Temple University
School of Business and Management
Department of Finance
Finance 3507 – Investments
Fall 2014
Instructor:
Dr. Yuanzhi Li, Assistant Professor of Finance
Office: Alter Hall 426
Phone: 215-204-8108
E-mail: yzli@temple.edu
Class Sessions:
Section 001 (CRN# 4454) TR 11:00AM-12:20PM (Speakman Hall 112)
Office Hours:
Tuesday 1-2 pm, Alter Hall 426.
For meetings outside my office hours, please make an appointment by email first. The best way to
reach me in general is through email. I will respond within 24 hours.
Disability Notice: Any student who has a need for accommodation based on the impact of a
disability should contact me privately to discuss the situation as soon as possible. Contact
Disability Resources and Services at 215-204-1280 in 100 Ritter Annex to coordinate reasonable
accommodations for students with documented disabilities.
Student and Faculty Academic Rights and Responsibilities
Freedom to teach and freedom to learn are inseparable facets of academic freedom. The University
has adopted a policy on Student and Faculty Academic Rights and Responsibilities (Policy #
03.70.02) which can be accessed through the following link:
http://policies.temple.edu/getdoc.asp?policy_no=03.70.02.
Prerequisites: Finance [3101], or Finance [3503], or Finance [3504] or Finance [3901]
You must earn a C or better in these courses to be eligible to take this course. You cannot take these
courses concurrently.
Course Description:
This course provides a detailed analysis of the equity market. Topics include: market
microstructure, the principles of portfolio theory, and valuation of equities including the techniques
of fundamental security analysis.
By the end of this course students are expect to:
1
1. Understand how securities are traded, the structure of exchange trading system and OTC
market.
2. Understand portfolio theory and identify the efficient frontier, the minimum variance
portfolio, and the tangent portfolio.
3. Develop a systematic way of thinking and framing investment decisions based on the
concepts of diversification and risk attitude.
4. Understand asset pricing models and be able to apply them to investment practice.
5. Understand how financial markets and institutions affect security prices and investment
decision.
6. Use Stock-Trak simulation account to gain hands-on knowledge of investments in stocks,
ETF (Exchange traded funds), and mutual funds. Also develop a written analysis report to
discuss the rationales for the trades and evaluate investment performance.
7. Understand the application of equity valuation in fundamental analysis.
8. Develop a good understanding of option contracts and the option market.
9. Understand bond pricing, bond yield, and default risk.
Course Materials
Required textbook:
Essentials of Investments 9th Edition, Irwin McGraw-Hill by Bodie, Kane,
and Marcus.
OR McGraw-Hill Create Custom Textbook available online.
(This is a cheaper version compared to buying the whole book. The price is $
104.47. Go to https://create.mheducation.com/shop/ ,
and put in ISBN: 9781308296005. For more details regarding access and
download the book, see the attached file. )
Recommended:
The Wall Street Journal.
Lecture notes:
Available on the Blackboard
Grading Policy
Components of the grade
Pre-class Questions
Homework
Stock-Trak Project
Exam I
Exam II
Final Exam
Total
Percentage
10
15
10
20
20
25
100
Pre-class Questions
Besides coming to the class and learning from my lecture notes, you also need to read the book to
better grasp the concepts in this course. To encourage reading outside the classroom, I will assign
2
book chapters to read at the end of each class session. The chapters are materials that we will cover
for the next class. This way, you will come to the class being well-prepared. To test whether you
indeed finished the assigned readings, a few questions (no more than five) need to be completed on
Connect.
Homework
Homework will be assigned after each topic. It will be weekly or bi-weekly. And you will have one
week to finish them. The homework will be assigned on Connect too, just like the Pre-class
Questions. You can discuss with your classmates while completing them, but the answers must be
submitted individually.
Stock-Trak Project
Starting the 2nd week of the class, students are required to use their Stock-Trak simulation account
to act as a fund manager investing in the financial market. You must trade bi-weekly (or weekly, but
no less frequently than bi-weekly). At the end of the semester, the fund manager must submit an
investment report to their clients (Prof. Li) evaluating the performance and discussing the rationale
for trades and strategies. The project can be completed by a group of FIVE (or fewer) students. The
investment report is due by the last class. NO LATE PROJECTS WILL BE ACCEPTED.
Exams
There will be three exams. All exams will be closed-book and closed-notes. If needed, a formula
sheet will be provided to you one week before the exam. Covered materials on each exam will be
from the lectures and assigned readings in the textbook. You are only allowed to use a calculator in
the exams. No phones or laptops.
The following is a tentative examination schedule.
Materials covered
Exam I
Topic 1, 2, 3, and 4
Exam II
Topic 5, 6, and 7
Final Exam
Cumulative but more focus
on topics 8-10
Exam date
Sep 30th
Oct 30th
TBD
* Makeup exam will be offered only because of illness (a doctor’s note required) or because of your
participation at a scheduled university activity (a coach’s note required) and the instructor must be
informed no later than 24 hours of the scheduled exam time. Make‐up exam must be completed
within 3 days after the original scheduled exam time.
