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									                                    SYLLABUS FOR F420
                           EQUITY & FIXED INCOME INVESTMENTS
                                       SUMMER 2007

Instructor:                           Yan (Ann) Zhang

Office:                               BU307, Cubicle 38

Office Hours:                         Mon &Wed 1:00-1:30pm, by appointment

Class Time:                           Mon-Fri 11:45am-1:00pm; from May 8th to June 14th, 2007

Class Room:                            BU 423

E-mail Address:             


F420 builds on the investment and analytical concepts and tools taught in F303, F305 and some of your
accounting courses. We will focus on the valuation of equity and fixed income securities, the
formation of a portfolio, and the allocation between the asset classes. The course is designed to mimic
the activities and decisions made by portfolio managers and analysts in a diversified mutual fund; that is,
we will focus on the security selection decision, the weighting of these securities into a portfolio, the
allocation between stocks and bonds, and the management and analysis of the risks of these positions. In
addition, you will act as a typical Wall Street (investment) security analyst and use various analytical tools
to completely analyze and report out on company and its valuation.

2. TEXTBOOK (required)

Investment Analysis: Portfolio Management, 8e by Frank K. Reilly and Keith C. Brown

Additional Readings

   Various articles and investment literature will be posted to Oncourse to supplement the course topics.
    These are required readings and will be key learning tools throughout the course.
   Regular reading of WSJ, Barron’s, Fortune, and The Economist, and regular watching of CNBC,
    FNN or MSNBC is strongly encouraged in order to get the full benefit of the class. Classroom time
    will be allocated to discuss how the course material applies to current world-wide events.

Other Resources

Your book outlines many websites at the end of each chapter that are useful in looking up financial
information. In addition, the IU online libraries are an excellent source of financial databases and
publications. For example, INVESTEXT Plus provides investment-related reports on various
companies and industries worldwide. Finally, the StockTrak ( website you’ll use
for the Portfolio project also list several fine investment websites.
                                                                                                      P. 1/6

The flow of the course is as follows. First, we will skim quickly through Reilley and Brown
(henceforth, RB) Ch 1, 4, 5, 6, 7, 8, 9, 10, and 11 (you are expected to master these materials by reading
on your own).

Our focus will be on the second part of the course, which consists of four sections:

 (i)    Asset allocation decision (sometimes referred to as benchmark selection): Here, you will learn
        how to
           a. Establish appropriate investment goals for each different investor.
           b. Translate your goals as well as your other needs and constraints into a policy statement.
           c. Allocate wealth across asset classes, given your knowledge about their risk and return
               characteristics, in order to achieve your goals as stated in the policy statement.
        This section covers RB Ch 2 and 3.

(ii)    Analysis of common stocks: My approach to learning in this part will be top-down, starting with
        country or industry analysis and ending with company analysis and stock valuation. Although
        we will spend most of our time on the fundamental analysis, technical analysis will be at least
        tangentially covered (so that you know what it is and when it is going to be useful). This section
        covers RB Ch 12, 13, 14, and 15. The portfolio management strategies part will be covered later
        in the fourth section.

(iii)   Analysis of bonds: You are supposed to learn the fundamentals and develop a general
        understanding of the bond markets. Our focus will be on Treasury (government) bonds although
        corporate and municipal bonds will also be covered. This section covers RB Ch 17, 18 and 19.
        Again, the portfolio management strategies part will be deferred to the next section.

(iv)    Active management and performance evaluation: This section will give you most of the
        fundamental skills needed to be a portfolio manager and/or a risk manager. We will first contrast
        active management with passive management (or indexing). We will then use the skills
        developed in the previous sections to implement an indexing strategy as well as actively manage
        a stock or bond portfolio. Here, total risk (as measured by Value-at-Risk) and tracking risk (as
        measured by tracking error) will be compared and contrasted. We will explore in great detail
        how to measure performance, in both the absolute sense and the relative sense. Finally, we will
        learn some techniques that can be used to explain where the returns and risks come from. This
        section covers RB Ch 16, 19, 24, and 25.

In the last part of the course, we will put everything together in an attempt to understand how the overall
investment process works and what skills and techniques are critical in each step of the process.

