individual suspected of cheating, including
copying homework solutions, stealing or using stolen examinations, will be disciplined to the
maximum extent allowed by the University.
4.
Any student with a disability should contact the instructor to discuss the resources available to
them.
5.
Your homework and examination grades will be posted as soon as possible but you should allow
at least three working days for grading.
6.
If you miss a class, it is entirely your responsibility to determine what you have missed including
any administrative announcements I may have made. Some of the material covered on exams may
not be in the text. Hence, you are urged to attend class regularly. Furthermore, you cannot
assume that all information needed for the examinations will be presented in class. It is imperative
that the textbook be read and studied.
7.
Additional pre-exam office hours will be announced in class during the semester.
8.
Dignify yourself and respect your classmates and the instructor. Should you have to leave class
early, please inform the instructor beforehand and leave quietly so as not to disturb the other
members of the class.
9.
E-mail is the best way to reach me. Phone calls will not be returned. Begin the subject of your
email with FIN 2802 to avoid being junked.
Student Services Notice: The University of Hong Kong fosters a whole-person approach to education.
The Office of Student Affairs (OSA) provides specialist services to students need physical, emotional,
and occupational assistance. If you have a physical or mental limitation that requires an
accommodation or an academic adjustment, please arrange a meeting with me at your earliest
convenience. You should also contact OSA at 2859-2305, osa@www.hku.hk, www.hku.hk/osa, or
visit them at Room 401, Meng Wah Complex.
Academic Integrity: Every HKU student is responsible for upholding the provisions of the University
Regulations on Academic Dishonesty, which addresses the University’s policy on academic honesty,
including provisions regarding plagiarism (see http://www.hku.hk/plagiarism/ for definitions) and
cheating, unauthorized access to University materials, misrepresentation/falsification of University
records or academic work, malicious removal, or destruction of materials, malicious/intentional misuse
of computer facilities and/or services, and misuse of student identification cards. Incidents of alleged
academic misconduct will be handled through the established procedures of the University Board of
Examiners and the Senate, which includes either an informal resolution by a faculty member, resulting
in a grade adjustment, or a formal hearing procedure, which may subject a student to a minimum one
semester suspension requirement.
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Relevant Questions and Answers for FINA 2802 2
•
Will this course teach me how to be a securities trader (on Wall Street, the City and/or the
Internet)?
To trade successfully you need (at a minimum):
(a) self-knowledge (specifically, the extent of your intelligence, energy, and risk tolerance
relative to others);
(b) knowledge of what it is you’ll be trading (stocks, bonds, FX or whatever);
(c) access to markets and current market data; and
(d) knowledge of the market structure and how trading is accomplished.
This course is mostly about (b). But I hope that you’ll pick up a little of (a) along the way.
•
I’ve already been a successful securities trader (on Wall Street, the City and/or the Internet). I
called the market turn in the Koruna, arbitraged the Yen-Deutschemark spread against cocoa,
and handicapped the Greenwich lobster race. Why should I care about this course?
How will you sustain your advantage? Changes in the structure of all markets are bringing you
into more competition with other traders. If you have been acting as an intermediary, you
should know that the Internet revolution is premised on your elimination.
•
Why should I care about this course if I don’t want to be a securities trader (on Wall Street, the
City and/or the Internet)?
For one thing, it’s getting tougher to avoid trading altogether. Knowing how to bid and offer
sensibly is becoming one of life’s little necessary skills. Looking beyond the financial sphere,
when you set up a market for your product, you often add value to the product. (Investment
bankers have long appreciated the usefulness of secondary liquidity in clinching the initial sale.)
Besides, you might very well find that trading (or just thinking about trading) is fun.
•
Will I get more out of the course (a higher level of cosmic consciousness?, a higher grade?) if I
try a little trading for real money?
Definitely not. No knowledge you'd be likely to gain would justify the risk of capital or sanity.
Would you try to learn corporate bankruptcy by setting up a corporation and going bankrupt?
•
How different is a paper portfolio, as the one we did for class exercises, from real trading?
In a "paper portfolio": you start with one billion imaginary dollars, "buy and sell" stocks at
reported prices, and at the end of the month tally your profits or losses. The essence of a
trading situation is that your actions affect the prices and actions of others. This doesn't happen
with paper trading. Also, with a paper portfolio, it's too easy to rationalize bad outcomes. This
may leave you with misconceptions about your own trading prowess and risk tolerance which
may well prove dangerous when you move to a real market. You might successfully move
from paper trading to real-world trading profits. You might also learn to perform rock music at
Shea Stadium by practice playing air guitar.
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Copied with minor modification from Professor Joel Hasbrouck's Trading and Markets class
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