Investment Management BusFin522 Course Overview and Investment Background
This course provides an overview of investment fields:
Financial instruments and how they are traded
Mean-variance analysis and portfolio theory
Efficient markets and market anomalies
Pricing of stocks, bonds, options, and futures
Course contents are comparable to BusFin722
Accounting 201 or 212; Econ 200 & 400; Statistics 133
If you haven’t taken these, you should plan to take them at the same time in this quarter, and let me know.
Basic concepts such as present values, future values, calculating returns, financial accounting statements, and basic statistics (means, variance, correlations, and random variables)
Textbook: Bodie, Kane, and Marcus, Essentials of Investments, 5th ed.
Lecture note available at http://fisher.osu.edu/ ~kho_1/522.html
Financial (or scientific) calculator
Recommend to read regularly the financial newspapers such as Wall Street Journal, Financial Times, etc.
Three exams (non-cumulative) 300 points (100 pts each)
Three quizzes 60 points (20 pts each)
Team project 60 points
Class participation/Attendance 15 points (1 pts each)
(Seating chart) 435 points
Grading will be close to curves, but may vary depending on the outcome of exam scores.
Will be given in class hours as scheduled.
Midterm exam 1: 1/26/05 (Wed) in class
Midterm exam 2: 2/16/05 (Wed) in class
Final exam: 3/14/05 (Mon) in class
No makeup exams except for serious cases.
You may work in groups on homework problems, but will not be collected for grade.
Part of the exams will be taken directly from or slightly modified from homework.
Form a group of 4~5 students
Your team members must be notified to the instructor by 3rd class..
The assignment will include a report, and a Power Point presentation.
Chapter 1 Investments - Background and Issues
What is an investment?
Giving up consumption today and putting money into assets that will bring greater wealth and consumption in the future
Compared to savings, investment involves higher risks, and thus,
one will want higher returns from investment
Where to Invest?
Real Assets: used to produce goods and services
(EX) Real estate, Auto plant, Cars, etc.
Financial Assets: claims on the income generated by real assets
(EX) Stocks, Bonds, Options, Futures, etc.
Balance sheet of U.S. households: Table 1.1
National wealth: Table 1.2
We will mostly talk about investments in financial assets
Fixed-income securities or bonds
Provides a stream of income (interest or/and principal) fixed or determined by a formula
Corporate bond, Treasury bond, Municipal bond, etc.
Fixed or Floating rate note
Money market securities: T-Bills, CDs, CPs, etc.
Stocks or Equity
Represents an ownership share of a company, and provides dividends and capital gains (or losses)
Value of equity is tied directly to the success of the firm, and thus, is riskier than investments in bonds
Common stocks vs. preferred stocks
Income streams are dependent on the value of underlying assets
Call options vs. put options
Financial Markets & Firm Financial markets facilitate allocation of risk of a firm, and help separate ownership and management of a firm. Real Assets NPV>0 Firm Firm value max, or, SH wealth max Financial Markets Risk-Return tradeoff Retained earnings (Reinvest) Capital Structure Decision: Raise equity or bond Capital Budgeting Decision: Invest the proceeds Dividends, Interests Corporate taxes Govern-ment Operating Cash Flows Cost of capital
Financial Market Participants
Firms are net borrowers, and raise capital (bond or equity) to finance investments in plant and equipment
Households are net savers, and purchase securities issued by firms
Government can be borrowers or lenders, depending on tax revenue and government expenditures
Banks take deposits and lend money to borrowers
Investment companies pool and manage funds for many investors
Investment banks specialize in selling (underwriting) securities to the public
Insurance companies, credit unions, mutual funds, pension funds, venture capital firms, etc.
Typical investors faces two steps of decisions:
Choice among broad asset classes
(Ex) stocks, bonds, real estate, commodities, etc.
This requires “economic analysis” (boom or bust) or “industry analysis”
Choice of particular securities within each asset class
(Ex) GM, IBM, etc.
This requires the valuation process of particular securities, so called, “security analysis”
Therefore, investors face the following problems:
Forecasting future returns (or cash flows)
Identifying sources of risk and measuring risk
Evaluating whether the expected return compensates for the risk
Principles of the markets
No-free-lunch rule (or no arbitrage rule)
Financial markets are competitive enough to rule out any profit opportunity from investing in obviously underpriced securities
Assets with higher expected returns have greater risk
Higher-risk assets should be priced lower to offer higher expected return than lower-risk assets
How to measure risk?
Market efficiency hypothesis
All relevant information is quickly and efficiently reflected in prices
In reality, however, we observe near-efficient markets where there may exist profit opportunities for diligent and creative investors
This provides an incentive for actively managing one’s investment portfolios
Active vs. Passive Management
Attempt to select undervalued securities and time the market
Adjust the portfolio weights according to a forecast of the market movements for next period
Shift between stocks, bonds, etc.
No attempt to select undervalued securities or time the market