SYLLABUS FOR F420
EQUITY & FIXED INCOME INVESTMENTS
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: firstname.lastname@example.org
1. COURSE DESCRIPTION
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
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.
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 (www.stocktrak.com) website you’ll use
for the Portfolio project also list several fine investment websites.
3. COURSE OUTLINE
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
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:
(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
(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
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)
(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
(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
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
1. Mid-Term Quiz.................................... 300 points
2. Final Exam (cumulative)……….......... 500 points
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.
7. F420 POLICIES
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.