Course Outline
MGT 2302
Security Analysis and Portfolio Management
Fall 2007
Course Meets: Thursdays 6:30-8:30 AM Room 133
Instructor:
E-Mail:
Phone (Fax):
Office Hours:
Professor Eric Kirzner,
John H. Watson Chair in Value Investing
Room 445
kirzner@rotman.utoronto.ca
416 978 3426 (416 971 3048)
Mondays 1:00-4:00
Thursdays 1:00-4:00
Value Investor in Residence at the Rotman School of Management: Ted Kernaghan
Finance Lab Manager: Kevin Mak
Course Scope and Mission
The objective of this course is to introduce the student to both the theory and applications of
investment finance. The student should obtain a broad knowledge of the asset allocation process,
security markets, market structures, the risk-return characteristics of investment products, and
hedging applications with financial innovations through the course materials, lectures,
discussions, and assignments. An emphasis will be placed on investment analysis research
through the group project. The emphasis of this course is on both intellectual stimulation and
practical rigorous applications, through the security analysis project. The course emphasis is on
the development of both quantitative analytic skills and presentation skills.
Lecture Sessions:
Students are expected to have read the assigned chapters of the text, and recommended readings
before the start of each class. In addition, students should attempt to be well informed on current
investment topics through reading the financial press (e.g. Globe and Mail Report on Business or
the Financial Post).
Evaluation and Grades
Grades are a measure of the performance of a student in individual courses. Each student shall
be judged on the basis of how well he or she has command of the course materials.
The final grade will be calculated as follows:
Course project and presentations
50%
Individual report
10%
Final examination
40%
Total
100%
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Required Text and Course Materials:
(BK) Zvi Bodie, Alex Kane, Alan Marcus, Stylianos Perrakis, Peter Ryan, “Investments,
Fifth Canadian Edition,” McGraw-Hill Ryerson, 2005
The Group Project:
The purpose of the group project is to provide students with a vehicle for creative thought
and study in the field of portfolio management and security valuation. The project will
provide you with the opportunity to study in depth the topics that are introduced in the
class. If carefully conducted, the project will synthesize, clarify and illuminate a large
part of the course material. The project has a highly practical element through the
investment portfolio component.
The Finance Lab
Students will get a thorough briefing on how to use the Rotman Finance Lab and how to
access data.
The Finance Lab is accessible by students 24 hours a day 7 days a week. Students are
encouraged to come in on a regular basis to work on stock analysis and trading. However,
keep in mind that trading may only take place during open market hours (weekdays
9:30AM to 4:00PM excluding holidays).
In order to become familiar with the lab, the following classes will be held in the finance
lab:
Sept.20, 9:30AM-10:30 AM – Lab Overview and Reuters BridgeStation
Sept.27, 9:30AM-10:30 AM – Rotman Portfolio Manager and Capital IQ
Also, there will be lab assistants available on a daily basis to give you any additional help
that you may require. The lab assistant schedule is: Monday-Friday 10:00AM - 4:00PM.
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For reference you can visit the finance lab website at
http://www.rotman.utoronto.ca/finance/lab/
Examinations
Students may miss an assignment or exam due to illness, domestic affliction, or in the
case of part time students, work commitments, without academic penalty providing the
appropriate documentation is received and approved in a timely manner.
In such cases students must notify the MBA Program Services Office on the date of the
missed assignment or examination and a medical certificate, employer’s letter or other
supporting evidence must be submitted to the Director, MBA Program Services within 48
hours of the due date of the assignment or the exam date.
A resolution will be determined by the instructor and may take the form of a make-up
exam, rewriting the exam at the next offering of the course or a revised grade calculation.
The decision as to how to handle the missed assignment or exam is at the instructor’s
discretion. If a student misses an assignment or final examination for any other reason, a
resolution will be determined at the instructor’s discretion and may include an academic
penalty. Students who do not notify the School of a missed assignment or exam will be
given a grade of FZ (failing grade) for the assignment or exam.
Course Work & Academic Honesty
Submission of Assignments – Students are required to use the MBA Assignment Cover
Sheet Template (see the Portal) for all submitted work which will be reviewed by the
Professor. In the case of group assignments, all group members must sign the
Assignment Cover Sheet. Late submissions of any assignment will be considered;
however, a resolution will be determined at the instructor’s discretion and may include an
academic penalty.
