FIN 594, Applied Portfolio Management


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FIN 594, Applied Portfolio Management

  1. 1. University of Illinois at Chicago The Liautaud Graduate School of Business Department of Finance Spring 2007 FIN 594, Applied Portfolio Management (4 credit hours; course call number: 23504) Class Schedule: Monday: 2:30 pm – 5:30 pm, (Location: SEL 2249F) Course Website: Instructor: Wendy Ku Office: 2331 UH Office hours: Monday: 2:00-2:30pm & 5:30-6:00pm (SEL 2249F), or by appointment Office telephone: (312) 413-3049 E-mail: Required materials: 1. Frank J. Fabozzi (editor), Handbook of Portfolio Management [HPM], 2001, John Wiley & Sons 2. Stock-Trak Online Trading Simulator access, 2006 References: 1. Tim Koller, Marc Goedhart, and David Wessels, Valuation: Measuring and Managing The Value of Companies, 4th edition (2005), John Wiley & Sons 2. Hersh Shefrin, Beyond Greed and Fear: Understanding Behavioral Finance and the Psychology of Investing, 2002, Oxford University School Press 3. Frank K. Reilly and Keith C. Brown [RB], Investment Analysis and Portfolio Management, 8th edition (2006), South-Western 4. T. Daniel Coggin, Frank J. Fabozzi (editors), Handbook of Equity Style Management, 2003, John Wiley & Sons 5. Z. Bodie, A. Kane, and A. Marcus [BKM], Investments, McGraw-Hill/Irwin 7th or 6th edition (2005). 6. Peter L. Bernstein and Aswath Damodaran, 1999, Investment Management, John Wiley & Sons, Inc. 7. Financial Analyst Journal [FAJ], CFA Institute 8. The Journal of Portfolio Management [JPM], Euromoney Institutional Investor PLC 9. The Journal of Investing [JOI], Euromoney Institutional Investor PLC Course Description Applied Portfolio Management (FIN 594, Special Topics in Finance) is an advanced and elective course for Finance majors and recommended for students who want to pursue careers in asset management, investment banking, or the financial planning industry. This course blends portfolio theory with the type of practical issues that one will come across in a career as a professional investment manager. Topics include identifying investor objectives and constraints, recognizing risk and return characteristics of investment vehicles, developing strategic asset allocations among equity, fixed-income and risk-free assets, utilizing derivative securities to manage portfolio risk and, if possible, enhance portfolio returns, and evaluating portfolio and manager performance relative to investment objectives and appropriate benchmarks. Investment tools, such as economic indicators and regression analysis will be introduced in labs. Guest speakers will be invited to share their professional asset management experience with the students. Additionally, students will have a unique opportunity to apply theories in a real-time, competitive simulation to learn equity trading and portfolio management techniques through a major class project named “Investment Proposal for UIC MBA Student-Managed BRIC Equity Fund.” Students will learn to develop an investment policy statement for the fund, utilize a top-down approach to construct the portfolio, select individual stocks, formulate portfolio rebalancing strategies, and finally, present and defend the proposal and investment decisions to the fund advisory board. 1
  2. 2. Prerequisites FIN 510 (Investments) is a strict prerequisite. Good skills in finance, accounting, economics, and statistics are required. Students should understand the concepts of time value of money, discount rate, risk premium, expected return and risk, variance and covariance, prior to taking FIN 594 Applied Portfolio Management. If you are uncomfortable with the topics in the take-home quiz #1, you may be unprepared to take this course. In addition, students should be familiar with spreadsheet software (e.g. Excel) and using the Internet interface (e.g. e-mail, Blackboard, ABI_INFORM) as research and communication tools. Learning Outcomes After completing this course and the required team project, you should be able to perform the following tasks: • Write an Investment Policy Statement (IPS) and present the investment proposal to clients • Make strategic asset allocation decisions, including selection of investment asset types, sectors, industries, and individual securities • Construct a portfolio and formulate appropriate investment strategies, including selection of passive indexing/active management strategies, top-down/bottom-up portfolio construction approaches, style investing, and risk management strategies • Evaluate and monitor portfolio performance with qualitative and quantitative methods Additionally, you should gain considerable research and communication skills through the course project experience. A well-written investment proposal and fund performance report can serve as a good writing sample when you look for jobs in the financial industry. Successful students will find the experience valuable and beneficial to their job interviews and investment career. Class Expectations FIN 594 is a very time consuming course. In addition to learning new course material, students are required to complete an intensive course project, which will be evaluated by investment professionals. Most of the research work needs to be done outside of class on a daily (or at least, weekly) basis. Students need to keep abreast of capital market conditions, do intensive research on countries, industries, and companies, and frequently communicate with classmates regarding investment recommendation updates. To be successful, this process requires active participation and commitments from everyone. However, students must also manage their time effectively to balance FIN 594 and other classes. Course Grade Homework: 20% Quizzes #1-3(*): 20% Course project (**): 45% Participation(***): 15% 100% (*) : Quiz #1 grade will be dropped if quiz #2 or #3 grade is higher. (**) : Course project “Investment Proposal for UIC MBA Student-Managed BRIC Equity Fund” includes a few written reports (30%), and the final presentation (15%). (***): Participation includes class attendance and discussion. I reserve the right to adjust your final grade if you miss classes without explanations or if you make good comments in class. 2
