capital markets (finc 950) syllabus - kellogg school of ... · this class will focus on answering...
TRANSCRIPT
Syllabus – 2
Questions this Class Will Answer
This class will focus on answering this main question:
What is the best (optimal) investment portfolio for you to hold?
There are a lot of sub-questions to this main question that we will answer as we go through the class
Here are just a few examples:
Which securities should you hold, e.g. should you hold commodities in your portfolio?
How do you decide how to divide your investment dollars across different securities?
How do you know if a security is cheap to indicate you should buy it or expensive to indicate you should sell it?
Is this process different for different securities, e.g. stocks vs. bonds?
How can you manage the risk of your portfolio with options?
Syllabus – 3
Perspective of the Capital Markets Class
Critically, this class will answer these questions from a specific perspective that is most likely unfamiliar to most of you, but is how many portfolio managers invest today
Most of you are probably familiar with fundamental analysis (discounted cash flow analysis) and the concept of stock picking (a form of active investment management)
We will not learn fundamental analysis in this class, this is taught in Securities Analysis, FINC 463). We will, however, learn how to trade based on the information garnered from fundamental analysis
Our approach will use quantitative analysis which uses mathematical and statistical techniques to determine portfolio strategies
Please be aware that the approach we use includes a lot of regression analysis, which is essential to quantitative investing
Some of what we will study includes active investing; but, from a broad perspective that includes not just fundamental analysis, but also more quantitative approaches
Syllabus – 4
The prerequisites for this course are:
Knowledge of probability and statistics through multivariate regression
Fin I or Accelerated Corporate Finance (ACF)
Basic Excel (as used in Fin I) is necessary for some problems and cases we will do
When more advanced Excel concepts are needed, they will be taught as part of this class
Prerequisites
Syllabus – 5
Group Case Assignments
There are eight case assignments
Five of the case assignments are group assignments
At the end of the quarter, group members have the opportunity to evaluate one another
Syllabus – 6
You may recommend a group member(s) for a grade reduction from your group’s overall case grade
I will take the average grade reduction for a group member (across all group members) then apply this to their grade
For example, assume that your group’s overall case grade is 84%; if a group member receives an average reduction of 10%, then that group member would receive a 74% instead
You may not recommend that all of your group members receive a grade reduction
To submit a peer evaluation, simply email me the names of everyone in your group whom you would want to deduct points from and how much at the end of the quarter
Email me only if you want to downgrade a group member’s overall score
Peer Evaluation of Group Members
Syllabus – 7
Portfolio Simulations
We will conduct four portfolio simulations during the class, these are individual exercises
Except for the first simulation, the simulations involve analyzing your own portfolio. If you do not have an investment portfolio, you will learn how to create one in the first two weeks of the class
The portfolio simulations will use a trading platform developed at Wharton called OTIS. After classes start, see the announcement on Canvas on how to register for OTIS, it costs around $19.95
Note: You can only trade securities on OTIS when the actual markets in the US are open—so this excludes weekends and evenings
Furthermore, mutual funds and bonds only trade once a day at the end of trading hours
Because of this, you must complete your trades at least 18 hours before we discuss the simulation in class
Syllabus – 8
Assignments to Analyze Your Own Portfolio
The will be two (for some three) individual cases and three portfolio simulations to give you the opportunity to
1. Create a portfolio if you do not already have one (You will do this in the “Create Your Own Portfolio” case)
2. Give you the opportunity to analyze your current portfolio if you have one or the one you will create
As part of these exercises you need to provide me what US securities you are or will be investing in so that I can collect the necessary data for you
The tickers need to be listed out with one ticker per row
Instructions on how to find tickers is posted with the “Email Your Tickers to Prof Braun” assignment
Syllabus – 9
Quizzes
There will be seven online Canvas quizzes (one almost every week)
Each quiz will cover material we went over in the class the week before the quiz is due
The quizzes will be posted one-week before they are due (so that I know what material to quiz you on)
You can take each quiz as many times as you wish
Ideally until you get all the answers correct
In addition to the quizzes there are practice questions for each Module we study. These questions and their answers are posted on Canvas and are not graded
It is strongly recommended you do some of these practice questions in preparation for the exams
Syllabus – 10
The midterm and final exams are open-book and notes exams
You are allowed to use your laptop and any electronic or paper material you wish during the exam
You may not reach out to any person for help during the exam
Exams
Syllabus – 11
Investments, Zvi Bodie, Alex Kane, Alan Marcus, 10th Edition, McGraw Hill
Publishers textbook link
http://shop.mheducation.com/highered/product.M0077861671.html
From this link you will find different options to buy the textbook
Amazon textbook link
http://www.amazon.com/Investments-McGraw-Hill-Irwin-Finance-Insurance/dp/0077861671/ref=sr_1_2?s=books&ie=UTF8&qid=1414691041&sr=1-2
OPTIONAL Textbook
Syllabus – 12