Academic Honesty - The University’s Code of Behaviour on Academic Matters
(“Code”) applies to all Rotman students. The Code prohibits all forms of academic
dishonesty including, but not limited to, cheating, plagiarism, and the use of unauthorized
aids. Students violating the Code may be subject to penalties up to and excluding
suspension or expulsion from the University. A copy of the Code may be found at:
http://www.utoronto.ca/govcncl/pap/policies/behaveac.html
The Rotman Code of Integrity
Students are expected to conduct themselves with the utmost integrity during their time at
Rotman and, without limiting the foregoing, will:
• Submit only original work, giving credit to others where appropriate;
• Neither give nor receive unauthorized aid in examinations or on assignments;
• Contribute substantially and proportionally to each group assignment;
• Ensure enough familiarity with the entire contents of group assignments so as to be
able to sign off on them as original work;
• Accept and acknowledge that assignments found to be plagiarized in any way will be
subject to sanctions under the University’s Code of Behaviour on Academic Matters;
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•
•
Represent myself honestly to members of the Rotman community and to outsiders;
and
Represent Rotman appropriately to the outside world.
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COURSE OUTLINE
Lectures No. 1 and 2: September 20, September 27
Topics and Readings
Introduction
(i) The history of investment finance theory and applications
(ii) Finance paradigms: The Right Approach
(iii) Introduction to Behavioural Finance
(iv) The Finance Lab: Introduction, Reuters BridgeStation, Rotman Portfolio Manager,
Capital IQ.
Guest: Kevin Mak, Manager of Finance Lab
Readings
BK Ch. 1
James W. Ware, “Quantum Investing,” Financial Analysts Journal, March-April 1992,
pp. 10-15.
Nichols, Nancy A., “Efficient? Chaotic? What’s the New Finance?,” Harvard Business
Review, March-April 1993, pp. 50-60.
Robert D. Arnott, “Whither Finance Theory?” Financial Analysts Journal,
January/February 2005, pp.12-14.
Benjamin Graham, “Toward a Science of Security Analysis,” The Analysts Journal,
August 1952, pp 97-99, reprinted in Financial Analysts Journal, January-February 1995.
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Lectures No. 3 and 4: October 4, 11
Topics and Readings
Markets, Instruments and Security Trading
(i)
Conventional investments; Investment companies; Exchange traded funds;
Alternate investments: income trusts, hedge funds
(ii)
Markets and trading: trading orders
(iii)
Short selling, leverage and arbitrage
(iv)
Trading abuses – front-running, market manipulation, spoofing and high
closing
Readings:
BK Ch.’s, 2, 3, 4
Richard Bookstaber, “Hedge Fund Existential”, Financial Analysts Journal.
Charlottesville: Sep/Oct 2003. Vol.59, Iss. 5; p. 19
Eric Kirzner, “Hedge Funds,” Advisor’s Guide to New Investment Opportunities, 2001,
Ch.5 pp. 31-36.
Michael King, “Income Trusts: a Growing Asset Class,” Canadian Investment Review,
Spring 2004, Volume 17, Number 1, pp. 8-18.
Lecture No. 5 and 6: October 18 and 25
Topics and Readings
Portfolio Management
(i) Two investment paths: Markowitz and Jones
(ii) Asset Allocation Principles
(iii) International Diversification
Readings:
BK Ch. 21, 22
Robert Arnott, “The Policy Portfolio Problem”, Financial Analysts Journal, July/August
2004, pp 6-8
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Auger, Robert and Denis Parisien, “Understanding Asset Allocation,” Canadian
Investment Review, Volume IV, No. 1, Spring 1991, pp. 37-44,
Campbell, John Y, “Diversification: a bigger free lunch,” Canadian Investment Review,
Volume 13, No. 4, Winter 2000, pp. 14-15.
Eric Kirzner, “The Active Versus Passive Investment Divide,” Advisor’s Guide to
Financial Research, 1999, Ch.3 pp.19-25.
Meir Statman, “The Diversification Puzzle”, Financial Analysts Journal, July/August,
2004, pp. 44-62.
Gary Brinson, Brian D. Singer and Gilbert L. Beebower, “Determinants of Portfolio
Performance II-an Update,” Financial Analysts Journal, May/June 1991, pp. 40-48.
Lecture No. 7: November 1
Framework for Security Valuation
Topics and Readings
(i) Security price movements: Studies of market efficiency
(ii) Security Price movements: single and multi-factor models:
Fama French Three-Factor Model
Readings:
BK Ch’s 9, 10
Wayne H. Wagner, “Ten Myths and twenty years of betas,” Journal of Portfolio
Management, Fall 2004, pp. 79-82
Jog, Vijay, “Canadian Stock Pricing Anomalies: Revisited” Canadian Investment
Review, Volume 11, No. 1, Winter 1998, pp. 28-33.
Hulbert, Mark, “Rockfall? Or Avalanche?,” Forbes, September 26, 1994, p. 211.
, “Mind Over Matter,” The Economist, April 23, 1994, pp. 3-5.
