| 1 | 1. Investments: Background and Issues. This chapter introduces us to the general concept of investing, i.e. foregoing spending cash today in the expectation of increasing wealth in the future. Real assets are differentiated from financial assets and the major categories of financial assets are defined. The risk/return tradeoff and the reality that most assets are efficiently (fairly) priced most
of the time are introduced. The role of financial intermediaries is discussed. |
| 2 | 2. Financial Markets and Instruments. This chapter describes the financial instruments traded in the primary and secondary markets. The various market indices that are used as indicators of “the market” are also described. The chapter concludes with a discussion of derivative products. After completing this chapter, the student should understand the composition and calculation of most indices, their importance and the importance and main determinants of most financial instruments. |
| 3 | 3. How Securities are Traded. This chapter discusses how securities are traded on both the primary and secondary markets, with detailed coverage of both organized and over the counter (OTC) activities. Margin trading and short selling are discussed along with detailed examples of margin arrangements. The chapter discusses elements of regulation and ethics issues associated with security transactions. |
| 4 | 4. Mutual Funds and Other Investment Companies. This chapter describes the various types of investment companies and mutual funds. This chapter also discusses services provided by mutual funds and describes expenses and loads associated with investment in investment companies. Investment policies of different funds are described and sources of information on investment companies are identified. |
| 5 | 5. Investors and the Investment Process. This chapter discusses the risk/return tradeoff and risk tolerance for both individual and institutional investors. The objectives and constraints of various types of institutional investors are presented. Once goals and objectives are determined, these parameters should be codified into a statement of investment policy. |
| 6 | Portfolio Theory: This section is extremely important from a theoretical academic viewpoint and several Nobel prizes have been given out for work done in static equilibrium and dynamic modeling here. Considerable time will be spent detailing what constitutes a good model, what the links are between these models and neoclassical economics and what the trade offs are in model development. |
| 7 | 7. Efficient Diversification. In this chapter, the concept of portfolio formation moves beyond the risky and risk free asset combinations of the previous chapters to include combinations of two risky assets and of many risky assets. The concept of risk reduction by combining securities with different return patterns is introduced. By combining securities with different return patterns, efficient portfolios (maximum return for a given level of risk) may be created. |
| 8 | 8. Capital Asset Pricing and Arbitrage Pricing Theory. This chapter presents the capital asset pricing model, which is an equilibrium model for the pricing of assets based upon risk. This model
rules out the possibility of arbitrage profits, that is, the exploitation of mis-priced securities. In addition, this chapter presents arbitrage-pricing theory, which uses a no-arbitrage argument to derive the same expected return/risk relationship. |
| 9 | 9. The Efficient Market Hypothesis: This chapter examines the concept of market efficiency, that is, that in general, securities are fairly priced and one cannot expect to outperform the market, risk-adjusted consistently over time. The implication of market efficiency for investors and studies of the efficient capital market hypothesis are presented in detail. |
| 10 | Fixed Income Securities: As well as going through basic preference theory, we will also go through the empirical basics here: pricing, immunization, duration, playing the yield curve. Depending on the class composition, elements of matrix algebra may be introduced.
10. Bond Prices and Yields. |
| 11 | 11. Managing Fixed Income Investments. This chapter discusses active and passive bond portfolio management strategies. The concept and use of duration are explained, as are the various types of immunization strategies utilizing duration. In addition, various active strategies, or bond swaps, are described. |
| 12 | Security Analysis. As well as explaining the difference between fundamental and technical analysis, we will critically (and very quickly) critique academics’ critiques of momentum trading. Elements of time series will also be considered.
12. Macroeconomic and Industry Indicators. This chapter discusses the broad-based aspects of fundamental analysis – macroeconomic and industry analysis. |
| 13 | 13. Equity Valuation. This chapter discusses the process of the valuation of common stock. The relationships between intrinsic value and market and book value are discussed. Various valuation techniques, and the strengths and weaknesses of these techniques are presented and discussed. |
| 14 | 14. Financial Statement Analysis. This chapter discusses the basic financial statements, the differences between accounting and economic income, return on equity (ROE), the decomposition of the ROE into component ratios for the purpose of financial analysis, other ratios relevant for financial analysis, and financial statement comparability problems. After studying this chapter, the student should be able to analyse a firm using the basic financial statements to perform ratio analysis. |
| 15 | 15. Technical Analysis. This chapter discusses the concept of technical analysis in the context of the efficient market hypothesis. The origin, with the Dow theory, of technical analysis is presented and charting is explained. Various other types of technical indicators are presented. After studying this chapter, the student should understand and be able to use the various technical indicators presented in this chapter. |
| 16 | Derivative Assets: Options and Futures: We will endeavour to go through the basics both of pricing and of institutional structures here. Because some people argue that Bodie et al do not cover these topics as comprehensively as they might, we will also the works of others in covering these topics. We will examine the Black Scholes and related static equilibrium models in some detail and also touch on the differences between deterministic and stochastic calculus. |
| 17 | 17. Option Valuation This chapter discusses factors affecting the value of an option, determination of option pricing in a two-state world (binomial option pricing), hedge ratios, and the Black-Scholes option-pricing model. Portfolio insurance techniques are also presented. |
| 18 | 18. Futures Markets. This chapter describes the futures markets, trading mechanics involved with futures trading, strategies and risks associated with futures trading and pricing of futures contracts. This chapter provides background material on stock index contracts, describes how such contracts can be used for hedging and speculation and discusses the concept of index arbitrage. |
| 19 | Active Investment Management: This is a pretty straightforward section. It gives several ways to measure performance, all of which have distinct advantages and disadvantages. The calculations are relatively very easy and can usually be done on a basic spreadsheet. Whereas the international section discusses rather imperfect ways to extend theory internationally, lectures will mention in passing the
importance of Eisenhower’s American and Victorian Britain in the formulation of theory. |
| 20 | 20. International Diversification. This chapter notes that the United State offers a relatively small portion of the entire assets available for investment purposes. In addition, the benefits of increased diversification as a result of international investing are presented. International indexes are available for passive investment purposes. Although exchange rate risk is present in international investing, exchange rate futures may allow a portion of that risk to be hedged. |
| 21 | 21. Active Portfolio Management. This chapter discusses the role of active portfolio management in a world of efficient markets. Two types of active management strategies are discussed: market timing and security selection. After studying this chapter, the student will be able to evaluate the market timing ability of managers. The student should also be able to understand the Treynor-Black model of efficient security analysis. |
| 22 | Please note this is a semester long course, The above is indicstive of what will be covered during the semester. |
