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Investments
FIN 341, Spring 2012
Mon / Wed, 10:10-12 AM (Copeland 633)
Professor: Andrew K. Prevost
Office: Copeland Hall, Office 236
Phone: 597-1945
email: prevost@ohio.edu
Office Hours: Mon/Wed 2:00 – 4:00 p.m. (or by appt)
Objective:
This course will cover the basics of portfolio theory and investment analysis. Specifically, the course
covers risk aversion and Markowitz portfolio theory, equity valuation, and portfolio performance
evaluation.
Course Resources:
(1) Z. Bodie, A. Kane and A. Marcus “Essentials of Investments” 8th ed.
(2) Lectures: Lecture notes and other miscellaneous files are available in my FIN 341 web folder, at
http://www.ohio.edu/people/prevost/FIN 341/
Grades:
The final grade for the course will be determined as follows:
Team Investment Project 20% (Initial report = 15%, Journal = 15%, Final report=70%)
Quiz 1 5%
Quiz 2 5%
Mid-Term Examination 30%
Final Examination (comprehensive) 40%
100%
A = 92-100% A- = 90-91%
B+ = 87-89% B = 82-86% B- = 79-81%
C+ = 77-78% C = 72-76% C- = 69-71%
D+ = 67-68% D = 62-66% D- = 59-61%
Class Participation:
Although it is not given a numerical weighting in the grade determination, class participation will factor
into the grading in the event you are on the border between grades.
Quizzes and Exams:
There will be one quiz prior to the midterm (around the fourth week), and one prior to the final exam
(around the eighth week) Each quiz will consist of 10 multiple choice questions. The midterm exam’s
chapter content will be announced in class, and the final exam is comprehensive.
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Lectures:
Lectures will stress the most important issues addressed in the text. You are responsible for all material
covered in class, assigned readings, and problem sets. Lectures may go beyond the scope of the textbook
for certain topics. Class lectures will often involve working through problems. Thus, you should bring a
calculator to class so that you may work problems and participate in class. You can get solutions for all
of the problems in the textbook in the course folder.
Course Outline/Schedule:
Topic Chapters Problems
Markets & Instruments, Portfolio Theory, and the
CAPM
Markets and Investments BKM 1-3 2: 17-20, 23, 25
(selected sections) 3: 10, 14-17, 19
Reading: “Screen test” Readings package
Determinants and Measurement of Risk and Return BKM 5 5: 5-7, 11, 12-16, 18
Risk and Portfolio Theory BKM 6 6: 5, 8-14, 17, 19, 21
The CAPM and Multi-factor Models (7.1-7.4) BKM 7 7: 5, 8, 9, 11, 13, 15,
17-20
Equity Valuation Models (13.1-13.4) BKM 13 13: 3, 5-7, 13, 14, 17-19
Portfolio Performance Evaluation BKM 18 18: 5-7
Market Efficiency, Behavioral Finance, and BKM 8-9 8: TBA
Technical Analysis 9: TBA
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Investment Project:
The purpose of this course is to expose you to the basics of investments and portfolio management.
Although class notes and textbook readings are an integral part of the learning process, the best way to
learn about investing is to actually do so. To this end, you will create and manage your own portfolio in
a web-based portfolio simulation. You should organize yourselves into teams of two or three. The team
will decide on an investment strategy, manage a portfolio, and prepare written reports regarding their
portfolio composition and performance.
The portfolio simulation will be managed by Investopedia, at www.investopedia.com. Each team will
register and join two games: 341spr2012a (the investment portfolio) and 341spr2012b (the speculative
portfolio). The password for the 341spr2012a game is oufin341a, and the password for the
341spr2012b game is oufin341b.
All teams will start out with $500,000 with which to build each of their portfolios. The simulation will
run for the quarter. Each team will create two portfolios:
One of these portfolios will be a relatively inactively traded portfolio where you should only buy
and sell (i.e. no margin trading, short selling, etc.) a relatively diversified domestic (i.e.
companies based in the U.S.) portfolio of stocks. We will refer to this as the investment
portfolio. The stocks you select should follow an underlying strategy: See, for example,
http://www.tradingwinner.com/archive/2006/11/25/trading-strategy-using-stock-screeners-to-
find-potential-buys/
You can use a screener to select individual stocks based on your criteria, such as:
http://screen.yahoo.com/stocks.html
http://www.google.com/finance/stockscreener
http://www.dojispace.com/ (a screener based on technical analysis strategies)
http://club.ino.com/join/whatyouget/
You should also consider market timing in this portfolio, i.e. moving funds into cash when you
think the market might drop, and vice versa.
