Fin 422

Spring 2005

Instructor Information

Jim Mahar,

Contact Information

• Office Location: Murphy 231
• E-mail address: jmahar@sbu.edu
• Phone number: 375-2359
• AIM: FinanceProfessor
• Office Hours: T 1:30 to 3:30, Th 1:30 to 4:30 and by appt.   

Course Description

Portfolio Theory and Selection is a survey of recent theories of risk diversification and portfolio balance. The course begins with the study of differing attitudes towards risk among investors and the implications for asset selection. Alternative valuation methods are reviewed. The problems of forming efficient portfolios and of evaluating their performance as well as those of professionally managed ones are considered. The motivation and consequence of including options, futures, and swaps in portfolios will also be examined.

This course will expose you to recent and significant theoretical and empirical developments in investments and portfolio theory. The student is expected to construct efficient portfolios and to apply these concepts using spreadsheet or other computer technology.

Course Objectives

• Describe the model of the financial system
• Identify important market characteristics
• Correctly use various valuation techniques
• Have a working knowledge of various pricing models (CAPM, APT, FAMA FRENCH)
• Explain the implications of the Market Efficiency Hypothesis
• Develop a MVE portfolio
• Discuss intelligently the benefits of diversification
• Discuss intelligently the role of a fund trustee for various types of funds
• Discuss the recent corporate governance crises and be able to identify good and bad practices in the field and how this impacts money management
• Apply various portfolio evaluation techniques
• Hedge a portfolio from market wide risk factors
• Set up and manage a portfolio for various investor classes
• Understand the role of a portfolio trustee

Prerequisites

You have to have passed Finance 421

Class website: http://www.financeprofessor.com/fin422/fin422mainpage.html

The Web site is meant as a means of assistance to you and not as a replacement for text or coming to class. For some chapters there will be much online coverage, for others there will not be as much coverage. Remember this is not meant to replace your other means of learning

Office Hours: see above and by appointment. I will try to provide online office hours (AOL Instant messenger: FinanceProfessor)

Please see me or contact me if you have questions. Do so early before a problem becomes unmanageable

Required Texts and other Materials

1. Portfolio Construction, Management, & Protection, 3e by Robert Strong

2. Access to FinanceProfessor.com Newsletter and Blog

3. Clicker system

Supplemental Texts and Websites

Text Website: http://www.swlearning.com/finance/strong/portfolio3e/portfolio3e.html

Technology Requirements

• Proficiency in Excel, an internet browser, and ideally the use of a RSS reader
• A basic calculator is required for every class.

Evaluation Procedures

Students will be evaluated based on their performances on exams, quizzes, projects, and class projects.

• Exams will assess your comprehension of the covered topics as well as your ability to apply the concepts and theories to new and different situations. One exam will be given during the course of the semester as well as a comprehensive final exam. The dates for the exams are tentative. The date of the final is determined by the university calendar. Students who are absent from an exam without prior permission from the instructor will receive a “0” on that exam.

• Quizzes will be given in class more or less every class to assess your understanding of the material and to provide you with more timely feedback than is possible with exams. These quizzes will be in class and will be done with the e-instruction system. Failure to attend class the day of an in-class quiz will result in a zero for that quiz. There will be no make-up quizzes.

• Cases will be done as a group projects. Each group will have approximately 3 members. Students will form their own groups. Failure to hand in projects on time will result in a zero for that project.

Grades

• Class participation, attendance, Homework      15%
• Midterm Exam                                                                      20%
• Final Exam                                                                             30%
• Computer Project #1                                                            10%
• Stock Market "Game"                                                          15%
•             Index Project                                        10%

Grading Scale

Due to the difficulty of the class, I reserve the right to grade on a curve, however, in the absence of that eventuality, the schedule of grades will be as follows:

A 93 – 100%

A- 90-92.9%

B+ 88 – 89.9%

B 83 – 87.9%

B- 80-82.9%

Etc.

F Below 60

Description of Instructional Methodology

Early classes are largely lecture-based although students will have periodic opportunities to work through material in class, either alone or in collaboration with other students.