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Lectures 8, 9, and 10: November 8, 15, 22
Valuation of Equity Securities
Topics and Readings
(i) Top-down investing
(ii) Bottom-up investing: Value approach; Growth approach
(iii)Technical analysis
Readings:
BK: Ch’s 14, 15, 16
Fundamental Analysis:
John Schmitz and Sean Cleary, “What has Worked on Bay Street, “Canadian Investment
Review, Volume 13, No. 4, Winter 2000, pp. 25-34.
Brian A.Schofield, “Evaluating Stocks,” Canadian Investment Review, Volume 13, No.
1, Spring 2000, pp. 16-22.
Brockman, Paul, Charles Mossman and Dennis Olson, “What’s the Value of
Fundamental Analysis?,” Canadian Investment Review, Volume X, No. 3, Fall 1997, pp.
10-15.
Oppenheimer, Henry R., “A Test of Ben Graham’s Selection Criteria,” Financial
Analysts Journal, September/October 1984, pp. 68-75.
Technical Analysis:
Glickstein, David A. and Rolf E. Wuhbel, “Dow Theory is Alive and Well,” The Journal
of Portfolio Management, April 1983, pp. 28-33.
Levy, Robert A., “Conceptual Foundations of Technical Analysis,” The Financial
Analysts Journal, July/August 1966, pp. 244-256.
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Lecture No. 11: November 29
Speculative and Hedging Markets and Instruments:
Topics and Readings
(i) Option contracts
(ii) Futures, forward and swap contracts
(iii) Complex securities and instruments
(iv) Speculative applications
(v) Hedging theory
(vi) Insurance, income and hedging applications
Readings:
BK Ch’s 17, 18, 19
Hal Lux, “The derivatives lab,” Investment Dealers’ Digest, March 16, 1992, pp. 20-25.
Kirzner, Eric, “The Unfolding Derivative Securities Story: Abroad and in Canada,”
Canadian Investment Review, Volume 1, No. 1, Fall 1998, pp. 73-78.
James C. Van Horne, “Of Financial Innovations and Excesses,” The Journal of Finance,
Volume XL, No. 3, July 1985, pp. 621-756.
Lectures No 12: December 6
Course Summary and Class presentations on group Project; December 7
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RULES AND GUIDELINES
1 Objectives: To operate a portfolio designed to meet a pre-established set of objectives.
2 Process: The project will be undertaken by groups of four or five. Group members
should draw up a contractual document, specifying the internal rules under which they
intend to operate. Items to be addressed should include, among other things: majority
rule votes, veto-systems, chairperson, dissolution, work-sharing and grade-sharing.
(Unless I am informed otherwise, it is assumed that all members share the group’s
allocated grade equally.)
RULES
3. Each group will have an initial capital endowment of $10,000,000 CAD consisting of
1,000,000 mutual units issued at $10.00 CAD each. Your group members collectively
own 10% of the shares. As part of the exercise, you must identify the stakeholders of the
remaining 90% (retail, institutional investors, endowment funds, ethical investors, etc.).
You may if you wish split your $10,000,000 endowment into two or more funds (a family
of funds) with different objectives and stakeholders.
2. Each group will establish an initial set of objectives for their fund or family of funds.
For example, they may be stated as portfolio performance relative to specific
benchmarks, such as outperforming the Toronto 35 Index, the FPX Balanced Index or
even the Kirzner Easy Chair (Toronto Star) Passive Portfolio. Investment policy and
strategy will be identified for each fund as well. Investment policy and strategy will
include active versus passive investing; small versus large cap investing; sector rotation
versus fixed allocation; value versus growth, etc.
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3. You may change the composition of your portfolio as often as you wish (subject to rule
#4). You are free to make as many revisions to the portfolio as you wish. In other words,
you can fully manage the portfolio.
4. Orders to buy and sell may be placed during trading hours Monday through Friday.
Prices and foreign exchange rates will be as verified and executed through the Rotman
Portfolio Manager (RPM) application under the supervision of Kevin Mak. The RPM
software will track and log your transactions on a real time basis. Certain special trades
can be arranged by emailing me or Kevin. Trading (per group) in a particular security is
limited to 30% of the trading volume on the relevant day. Trades may, in special cases,
be disallowed at the discretion of the market surveillance commissioner (that’s me).
Keep in mind that all changes to the portfolio need to be justified in terms of security
analysis. Excessive trading could be costly in more ways than one!
5. Transaction costs are as follows:
Bonds:
Government: $1.00 per bond
Corporate: $1.50 per bond
Canadian, U.S. and international common and preferred equities, income trusts:
2 cents per share.
Option Contracts:
Option contracts:
$5 per contract each way
*NB: Options cannot be executed, instead they are cash settled on expiration at their
intrinsic value.
6. Securities fall into two categories: high margin, or low margin. Equities with an
average daily turnover (average shares traded * last price) > 10 Million, fall into the high
margin category. They have a 30% margin requirement and a 130% margin requirement
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for short positions. All other equities have a 70% margin requirement for long positions
and 170% margin requirement for short positions.
