FINA 469
Investment Analysis and Portfolio Management
Spring 2015
Professor Steven Mann
Office: 456I
Office Hours: T/R 2:00-3:30
Office Phone: 777-4929
E-mail: svmann@moore.sc.edu
Textbook
Bodie, Z., A. Kane, and A. Marcus, Essentials of Investments. Ninth Edition. McGrawHill Irwin, 2013.
Recommended Text
The Wall Street Journal
Course Objectives
1. Organize the student’s thinking processes about investment decision making.
2. Introduce the student to the tools utilized in investment analysis.
3. Give the student the opportunity to solve problems encountered in the marketplace by
portfolio managers.
Administrative Notes
Office hours: Although I have formal office hours on Tuesday and Thursday afternoons,
I encourage you to call or stop by my office whenever you have a question or problem.
The following caveats to the preceding:
1. I am occasionally under time pressure on a project and will need to answer your
question at a mutually convenient time.
2. If you expect you will need a long meeting, please attempt to arrange a mutually
convenient meeting time with me first.
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Performance Evaluation
Exam I
Exam II
Exam III
Project/Paper
100
100
100
100
Total
400 points
Exam I will be on Thursday, February 12, during the regularly scheduled class period.
Exam II will be on Thursday, April 2, during the regularly scheduled class period.
According to the official final exam schedule, Exam III will be on Tuesday, May 5, at
9:00 AM for section 1 (10:05 class) and on Monday, May 4, at 12:30 pm for section 2
(11:40 class). No make-up exams will be given, i.e., no exam will be administered at a
different time.
Chapters to be Covered in the Course
1, 2, 3, 4, 5, 6, 7, 8, 10, 11, 13, 15, 16, 17, 19
A quick glance at the above list indicates that we will be reading numerous chapters in
our text not to mention the Wall Street Journal, Standard & Poor’s Stock Guide, Value
Line, etc. This seems like a lot of reading. It is! Do not worry. Some things we will
read only for content while on others we will concentrate considerable effort. I will help
you decide which is which.
Portfolio Project
We will be using STOCK-TRAK, an investment simulation game. Each student will
manage a $500,000 portfolio. This portfolio could include stocks, bonds, mutual funds,
cash, etc. Portfolio managers will make trades over the Internet or by calling a toll-free
number and speaking with brokers who will record your trades. The first day of trading is
Monday, February 2. Students must participate actively in project in order to receive a
passing grade in the course.
Grading Policy
The course grades will be computed to obtain a class grade point average of
approximately 3.25. I base the course grade on total points. I start with a straight scale
90% and above is an A, 80% and above is a B, and so forth. The class grade point
average is calculated. If the class grade point average is 3.25 or higher, I assign grades
based on that scale. If the grade point average is below 3.25, I drop the scale by one
percent and repeat the process. When the target grade point average is achieved, I assign
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grades. Problem sets will receive a “+”, “0” or “-“. Any student receiving three or more
minuses on these assignments will not pass the course
Re-grade policy: If you think that a serious error has been committed in grading your
exam, you must submit the exam for a complete re-grade along with a detailed written
explanation of your objection within 10 business days of receiving the graded exam.
There is absolutely no guarantee that the re-grade will result in a higher score. The score
may be higher, lower or the same.
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Learning Objectives, Part I
FINA 469
Professor Steven V. Mann
The following represents a list of things that we will discuss in the first part of our course.
I. Securities and Markets
What is a security?
What is a complicated security?
What attributes of expected cash flows do investors care about?
Fixed-income vs. variable-income securities
U.S. Treasury securities
Agency securities/Mortgage-backed securities
Corporate bonds
International bonds
U.S. pay vs. foreign pay
Eurodollar bonds
Yankee bonds
Domestic issues
Foreign bond market
Eurobonds
Primary vs. secondary markets
Money vs. capital markets
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What is liquidity?
What is depth, breadth and resiliency?
bid-ask spread as a pair of options
market impact costs
organized exchange vs. over-the-counter market
what is a market maker?
specialists vs. competitive market makers
II. Portfolio Building
risk aversion, risk neutral, and risk lovers
portfolio’s expected rate of return
long vs. short position
mechanics of short selling
portfolio’s variance
what is the role covariance, correlation?
diversification
efficient set
portfolio opportunity set
minimum variance set
minimum variance portfolio
How do we locate the efficient set?