A course pack with the required cases is available for purchase and is posted on Canvas under the “Study.Net” tab
This course pack includes three cases
The other cases we will use will be provided to you free via Canvas
There are also additional recommended readings for some Modules that are posted under the “Files” “Additional Readings” tab on Canvas by Module or case
Other Material
Syllabus – 13
I am committed to providing you with a learning experience of the highest quality
Since this is a new class, I need your help
If you need something to help you learn better, please let me know
Please provide me with feedback via email throughout the term so that I can fix any problems and improve the quality of the class on an ongoing basis
For example, typos are never any good, but if you find any, please post them on the Canvas discussion board and hopefully save your classmates any frustration that you may have had
Just let me know what you need, what you might find helpful, and I will do my best to provide it
My Commitment
I will be very happy to make changes and adjustments as necessary to make this class a success for you
Syllabus – 15
Realized returns vs. expected returns
Risk
Details on some financial instruments: Different types of bonds, different types of stocks
Interest rate risk (duration)
Credit risk
Taxes and returns
Primer on trading: Market orders and limit orders
Buy-side market participants and their holdings: Households, mutual funds, dealers, brokers, hedge funds and high frequency traders
Readings:
The Wolf Hunters of Wall Street
Topic 1: Introduction to Financial Markets
Syllabus – 16
Topic 1 Case
Exchange-Traded Funds at Vanguard
Vanguard Group management, led by CEO John Brennan, was considering whether to launch exchange-traded funds (ETFs) in early 2000. ETFs, first created in the early 1990s, combined aspects of traditional mutual funds and closed-end funds. Because ETFs were exclusively index-tracking products, Vanguard, the largest index mutual fund company, had some potential expertise in managing ETFs. However, entering this market would present also unique challenges for Vanguard. Vanguard had a philosophy espousing low-turnover investing, while ETFs enabled short-term trading. The company would also need to develop a distribution network for ETFs. Finally, since Vanguard's mutual fund investors owned the company, management considered whether existing shareholders would benefit from an ETF product launch
Learning objective:
To educate students about how exchange-traded funds (ETFs) work, their differences from other types of mutual funds, and the strategic issues for ETFs going forward
Syllabus – 17
Topic 1 Portfolio Simulation
In the first portfolio simulation students will create a portfolio of one stock exchange traded fund and one bond mutual fund
This will be a baseline portfolio that will be used as a performance benchmark for the other portfolios created during the quarter
Syllabus – 18
Quick review of Fin 1 or Accelerated Corporate Finance (ACF) material on portfolio theory
Introduction to portfolio theory for when you are considering investing in more than two assets
Minimum-variance frontier
Capital allocation line and the tangent portfolio
Selecting the optimal portfolio with a utility function
Long term investing: Strategic investing (rebalancing) and tactical investing
Effective of homeownership on investment portfolios
Topic 2: Advanced Modern Portfolio Theory
Syllabus – 19
Topic 2 Case 1
Choosing Mutual Funds for Retirement Accounts (A)
Focuses on an individual's decision to participate in her firm's retirement plan and how to invest her contributions. The (A) case focuses on which mutual funds the participant should invest in. Plan participants have a choice of 24 mutual funds with different investment strategies. Includes data from Morningstar on the composition and performance of the different funds and historical data. Uses Northwestern’s new 403(b) plan as its example
Learning objective:
To expose students to the concepts of Sharpe ratios and mutual fund/exchange-traded fund fees and their role in selecting investments
Subjects covered:
Investments; Mutual funds; Pension plans; Personal finance; Retirement savings; Mutual fund and exchange-trade fund fees; Sharpe ratios
Syllabus – 20
Topic 2 Case 2
Creating Your Own Portfolio
This case is for students who do not currently have an investment portfolio. The case instructs students in how to create a hypothetical portfolio that they will analyze during the quarter
Learning objective:
To expose students to the principals security selection
Subjects covered:
Asset allocation; Asset management; Portfolio management;
Syllabus – 21
Topic 2 Case 3
Optimizing Your Portfolio
This case has you take your current investment holdings and then optimize the portfolio to increase its return while minimizing its risk. For those students who do not have an investment portfolio, the will use the portfolio they create in the “Creating Your Own Portfolio”
Learning objective:
To expose students to the principals of portfolio theory
Subjects covered:
Asset allocation; Asset management; Portfolio management;
Case reading:
Vanguard’s Diversification Strategy
Syllabus – 22
Module 2 Portfolio Simulations
In two different trading simulations students will use their investment portfolios (including the portfolios created in the “Create Your Own Portfolio” case)
The first simulation has students buy their current portfolio
The second simulation has students buy their optimized portfolio from the “Optimizing Your Portfolio” case
Across the term students will compare the performance of these two simulations to each other and to the baseline stock and bond portfolio created in the Module 1 simulation
Syllabus – 23
Introduction to futures
Discussion of mutual funds that include futures
Review of option payoff diagrams from Fin I/ACF
Option portfolio strategies: Protective puts, covered calls, collars, straddles, etc.
