East China Normal University International Summer Session

FIN 23: Introduction to Investment

Term: May 29 – June 23, 2017 Instructor: Shantaram Hegde Home Institution: University of Connecticut Office hours: TUE 1:15-2:25 PM and WED 1:50-3:00 Email: shegdesie16@yahoo.com Teaching Assistant (TA): TBA TA Email: TBA

Course Description This course focuses on the investment process and features of securities including mutual

funds, real estate, tax advantaged investments, derivative securities, fixed income securities

and international investments. Students are introduced to portfolio theory and concepts of

risk/return, risk models, and efficient markets.

Prerequisite: FIN 21 (Introduction to Finance) or ECO 12 (Macroeconomics)

Course Overview “A cynic is someone who knows the price of everything and the value of nothing,” Oscar Wilde The main objective of this course is to help you gain a better understanding of the valuation of a variety of financial securities and the formation of investment portfolios that offer optimum risk-return potential. To firm up your grasp of these topics, we will discuss a wide variety of investment problems, supplemented by contemporary corporate news and team project presentations. The time and effort you invest in this course is sure to enhance the value of your human capital and add to your wealth, perhaps even to your health and happiness. We will be guided by the following Chinese proverb in the design and delivery of this course: “Tell me and I’ll forget; show me and I may remember; involve me and I’ll understand.” To implement “involve me and I’ll understand,” students will prepare and present a wide range of projects on the principles and practices of security valuation and portfolio management in teams consisting of two members. Here is a list of the Alpha Investing: Core-Satellite Strategy projects: 1. Investing in High Dividend Stocks. 2. Investing-Going Global. 3. Investing in the New Tech-Stock Temptation. 4. Investing in Growth Stocks. 5. Investing - Small is beautiful

Use the Single Index Model with monthly returns data over the recent five years to assess the performance of Your alpha portfolio.

Course Goals: A student who satisfactorily completes this course should be able to understand and address the following key questions:

1. How to evaluate the risk and return on stocks, bonds, futures, options, and portfolios? 2. How to figure out if a financial security –stock, bond, futures, options, or portfolio –

is underpriced or overpriced? 3. How to construct an optimal portfolio of stocks, bonds and other investment assets?

4. Is active portfolio management superior to passive portfolio management? 5. How can investors use futures and options on stocks to tailor risk and return to their

tastes and preferences?

Required Text

Investments by Bodie, Kane, and Marcus, 9th Edition (© 2011 McGraw-Hill Higher Education); e-textbook is available at amazon.com - Kindle eBooks store and www.coursesmart.com.

Course Hours

The course has 20 class sessions in total. Each class session is 135 minutes in length, for a total of 2700 minutes of in-class time. The course meets from Monday to Friday.

Attendance

Summer school is very intense and to be successful, students need to attend every class. Occasionally, due to illness or other unavoidable circumstance, a student may need to miss a class. ECNU policy requires a medical certificate to be excused. Any unexcused absence may impact on the student's grade. Moreover, ECNU policy is that a student who has more than 2 unexcused absences will fail the course.

Grading Policy

ECNU awards grades of A, A-, B+, B, B-, C+, C, D, and F. Most colleges and universities do not award transfer credit for grades of D or F. In this course, grading will be based on the following:

Mid-term Exam, end of week 2 of course grade

Final exam, end of week 4 30%

Homework, end of week 1 and 3 20%

Investment Festival (project presentation) week 4 15%

Classroom engagement (attendance, attention, participation in discussions) 10%.

General Expectations: Students are expected to:

Attend all classes and be responsible for all material covered in class and otherwise assigned. Any unexcused absence may impact a student's grade. Moreover, ECNU policy is that a student who has more than 2 unexcused absence will fail the course

Complete the day’s required reading and assignments before class Review the previous day’s notes before class; make notes about questions you have

about the previous class or the day’s reading Refrain from texting, phoning or engaging in computer activities unrelated to

class during class (不要用手机)

Participate in class discussions and complete required written work on time

Course Schedules

The planned schedule sketched out below may be modified to suit the interests or abilities of the enrolled students or to take advantage of special opportunities or events that may arise during the term. WEEK ONE (May 29 – June 2): Introduction Chapter 5: Risk, Return, and the Historical Record (skip Section 5.9) Problem sets: First, do All Concept Check questions; then review the Solutions to Concept Checks Exercises: 1, 4, 6, 7, 8, 11, 13, and 14 Readings: Investment News; Machine Learning Chapter 6: Capital Allocation to Risky Assets (skip Appendix A and B) Problem sets: First, do All Concept Check questions; then review the Solutions to Concept Checks Exercises: 4, 10 to 12, 21, and 23 to 26 Chapter 7: Optimal Risky Portfolios (skip section 7.5, Appendix A and B) Problem sets: First, do All Concept Check questions; then review the Solutions to Concept Checks Exercises: 4 to 11, and 16 Chapter 8: Index Models Problem sets: 4, 5, 9 to 14, 15, and 17 First, do All Concept Check questions; then review the Solutions to Concept Checks Exercises: Homework#1 WEEK TWO (June 5 – June 9): Chapter 9: The Capital Asset Pricing Model (skip section 9.4 to 9.6) Problem sets: First, do All Concept Check questions; then review the Solutions to Concept Checks

Exercises: 4, 5, 9, 10 to 16, 21, and 23 Portfolio Management News Chapter 24: Portfolio Performance Evaluation (skip pages 837-840)