Margins are subject to change at any time!
7 All positions are marked-to-market daily. Accounts must be fully margined as of the
close of trading each day.
8. Detailed records, including financial statements are to be kept on a daily basis.
9. ELIGIBLE SECURITIES
Common and preferred shares traded in CAD, USD, EUR, GBP, JPY, CHF, and AUD.
Options and futures contracts traded on the Montreal Exchange and US future and
options exchanges. US Corporate and Government bonds.
Other Securities?
See me for permission
10. Currency & Interest Rates
RPM allows users to manage their currency exposure by trading at the interbank Forex
rates.
11. ONGOING REPORTING
The NAV’s of your portfolio as of the close on Wednesday and Friday is to be compiled
and provided for each of your funds and submitted to Professor Kirzner and to Kevin
Mak of the Rotman Finance Lab by 10:00 PM on Wednesday and 10:00 AM Monday
respectively. We will be publishing NAV’s on Thursday in class and NAV’s will be
posted on the Rotman ticket tape on a continuous basis!
12. The project commences on September 27, 2007.
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REPORT REQUIREMENTS
Each group will submit reports as follows:
REPORT #1 – Due October 4 to include as a minimum:
1. Investment fund bylaws
2. investment objectives of each of the funds
3. investment policy of each of the funds
4. initial balance sheet including details of initial portfolios
5. justification of initial portfolio selection
(5 marks)
The report should not exceed eight pages in text, although you may use an unlimited
number of appendices and tables.
REPORT #2 – Due October 18 to include as a minimum:
1. balance sheet including details of portfolio
2. income statement, cash-flow statement
3. justification of portfolio and changes and revised objectives if any
4. beta of portfolio
5. explanation of why the fund(s) have met, exceeded or failed to meet objectives and
expectations
(10 marks)
The report should not exceed eight pages in text, although you may use an unlimited
number of appendices and tables.
REPORT #3 – Due November 26 to include as a minimum:
1. balance sheet including details of portfolio
2. income statement, cash-flow statement
3. justification of portfolio and changes and revised objectives, if any
4. beta of portfolio
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5. explanation of why the fund(s) have met, exceeded or failed to meet objectives and
expectations
6. a fundamental analysis of a company in your fund’s portfolio including
(i) an historical overview and summary of business operations of the selected company
and its industry
(ii) longitudinal and cross-sectional ratio analysis
(iii) Risk measures including beta and standard deviation calculations, decomposition
of total risk into systematic and unsystematic components, and vulnerability of the firm
to adverse interest rate, price, and exchange rate movements.
7. Valuation of the company and buy/hold/sell recommendations for
(i) a large pension fund.
(ii) an individual investor who holds a diversified portfolio of securities.
(iii) a speculator who has a one-year investment horizon. One or more specific valuation
methods should be employed.
8. Technical analysis of the firm and industry.
9. Seasonal price characteristics of the firm and industry, such as the application of the
(i) day of the week effect
(ii) turn of the year effect
(iii) small firm effect
(20 marks)
The report should not exceed twenty pages in text, although you may use an
unlimited number of appendices and tables.
FINAL REPORT #4 – December 6 to include as a minimum:
1. final balance sheet including details of portfolio
2. cash-flow statement
3. assessment of performance of portfolio
4. indication of what you have learned from the project
5. what you would, ex-post, have done differently
6. Group presentations
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The report should not exceed eight pages in text, although you may use an unlimited
number of appendices and tables.
(15 marks)
INDIVIDUAL REPORT
Due October 25, 2007
This individual assignment is to write a two-page report describing
(a) What you have learned from the exercise thus far
(b) How decisions are made within your group and whether you have an effective
decision-making process
(c) What you hope to learn about/apply over the final part of the exercise
(10 marks)
GRADING
The reports will be graded on the basis of:
(i) the scope and quality of your analysis
(ii) independence of thought and ability to extract from published information without
mere repetition
(iii) the clarity and accuracy of your reports
(iv) application of quantitative techniques
(v) your willingness to apply course concepts in the project
(vi) bibliography and identification of sources
You are not bound strictly to the course materials, although you should where possible
and appropriate, use techniques or material discussed in class.
Effort, even if results are incomplete or in the realm of conjecture, will be rewarded, so
attempt as many topics as your time permits. If you wish, comment on how, in a more
extensive study, you would proceed more completely.
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Most of all you want to make this a creative exercise. The more thought and effort that
you put into designing your investment fund structure, objectives and policy, the greater
the likelihood that the project will be both challenging and interesting. In the past MBA
groups have used some very creative approaches. The more imaginative and insightful
you are, the higher the grade. Try to avoid the merely descriptive!