Discussion of mutual funds that include options
Topic 2: Using Derivatives in Your Portfolio
Syllabus – 24
Topic 3 Simulation
In this simulation students will take either their initial investment portfolio or their optimized portfolio and add futures or options to the portfolio to enhance the return of the portfolio and/or manage risk the risk of the portfolio
This portfolio will be compared to the other portfolios created during the term
Syllabus – 25
Topic 4: Factor Models
Multifactor models
Fama-French three-factor model
Carhart four-factor model
Fama-French five-factor model
Three factor model for bonds
Readings:
Characteristics, Covariances, and Average Returns
Dissecting Anomalies with the Five-Factor Model
Explorations in Factors Explaining Money Market Returns
Luck versus Skill in the Cross-Section of Mutual Fund Returns
Syllabus – 26
Topic 4 Case
AQR’s Moment Funds (A)
AQR is a hedge fund based in Greenwich, Connecticut, that is considering offering a wholly new line of product to retail investors, namely the ability to invest in the price phenomenon known as momentum. There is a large body of empirical evidence supporting momentum across many different asset classes and countries. However, up until this point momentum was a strategy employed nearly exclusively by hedge funds, and thus not an investment strategy available to most individual investors. This case highlights the difficulties in implementing this "mutual funditizing" of a hedge fund product, along with the challenges that the open-end and regulatory features that a mutual fund pose to many successful strategies implemented in other contexts
Case readings:
Aspects of Investor Psychology: Beliefs, Preferences, and Biases Investment Advisors Should Know About
Fact, Fiction and Momentum Trading
Syllabus – 27
Performance evaluation with factor models
Indexing and how to create benchmark or factor portfolios
Investing based on forecasts of factors
Smart beta ETFs
What are they and the value added (if any) of investing in them
Topic 5: Applications of Factor Models
Syllabus – 28
Topic 5 Case
Smart Beta Exchange-Traded Funds and Factor Investing
iShares by Blackrock is considering launching an innovative investment management product in the rapidly evolving ETF space, a multifactor ETF. iShares is the world market leader in the overall ETF market, as well as the newer smart beta ETF market. To understand the motivation for this product they reviewed recent academic literature on what are relevant factors that drive investment returns and factor investing. iShares needed to determine if this new multifactor ETF had value added over the ETFs they already sold
Learning objective:
To examine the launching of an innovative factor-based smart beta ETF in the investment management industry
Subjects covered:
Competitive strategy; Corporate strategy; Financial instruments; Investment management; Investments; Smart beta exchange-traded funds
Syllabus – 29
Topic 6: Arbitrage and Active Trading
Law of one price
Law of no arbitrage
Arbitrage trading with stocks
Arbitrage trading with bonds
Active trading with the CAPM
Active trading with the arbitrage pricing theory (APT)
Syllabus – 30
Topic 6 Case
Deutsche Bank: Finding Relative Value Trades
Deutsche Bank's Fixed Income Research Group is looking for yield curve trades to pitch to clients as well as for their proprietary trading desk. The group has data on recent bond trades and a proprietary term structure model, which they can use to develop trading ideas
Learning objective:
To help students understand how the sales and trading function works within an investment bank. To have a qualitative discussion of the motivations and incentives of sell-side firms and the various functions within these firms as well as how these firms interact with clients. Also how to spot potential arbitrage opportunities along the yield curve
Subjects covered:
How bond trading desks work; Trading bonds against theoretical prices; Risks inherent in trading against theoretical prices (model risk)