  3. 3. Homework: There will be a few short problem sets, which will be given at the end of each lecture. The homework is intended to ensure that students review course material in a timely manner since each week’s material builds upon what students have already learned. Students must type the answers and submit them on time. The lowest homework grade will be dropped. Quizzes: There will be three quizzes. The purpose of these tests is to evaluate how well students comprehend the knowledge obtained in class and through self-guided study. Quiz #1 covers selective topics that students learned in FIN 510 Investments. It is intended to refresh students’ memory on relevant topics that serve as foundations of FIN 594. An oral exam Quiz #2 covers those introduced during 1/22-3/5. A take-home Quiz #3 covers those introduced during 1/22-4/30. Cheating or plagiarism will NOT be tolerated. Any student caught cheating or plagiarizing will receive zero credit and may face further disciplinary action. Course project: Students will be assigned to teams at the beginning of the semester by the instructor, taking into consideration each student’s background. Any voluntary change in team members should be made and the instructor should be informed no later than the third week of the semester (1/29/2007). Team members will work together as a group of portfolio managers specializing in a particular industry sector and/or investment region. The grade on the project will be based on two parts: (1) written reports and (2) final investment presentation. The instructor will provide detailed instructions and required components on each of the parts. Students are encouraged to utilize various research resources, such as the Wall Street Journal, Financial Times,,,,, Thomson Investext Plus database, Mergent Online database, WRDS database, Hoover’s Online database, LexisNexis database, Standard and Poor’s Industry Surveys and Stock Reports (NetAdvantage), etc. The instructor will announce a schedule of written report deadlines. Late submissions will significantly affect the course grade. Class attendance and participation: Students are required to attend class, arrive on time, and actively participate. Attendance is mandatory as the course material is challenging and some may not be covered by the required textbook. If you miss more than 3 lectures for the semester, the best grade to receive for FIN 594 will be a B. If you must miss a class, please send an e-mail to me before the class and explain the reason. Students are strongly encouraged to actively participate in class discussion and ask questions. Communicating ideas is an important part of a portfolio manager’s job, and debating among peers can often foster a more conducive learning environment. Extra credit: Students who wish to earn extra credit towards the final grade may review one article published in Financial Analyst Journal, Journal of Portfolio Management, or Journal of Investing in 800-1,000 words. These journals can be found online though UIC Library E-Journals List. The selection of the article and the quality of the write-up will influence the grade. Students are advised to consult the instructor before selecting articles. 3
  4. 4. Two Week Drop Rule All courses in the College of Business Administration are subject to the “two week drop” rule. After two weeks a student may drop a course only by petition, and such petitions are approved only in extenuating circumstances. (Tentative) Course Outline and Reading Assignments Note: 1. If no chapter is referenced, students are only responsible for the material in the lecture notes. Please keep in mind that other reading material such as published research articles will also be assigned occasionally on an ad hoc basis. 2. We are still working on the schedule of guest visits. Guest speaker(s) will share their professional money management experience with the class. Schedule changes will be announced on the Blackboard course website. Week Date Lecture Topics Readings 1 1/15 Martin Luther King, Jr. Day; NO CLASS 2 1/22 Introduction to Portfolio Mgt.; Review on Risk and Return Calc. Handouts Introduction to Research Databases; Intro to BRIC Equity Funds (Take-home Quiz #1 DUE) 3 1/29 Portfolio Management Process and Investment Policy Statement Handouts Passive, Semi-Active, and Active Management Techniques [HPM] Ch.1 Asset Allocation Concepts; Global Benchmarks and ETFs [HPM] Ch.4 4 2/05 Efficient Capital Markets, Behavioral Finance, Technical Analysis Handouts Global Industry Analysis [HPM] Ch.12 5 2/12 Guest Lecture (John Wightkin, Principal, QSG) Financial Ratio and Basic DCF Analyses [HPM] Ch.12 Introduction to Quantitative Equity Research Methods Handouts 6 2/19 Global Economic Analysis; Currency Risk Analysis [HPM] Ch.5 Sector Rotation Concepts Handouts 7 2/26 Emerging Market Investments and Issues [HPM] Ch.16 Portfolio Risk Management and Risk Budgeting Techniques Handouts 8 3/05 Equity Style Management [HPM] Ch.14 Portfolio Performance Evaluation; Attribution Analysis [HPM] Ch.10 & 32 9 3/12 Guest Lecture (Laura Vossman, Director of Investments, UIF) Quiz #2 (Part A) 10 3/19 Guest Lecture (Larry Cao, Morningstar) Quiz #2 (Part B) 11 3/26 Spring Break; NO CLASS 12 4/02 SAS Programming: Basic Commands and Operations (Guest Handouts Lecture by Joe Schreiner, UIC ACCC) 13 4/09 Trading and Portfolio Rebalancing [HPM] Ch.17 14 4/16 Course Review 15 4/23 Rehearsal for the Proposal Presentation 16 4/30 4/30/2007, Monday, 3:30 pm-5:00 pm, (Location: TBA) Proposal Presentation to the Investment Committee 17 5/7 (Take-home Quiz #3 DUE) 4
  5. 5. Honor Code This course and its associated coursework are being administered under the policies of the University of Illinois at Chicago (UIC) College of Business Administration Honor Code. All students are expected to respect and uphold this code. Honor Code for the College of Business Administration As an academic community the College of Business Administration at the University of Illinois at Chicago is committed to providing an environment in which teaching, learning, research, and scholarship can flourish and in which all endeavors are guided by academic and professional integrity. All members of the college community – students, faculty, staff, and administrators – share the responsibility of insuring that high standards of integrity are upheld so that such an environment exists. In pursuit of these high ideas and standards of academic life, as a student I hereby commit myself to respect and uphold the University of Illinois at Chicago (UIC) College of Business Administration Honor Code during my entire matriculation at UIC. I agree to maintain the highest moral and ethical standards in all academic and business endeavors and to conduct myself honorably as a responsible member of the college academic community. This includes the following: • Not to seek unfair advantage over other students, including, but not limited to giving or receiving unauthorized aid during completion of academic requirements; • To represent fact and self truthfully at all times; • To respect the property and personal rights of all members of the academic community. 5