You should use the following tentative schedule in preparing for class:

                                                                                                     P. 2/6
(Class) Date         TOPICS                                  READINGS                                   Assignments Due
                                                             Text (RB); Oncourse (O)
(1-3) May 8, 9, 10      Introduction: The investment         RB: (Ch1, 4)                             List   of   team
                         background & Developments in         RB: (Ch 5, 6, 7)                         members’ names
                         Investment Theory                    RB: (Ch 8, 9)                            due (May 9)
                        Introduction: Investment theory
                        F303/305 Review (on your
(4-5) May 11,14         Introduction:           Valuation      RB: Ch 10, 11, part of 12              HW1      (randomly
                         principles and practices (the                                                  collected on or
                         analysis of financial statements,                                              after May 14)
                         security      valuation,     and
                         macroeconomic analysis)
(6) May 15              Asset allocation decision              RB: Ch 2,3
(7-8) May 16, 17        Group presentations: Asset                                                     2-page investment
                         allocation     and    investment                                               guidelines   (due
                         guidelines (introduction part)                                                 May 16)
(9) May 18              Common        stocks:    Country       RB: Ch 12
(10) May 21             Common        stocks:    Industry      RB: Ch 13
(11-12) May 22, 23      Common stocks: Company                 RB: Ch 14                              HW2      (randomly
                         analysis and stock valuation           HLG Research, Automotive               collected on or
                                                                 sector (O)                             after May 22)
(13) May 24             Technical analysis                     RB: Ch 15
                                                                Damodaran, An introduction to
                                                                 valuation (O)
                                                                CitiGroup, IBM (O)
(14) May 25             Bonds: Basic terms and jargons         RB: Ch 17                              5-page     company
                                                                                                        analysis (May 25)
May 28                                                                                                Memorial Day, No
(15) May 29             Mid-term exam                          All the materials covered to date
(16-17) May 30,31       Bonds: Bond mathematics (for           RB: Ch 18
                         valuation and risk analysis)           Place, Basic bond analysis (O)
(18) June 1             The asset management industry          RB: Ch 16 (p. 607-608), 24 (p.         HW3(randomly
                        Active management Vs Passive            996-1000)                              collected on or
                         management                             Timbers and Wellington, The            after June 1)
                                                                 case for active or passive
                                                                 investment management (O)
(19) June 4             Allocating between stocks and          RB: Ch 16 (p. 634-640), 24 (p.
                         bonds                                   1031-1034), 12 (p. 450-452)
                                                                Armstrong, The asset allocation
                                                                Bauer and Dahlquist, Market
                                                                 timing and roulette wheels (O)
                                                                Perold and Sharpe, Dynamic
                                                                 strategies for asset allocations (O)
(20) June 5             Equity portfolio management            RB: Ch 16
(21) June 6             Bond portfolio management              RB: Ch 19
(22-23) June 7,8        Portfolio         performance          RB: Ch 25                              HW4       (randomly
                         evaluation                             Goodwin, The information ratio         collected on or
                                                                 (O)                                    after June 7)
                                                                                                                     P. 3/6
 (Class) Date         TOPICS                               READINGS                              Assignments Due
                                                           Text (RB); Oncourse (O)
                                                            Shein, Is it more than just
                                                               performance: tracking error and
                                                               the information ratio (O)
                                                            Clarke, Silva, and Thorley,
                                                               Performance attribution and the
                                                               fundamental law (O)
                                                            Singer and Karnosky, The
                                                               general framework for global
                                                               investment management and
                                                               performance attribution (O)
 (24-25) June11, 12      Group           presentations:                                         5-page      strategy
                          Investment strategies and risk                                         proposal (June 11)
 (26) June 13            Recap of key takeaways from         All covered materials
                          the course
 (27) June14             Final exam                          All covered materials

In addition to the above assigned readings, my PowerPoint slides for each lecture shall also be posted on


The following three small projects are to be completed by a team of four people. You are required to
submit the names of all your team members by the end of the second class (May 9). The same team
will work together on all three projects.