University Policies

Academic Honesty Policy at St. Bonaventure University:

I am committed to St. Bonaventure University’s academic environment for students, supporting and rewarding only the highest standards of ethical behavior. That said, academic dishonesty, in any form, will not be tolerated. Please consult the St. Bonaventure University Student Handbook for a list of unacceptable practices, penalties to be assigned and procedures to be followed in prosecuting cases of alleged academic dishonesty. Further, the St. Bonaventure University Undergraduate Catalog may be consulted for specific details on all academic policies at St. Bonaventure.

Simply put: don’t cheat. If you do and I catch you, you lose.

Students with Disabilities

Students with disabilities who believe that they may need accommodations in this class are encouraged to contact the Disability Support Services Office, Doyle Room 26, at 375-2065 as soon as possible to better ensure that such accommodations are implemented in a timely fashion. Documentation from this office is required before accommodations can be made.

Instructor Policies

Attendance

As you can see from the schedule, we will be investigating a new topic at nearly every class. It is critical that you come to class. With permission you can attend the other class if you have a conflict with your scheduled class time. Students who aren’t in class on a regular basis will not do well. Students are also expected to be on time for class and to be prepared.

Participation

Students are expected to actively participate in class by asking and answering questions. NOTE: attending class should not be confused with participation!

Preparation

Students are expected to have the reading assignment completed when they arrive at class. While some material is difficult and may need additional explanation, students should have a basic understanding of the concepts that are to be covered that day.

Courtesy

Students are expected to arrive on time and prepared for each class meeting and to refrain from behavior that distracts other students (answering cell phones, text messaging, etc.).

Collaboration

There will be occasions during this course when students will be given the opportunity to work collaboratively with one other student or in a larger group. Collaborative work allows students to learn from each other. Individual participation is key to the success of any collaboration.

Academic Integrity

DON’T CHEAT!!!

Exemplary academic integrity is expected and assumed. Violating this assumption to any degree is not tolerated and carries severe consequences. .

Course Outline—See CLASS WEBSITE

COURSE OUTLINE ADDITIONAL READINGS WILL BE ADDED AS THE COURSE PROGRESSES. This is a partial list! However, the time devoted to each section will be approximately correct.

Week 1 Review of Investments

Chapter 1 Concept of Investing

Chapter 2—Risk and Return

Chapter 3—The Market Place

Appendix: Statement of the Standards of Professional Conduct

Week 2

Setting portfolio Objectives--Chapter 4  Appendix Mutual Fund Evaluation

                Investment Policy-Chapter 5

If needed: Review of stocks and Bonds

Week 3

Chapter 6. Market Mechanics: Diversification.
Chapter 7 Why Diversification is good

Chapter 8 International Diversification

Week 4

Market Efficiency

Chapter 9 Capital Markets and Efficiency.

Behavioral Finance.

Week 6

Modern Portfolio Theory—Readings TBA

Chapter 10: Picking Stocks

Chapter 11: Stock Screening

Review of Valuation

Fundamental Vs Technical Analysis

EXCEL Assignment 1 due: Develop Efficient frontier for at least 5 asset classes

Week 6

Chapter 12 Bond Duration

Chapter 13 Selection

Week 7

Excel Tutorial if time Chapter 14: Real Assets

Thursday: TEST

Week 8

Chapter 15: revision of the Equity Portfolio

Chapter 16: Revision of the Fixed Income Portfolio

Week 9

Chapter 19: Performance evaluation

Week 10

Chapter 17: The Role of Derivative Assets.

Derivatives as investments

Appendix: Option Pricing

Week 11

Chapter 18 Option Overwriting

Financial Engineering

Derivatives as a hedge

Chapter 21: Principles of the Futures Markets

Chapter 22: benching the Equity Players

Week 12

Chapter 23: removing Interest rate risk

Chapter 24: Integrating Derivative Assets and Portfolio Management

Week 13

Chapter 25 Contemporary Issues in Portfolio Management

Week 14 So you are a trustee, Now what? Insurance etc.

Week 15

Catch up and review

Final When scheduled by the University—yes it is cumulative J