Your other portfolio will be aggressively speculative in nature – for this portfolio, you may (and
should!) buy stock on margin / short sell / day trade / buy put and call options. You can also
purchase international stocks for this portfolio. Your underlying strategy for this portfolio could
be based on the same strategy as your investment portfolio, for example instead of buying the
stock you buy the call option instead, or it may be completely different. There are two reasons
for having separate portfolios: (1) You will be able to see if taking excessive risk pays off, and
(2) Your portfolio analysis project at the end of the quarter is, strictly speaking, not applicable to
portfolios that go beyond buying / selling stocks.
Trading will take place at market closing prices. You can submit market, limit, and stop loss orders.
Any order submitted after 4:00 p.m. will not be executed until the start of trading the next day. Teams
will be able to buy on margin and/or short sell. Interest of 1% APR will be earned on unused cash
balances while interest of 8% will be charged on margin balances. A commission of $9.99 is charged for
all transactions. For options, there is a $9.99 base commission, as well as a $1.75 per-contract
commission.
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Initial Report
There are literally thousands of mutual funds currently available to investors (in fact, there are more
mutual funds than there are exchange-traded stocks!). Many of them have objectives such as growth and
income, income, value, aggressive growth, etc. Each team will determine what investment style it will
follow for its investment portfolio and for its speculative portfolio. The choice is completely up to each
team. For the investment project, grades will not be based on how much money a team gains or loses,
but rather how they follow their style and the presentation of their reports. By the third week of the
course, each team must submit a statement of objectives which defines an investment style for their
investment portfolio as well as an appropriate benchmark against which their performance should be
measured. In addition, a short description of the aggressive portfolio should be included – will it only
include long options, long and short options, some combination of margin buying and long call options,
etc.?
The initial report should be written as though it were a prospectus for the team's portfolio explaining how
the portfolio will be constructed. The report should include what criteria a security will have to pass to
be placed in each portfolio as well as what factors may affect performance. Additionally, the report
should include a brief discussion of the risks of each portfolio. Concepts discussed in class should be
explained in the context of the teams’ portfolio. This report should not exceed three pages.
Portfolio Journal
Every week you will keep a record of the single biggest success and the single biggest failure in your
investment portfolio. You need to describe the specific reason for the success or failure (i.e., the reason
the stock price went up or down), and what you plan to do about it for the following week (buy more /
sell and buy something else / watch and decide next week). At the end of the course, your journal should
have at least 9 entries (for at least 9 weeks).
Final Report
Requirements for each team include:
1. A description of each team’s two portfolios and how they are consistent with their stated
strategies or if they were not consistent why not. What happened?
2. Tracking the performances of their portfolios each week throughout the quarter.
3. Producing a comprehensive report outlining the performance and risks of the investment
portfolio and how they compare to the appropriate benchmark.
4. What was your overall greatest success (note: this may not necessarily be the asset with the
greatest return) for each portfolio? Any mistakes? If you had to do it over, would you keep
the same investment strategy or try something else? Why?
Daily portfolio balances to be used in the analysis are stored under “performance history” in
Investopedia.
Each report should be typed, double-spaced and generally no more than 10 pages in length (but may be
less, you decide how much is appropriate), not including tables and graphs. The report will be graded on
the basis of the quality of the research, as well as the professionalism of the presentation (neatness,
clarity of exposition, spelling, etc). I will assign the same grade to each member of the group unless
there is a compelling reason to do otherwise. Concepts discussed throughout the quarter should be
incorporated into the final report.
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Portfolio Simulation Registration Information
1. Go to the home page www.investopedia.com. On the left side of the screen, click on
“Register” and fill out the form. Your two portfolios will run in separate games,
“341spr2012a” (the investment portfolio game) and “341spr2012b” (the speculative
portfolio game).
2. Once you have registered and have a username / password, you can join each game. Log
in, click on “Games”, and then click on “Join Game”. In the “Search Games” box, type
“aprevost” using “Game Creator’s Nickname”. The two games should appear, and then
click on “Join” for each one. Type in the game’s password at the bottom of the screen,
and you are now in the game.
2. To join the second game, use your browser’s “back” button to return to the “join game”
page (should be two screens back).
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FIN 623 – Seminar in Investments
Initial Report
Due: Thurs, Week 3
This first report should outline your group’s portfolio creation criteria and investment objectives. The
report should be typed, double spaced, and no more than 3 pages. The following topics should be
addressed in your report. Note that you do not necessarily need to address each aspect in the following
points, and you should feel free to include another aspect if not included below. Please include your group
name as well as the group members.
What is the investment style of your group for your investment portfolio? Will it be geared more
towards growth or income or a mixture? Would you classify your style as aggressive or conservative?
What strategy are you going to employ for your second portfolio?