4.1 Investment Policy Statement (IPS)

You will be given your client’s profile, including investment goals, future income, liquidity
requirements, and other constraints and limitations. You will act as a planner, helping your client draft
an IPS. Our focus is not on the legal content and format of the IPS, but rather on the financial parts of
the IPS. That is you should state clearly the investment objectives, the target asset allocation, allowable
asset classes, and how much the manager can deviate from the target allocation. In addition, you should
provide estimates of expected return and risk (i.e. standard deviation of returns), and some scenario
analysis in order to demonstrate your proposed allocation will meet your client’s objectives. Finally,
depending on your client’s circumstances, you may also need to perform your analysis both in nominal
terms and in real terms.

You will have 10 minutes to present your work and convince me and your fellow classmates (as your
clients) to approve your IPS (on either May 16 or May 17). You will also need to submit a 2-page
written IPS with very brief supporting figures and reasoning at the beginning of the class on May 16.
Your grade will depend on both your presentation and report, although more emphasis will be given to
the presentation.

                                                                                                               P. 4/6
4.2 Company Analysis Report

In this project, you will select a company, analyze the market and industry conditions, fully analyze the
company’s financials, complete a valuation of the company using several valuation models/techniques,
and then compile a written research report similar to what is done by Wall Street (and the like) analysts.
The report shall be no longer than 5 pages (including graphs and tables).

The project will require you to stay up-to-date on news that affects the company and its industry,
including following other analysts comments and tracking earnings and news announcements from the
company. Plagiarism will not be accepted and will be severely punished. The report must reflect the
most up-to-date news and information as of the submission date (May 25).

4.3 Investment Strategy Proposal

In this project, you will act as an active fund manager. Your job is to propose a few active bets that will
yield a positive return over a given investment benchmark (under a set of constraints, given in terms of
allowable asset classes, limits on deviations from the benchmark, and/or maximum losses). You must
consider the most current information on both the macro levels (country and industry) and the micro
levels (each individual stock). Specific figures, including expected returns and ex-ante tracking errors,
are expected. Proficiency in spreadsheet modeling will be very helpful here.

You will have 10 minutes to present your strategies, and convince me and your fellow classmates (as the
investment committee) to approve them (on either June 11 or 12). You will also need to submit a 5-
page strategy proposal with very brief supporting tables, figures, and qualitative reasoning at the
beginning of the class on June 11. Your grade will depend on both your presentation and report,
although again more emphasis will be given to the presentation.


The list of questions will be posted on ONCOURSE 2-3 days before the homework is due. Most (but
not all) of the questions will come from Reilly & Brown text chapters we cover. We will cover some
problems in class (but not all). However, I will post the answer keys to ALL chapter problems and other
homework questions throughout the course. Homework is to be done legibly either by hand or via
Word/Excel, suitable for submission. I will collect on a RANDOM basis on the assigned due dates. I
will not grade homework, but look for honest efforts in attempting the questions/problems. This will
constitute half of your participation/HW grade.


   Projects & Spreadsheet Exercises (45%):
          1. Investment Policy Statement…………                   300 points
          2. Company Analysis……………………                          200 points
          3. Strategy Proposal……………………..                       300 points

   Exams (35%):
        1. Mid-Term Quiz....................................   300 points
        2. Final Exam (cumulative)………..........                500 points
                                                                                                     P. 5/6
  Homework & Participation (20%):                      400 points

  Total                                                2000 points

Grade Policy and Reporting

Grading is done on a relative (not absolute) basis. Standard Finance department policy is that the
average GPA will fall between 2.70 and 3.0. The class curve is based on total points for the course. I
will post % scores for exams/projects to ONCOURSE.


1. F420 operates under a “closed computer” policy.
2. I expect students to be ready for class at the scheduled time. Class will start on time.
3. Class attendance is strongly encouraged. If you need to miss a class, you are expected to notify me
   in advance (if possible). In any case, class assignments must be turned in to me BEFORE class (via
   email or in my office) if you are to receive credit.
4. Bring a calculator to every class session. It will be useful when we do live exercises.
5. Homework will be collected RANDOMLY and count toward your participation/HW grade.
6. Make-up exams will only be given for family or medical emergencies. Prior notice and hard
   evidence are required.
7. Projects are due on the due date. No project will be accepted late.
8. I will try to stick to the course outline schedule, however adjustments may be made.

                                                                                                P. 6/6

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