In practice, what do we need to estimate the efficient set?
What is asset allocation?
What is the security selection decision?
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What is an indexed portfolio?
What is the capital allocation line? (equation, graph)
What is the capital market line? (equation, graph)
What is a complete portfolio?
What is the distinction between market and unique risk?
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Learning Objectives Exam II
FINA 469
Professor Steven V. Mann
Part III Asset Pricing Models
Security Market Line (equation, graph)
How do we locate mispriced securities in the CAPM?
What causes the Security Market Line to change?
How is expected return estimated with the security market line?
Law of One Price
How does arbitrage work?
What is the fundamental assumption of the APT?
Factor risk premium
Factor portfolio
Multifactor APT
How is APT used in practice?
What are the empirical problems with APT?
Compare/contrast the CAPM vs. the APT
Part IV Stock valuation models
discounted cash flows vs. relative value approach
Gordon growth model
two-stage dividend growth model
H-model
Three-stage model
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What type of investment strategies did Long-term Capital Management pursue?
Financial ratio approaches
P/E ratios
P/S ratio
P/Book ratio
Different styles of equity investing – value vs. growth
Part V Market Efficiency
Explain the logic of market efficiency?
How is the idea of market efficiency tested?
Explain the role of transactions in EMH tests?
Explain the role of the asset pricing model in EMH tests?
What are the different kinds of anomalies?
Examples of EMH anomalies
Active vs. passive portfolio management
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Learning Objectives for the Final Exam
FINA 469
Professor Steven V. Mann
Part VII Fixed-income Securities
What factors affect a bond’s required yield?
Price a bond
Explain why bonds change in price
What are day count conventions?
Explain how bonds are priced between coupon payment dates
How is accrued interest calculated?
What is the difference between the full and flat price of a bond?
Explain the three sources of dollar returns from investing in bonds
Calculate current yield
Explain how to calculate yield to maturity with the bond pricing formula
Explain how to calculate yield to call with the bond pricing formula
Calculate the total return of a bond (formula provided)
Explain scenario analysis
What is par curve and how is it calculated?
What is spot curve and how are spot rates calculated
Calculate a spot rate
What is a forward rate and how are they calculated?
Calculate a forward rate (formula provided)
Explain how par rates, spot rates and forward rates are related to each other
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What are the types of yield curve shifts and how are they related?
Explain the importance of the curvature of the price/yield relationship
Calculate Modified duration (formula provided)
Explain what dollar duration tells us?
Calculate the convexity of a bond (formula provided)
What does convexity tell us?
How are convexity and duration related?
What are the properties of convexity?
What is negative convexity?
What is the value of convexity?
What is effective duration/convexity?
What is securitization?
Explain the role of a special purpose vehicle in an ABS transaction?
Why can ABS issuers borrow at lower rates than if they issued debt directly?
What is/are the differences between the cash flows of amortizing vs. non-amortizing
assets?
Part VIII Derivative Securities
Basic definitions of calls and puts
What are the payoffs of calls / puts at expiration?
What are the basic option strategies? (covered call, protective put, straddle, etc.)
How can one hedge with options?
What is the current exercisable value?
What is the premium over current exercisable value?
Basic intuition about option pricing
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What is the option pricing model in a world of perfect certainty?
Explain how changes in the five fundamental variables affect call values? (i.e., the
Greeks)
What is a synthetic call?
What is a synthetic put?
Explain put-call parity
What is a forward contract?
How much is forward contract worth at expiration?
What are the risks of forward contracts?
What is a futures contract?
How do forwards and futures differ?
Explain how marking-to-market works
What are futures used for?
Explain how stock index arbitrage works
Explain how portfolio insurance works
What are options on futures and how do they work?
What are contracts-for-differences and how do they work?
Please adhere to the Honor Code in your study of fixed-income.
University of South Carolina Honor Code:
It is the responsibility of every student at the University of South Carolina
Columbia to adhere steadfastly to truthfulness and to avoid dishonesty, fraud, or
deceit of any type in connection with any academic program. Any student who
violates this Honor Code or who knowingly assists another to violate this Honor
Code shall be subject to discipline.
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