Problem sets: First, do All Concept Check questions; then review the Solutions to Concept Checks Exercises: 4, 7, 8, 10, 11, 15, and 20 Valuation News Review for Exam Friday: Mid-term Exam WEEK THREE (June 12 – June 16): Chapter: 10 Arbitrage Pricing Theory and Multifactor Models of Risk and Return (skip section 10.6) Problem sets: First, do All Concept Check questions; then review the Solutions to Concept Checks Exercises: 4, 5, 7, 8, 10, and 11 Chapter 11: The Efficient Market Hypothesis Problem sets: First, do All Concept Check questions; then review the Solutions to Concept Checks Exercises: 7, 11, 13, 17, 18, 20, and 21 Chapter 13: Empirical Evidence on Security Returns (skip section 13.4 to 13.5) Problem sets: First, do All Concept Check questions; then review the Solutions to Concept Checks Exercises: 3 to 13 Chapter 14: Bond Prices and Yields (you review) Problem sets: First, do All Concept Check questions; then review the Solutions to Concept Checks Exercises: 6, 9, 10, 18, 21, 22, 29, and 30 Fixed Income News Friday: LAST DAY TO DROP CLASSES Homework#2 WEEK FOUR (June 19 – June 23): Chapter 16: Managing Bond Portfolios (skip pages 521 to 526) Problem sets: First, do All Concept Check questions; then review the Solutions to Concept Checks Exercises: 4, 5, 7, 9, 10, 12, 13, 14, 17, and 23 Chapter 18: Equity Valuation Models Problem sets: First, do All Concept Check questions; then review the Solutions to Concept Checks Exercises: 8, 10, 12, 14, 17, and 19 Chapter 20: Options Markets: Introduction (skip sections 20.6 and 20.7; probable) Problem sets: First, do All Concept Check questions; then review the Solutions to Concept Checks

Exercises: 6, 7, 8, 9, 12, 15, 20, 22, and 26 Investment project presentations June 19: Submit Project Reports by email to me and Holly June 22: Projects 1 and 2 Chapter 21: Option Valuation (probable) Problem sets: First, do All Concept Check questions; then review the Solutions to Concept Checks Exercises: 9, 10, 11, 16 to 21, 29, 32, 39, and 43 Options News Chapter 22: Futures Markets (tentative) Problem sets: First, do All Concept Check questions; then review the Solutions to Concept Checks Exercises: 4, 7, 13, 14, 15, and 16 Review for Final Exam Friday, June 23: Final Examination

Academic Honesty

Students are expected to maintain high standards of academic honesty. Specifically, unless otherwise directed by the professor, students may not consult other students, books, notes, electronic devices or any other source, on examinations. Failure to abide by this may result in a zero on the examination, or even failure in the course. Students are also expected to adhere to appropriate scholarly conventions in essays and research papers. This class includes project assignment(s) in which students must give credit to all outside sources used by means of citations and a bibliography. Failure to do so may result in a zero on the paper assignment, or even failure in the course.

PORTFOLIO MANAGEMENT TEAM PROJECT

Passive-Active Investment Strategy – How to Beat the Market?

The main objectives of this exercise are:

A) to select an investment theme, such as value, growth, dividends, global investing, etc.

B) to construct and evaluate an investment strategy a) to capture the benefits of diversification by

investing 80% of funds, in the market index (S&P 500 index) and b) the remaining 20% in the stocks or

mutual funds/exchange-traded funds (ETFs), based on the investment theme you select in A), that you

believe will outperform the market (Satellite, Alpha, active).

Begin with a review of “The Single-Index Model”, see Chapter 8 in the Textbook. For simplicity, we

assume a passive portfolio weight of 80% and an active portfolio weight of 20%.

Select an Investment Theme-Security Analysis

1. Review the brief descriptions of investment themes included in the file “Investment Themes”.

2. Assume you are at the start of the study period, January 2011. Pick One investment theme (that you

believe would outperform the market during 2011-2015), do further research to select your active

positions - single stocks and/or mutual funds or ETFs. Be sure monthly return data are available in

http://finance.yahoo.com/q/hp?s=GOOG+Historical+Prices).

Data collection

Collect Monthly returns on the Single Stock and the ETF you choose for 60 months from January 2011 to

December 2015 from Yahoo Finance (example,

http://finance.yahoo.com/q/hp?s=GOOG+Historical+Prices).

Collect average (expected) sector/industry (benchmark) returns corresponding to your active positions,

from

https://eresearch.fidelity.com/eresearch/markets_sectors/sectors/si_performance.jhtml?tab=siperform

ance; divide the cumulative 5-year industry index return by 60 to obtain an estimate of monthly index

return.

I’ll provide monthly data on the one-month risk-free rate and the S&P 500.

Statistical Analysis

See Chapter for guidance.

Use Excel (Data, Data Analysis, Correlation, Regression) to generate for the active and passive

investment positions

a) Risk Parameters (annualized),

b) Correlation of Residual,

c) The Index Model Covariance Matrix, and

d) Regression Statistics.

How did you do? Performance Statistics: Sharpe ratio, M2, Alpha, Beta, Treynor, T2, Information Ratio,

σ(e), and R-SQR. See “Performance Measurement-Chapter 24 in the textbook.

How did you do? Performance Attribution: For this question, assume the following benchmark (bogey)

weights for your positions: 20% for the active component and 80 for the passive position. Your actual

asset allocations are: 25% for the active segment and 75% for the passive position.

i) Asset Allocation – how much of your outperformance is due to your asset allocation bets?

ii) Security Selection - how much of your outperformance is due to your security selection bets?

Presentation

Prepare a 25-minute in-class team (with 2 members) presentation (about 15 slides plus data appendix;

no additional writeup/report is required). Be sure to explain your investment thesis and performance

based on the statistical analysis you performed.