What to Expect
This course is very demanding and will command considerable work on your part; typically 10
hours per week is required. It is highly recommended that you read the assigned chapters carefully
at least twice. Before each new topic is discussed in the class, read the materials and finish the preclass questions, so that you come prepared for the lecture. After each topic is finished, you should
read the materials again and review the lecture notes, so that you have a fair understanding of the
concepts before attempting to complete the homework.
3
There will be no mock exam questions before each exam. The best review questions are the
homework questions and examples in the lecture notes.
General information
* You are expected to actively participate in classroom discussion, asking and answering questions
in the classroom. If you need to leave the class early, please let me know of the reason in advance.
Finally, please avoid talking during class hours (except during discussion time).
* No extra work will be given to make up a low grade in any exam or project assignment after they
are graded.
* A grade of “Incomplete” will not be assigned unless the following conditions are both met:
 You have successfully completed (“C” or higher) 80% of the grade items.
 You cannot, because of a documented medical emergency, complete the remaining items
before I am required to turn in the grades.
Calculators: I do not recommend purchasing a financial calculator; a simple scientific calculator is
sufficient. Please be advised that text calculator will not be permitted during exams unless you show
the instructor that you have deleted all text information on it.
4
Course Outline (Topics)
1. Course Introduction
Financial markets and instruments (Chapter 1, 2) (Aug 26th, 28th, and Sep 2nd. 1.5 weeks)
 Develop an overview of the financial market.
 Understand the risk and return characteristics of various financial instruments.
 Understand how various market indexes are constructed and the difference between priceweighting and value-weighting.
2. Market microstructure and investment companies (Chapter 3,4) (Sep 4th and 9th, 1 week)
 Introduce exchange trading system and the OTC market
 Understand how securities are traded, order execution, bid-ask spread, and best price.
 Understand the structure, function, and investment strategies of various investment companies
 Compute net asset value, and the return on mutual funds by taking into account various mutual
fund fees.
3. Risk and return (Chapter 5) (Sep 11th and 16th, 1 week)
 Compute various returns over multiple periods.
 Conduct scenario analysis in computing expected return and volatility.
 Understand the trade-off between risk and return.
 Understand asset allocation problem between risky asset and the risk-free asset.
4. Portfolio theory and efficient diversification (Chapter 6) (Sep 18th and 23rd, 1 week)
 Understand diversification.
 Calculate covariance and correlation of returns.
 Identify efficient frontier, minimum variance portfolio, and tangent portfolio.
 Understand asset allocation problem between two or more risky assets.
Exame I Review (Sep 25th)
Exam I (Sep 30th)
5. Asset pricing models (Chapter 7) (Oct 2nd, 7th, and 9th, 1.5 weeks)
 Understand various implications of the Capital Asset Pricing Model (CAPM).
 Apply CAPM in investment practice based on security market line.
 Introduce the single-index model.
 Understand arbitrage opportunity and profits.
 Understand single-factor and multi-factor Arbitrage Pricing Model (APT) models.
 Recognize the similarity and difference between CAPM and APT.
6. Efficient market theory (Chapter 8) (Oct 14th and 16th, 1 week)
5
 Understand the three forms of efficiency market hypothesis.
 Understand the concepts of technical analysis and fundamental analysis
 Learn to analyze empirical evidence supporting or against various forms of the efficiency market
hypothesis.
 Understand the implications of market efficiency in price formation and investment decision
making.
7. Equity valuation (Chapter 13, 14) (Oct 21st and 23rd, 1 week)
 Understand key accounting variables for fundamental analysis, e.g., ROA and ROE.
 Understand the concept of intrinsic value.
 Learn single stage and multistage dividend discount models.
 Understand the relationship among stock price, dividend policy, and firm’s growth opportunity.
 Relative valuation.
 Apply equity valuation models in fundamental analysis.
Exam II Review (Oct 28th)
Exam II (Oct 30th)
8. Options Markets (Chapter 15) (Nov 4th, 6th, and 11th, 1.5 weeks)
 Introduce the option contracts, including European option, American options, put and call options
 Understand payoff and profit of call and put options
 Introduce exotic options
9. Bond prices and yields (Chapter 10) (Nov 13th and 18th, 1 week)
 Understand various bond characteristics.
 Understand the relationship between default risk, bond pricing, and yield.
 Recognize the difference between bond yield and bond return, and its implications on investment
of fixed income securities.
10. Performance evaluation on investment portfolios (Chapter 18) (Nov 20th and Dec 2nd, 1 week)
 Understand how to evaluate performance.
 Recognize the differences among various performance measures.
 Learn to apply various performance evaluation methods appropriately in different scenarios.
 Introduce Treynor-Black security selection model.
 Understand various performance attribution procedures.
Final Exam Review (Dec 4th)
6