What criteria will you use for selecting securities? Are you going to use an asset allocation scheme
(i.e. allocate across different equity classes)? If so, will your percentages remain fixed or will they
vary based on perceived under/over valuations? Will you only select securities which conform to
certain fundamental specifications? For instance, only firms with P/E ratios below 10 or only
companies with less than 20% leverage. Are you selecting securities based on some economy-wide
strategy? For example, are you only going to buy gold mining or oil stocks? Will you only buy firms
which have done well in the past? Is your group going to rely on charts to determine which securities
to buy? Will you base your decisions on news reports? For example, are you going to select firms
which are likely to be taken over? How will you decide which firms are likely targets? Will you use
the financial statements to calculate ratios and perform other fundamental analysis?
In your investment portfolio, should you re-evaluate your portfolio if a security no longer meets your
specified criteria? In your speculative portfolio, what trading rules will you use? For instance, short
sell any stock / option that rises by 7% or buy a stock / option which has abnormally high volume for
two consecutive days. How frequently will you revise your portfolios? Daily, weekly, randomly?
What risks will your portfolios face? Are there ways to lower the risks? What macro-economic
factors may impact your portfolio returns? Given the risks, who should invest in your portfolio? For
example, are your portfolios a good investment for conservative investors who want high income with
low risk?
What is the appropriate benchmark against which your investment portfolio’s performance should
be measured? For instance, if your portfolio is heavily weighted in technology stocks, should you use
the Nasdaq composite index or the S&P 500? If you are only investing in small companies, is the
Dow Jones Industrials the right index to be measured against? You want to use a benchmark that is
similar to your portfolio so that your performance can be accurately analyzed.
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FIN 623 – Seminar in Investments
Final Report
Due: Last day of quarter (Thurs)
The final report should provide a comprehensive examination of your portfolio’s composition and
performance over the quarter. The report should be double-spaced and no more than 10 pages, not
including graphs, figures, etc. The majority of the following analysis only concerns the investment
portfolio.
For purposes of your report, you only need to include performance through the 9th week of the course.
Each report will include a qualitative and quantitative section. Each report should include the following:
Describe your two portfolios and how they are consistent with the stated strategy from the initial
report. If you have deviated from your original strategy, explain why. What happened? Did you
simply deviate with a single security or did you completely change your investment strategy. If you
changed your strategy, why did you do so?
Calculate the holding period return (ignoring dividends) from the start of the simulation to the end of
the simulation of your two portfolios. For your investment portfolio, calculate the benchmark you
selected as appropriate. Using only returns, did you beat the benchmark that you selected? Did your
speculative portfolio beat your investment portfolio?
For all of the quantitative calculations that you will perform (see below), include the relevant
information in the write-up: What are the implications of the numbers that you calculate? Interpret
your calculations and explain their significance. (example: what were the alpha and beta of your
portfolio and what can we determine about the portfolio’s risk and return).
Describe your most successful investment (note: this may not necessarily be the asset with the greatest
return) in each portfolio. What mistakes did your team make? If you had the chance to start the
simulation over, would you choose the same strategy or something different? Why or why not? What
was the one thing that you learned from this simulation that stands out above everything else? What
do you think reason is for why your speculative portfolio under / overperformed your investment
portfolio?
Required Calculations (only for your investment portfolio!)
Calculate daily holding period returns for your portfolio. You may ignore any dividends that were
paid in this calculation. Calculate the average return, the variance, and the standard deviation of your
portfolio using the daily returns. Use the day that your group registered as the first day.
Calculate the daily holding period returns on the index you are going to compare your portfolio to (e.g.
S&P500 or another market index). Calculate the average return, variance, and standard deviation of
the index returns. You can download daily values of the S&P500 (and many other indexes) at
http://finance.yahoo.com/m1?u (click on the ticker, click on “historical prices” on the left side of the
screen, and then enter in the time period you want values for.)
Calculate the covariance of the excess returns on your portfolio and the excess returns on the index.
Use the appropriate daily risk free rate from the simulation. Calculate the correlation coefficient.
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Calculate the alpha and the beta of your portfolio. You may use linear regression to do this. What
percentage of the variance of your portfolio is explained by systematic risk? What was the level of
systematic risk of your portfolio. What was the level of firm-specific risk in the portfolio?
On a scatter plot, graph the daily excess portfolio returns versus the excess index returns (this is the
graph that we examined when we talked about the Security Characteristic Line). Plot the SCL through
the points.
Calculate the Sharpe, Treynor, and Jensen, Information Ratio, and M2 measures for your portfolio and
for the index. Compare them and interpret the results. How skilled were you at timing the market?
Compare your portfolio to my portfolio, and explain why you think you out- (or under-) performed it.
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