Working Draft subject to change without notice until
9/4/2009
Changes to syllabus after 9/5/2009 on web
page will be in green
BUS-732 Investment Analysis and Portfolio
Management
Instructor: Stephen P. Huffman, Ph.D, CFA, FRM
College of Business Administration
Investment Analysis and Portfolio Management covers both modern investment and portfolio theory and traditional approaches to investment selection and management. Modern theory includes the examination of asset pricing models and efficient market hypotheses. In addition to traditional approaches to stock and bond selection such as fundamental analysis and technical analysis, we will also explore the characteristics of mutual funds. Investment management strategies are developed for individuals and institutional investors. Current topics, such as options, futures, swaps and other financial derivatives, are also explored. The regular use of The Wall Street Journal and other investment information sources, such as those found on the internet, provide real time examples for classroom discussion and debate. The concepts and tools discussed during the class will be applied in a $1,000,000 the portfolio simulation, Stock-Trak. Stock-Trak uses real time prices and allows students to trade: stocks, bonds, mutual funds, exchanged traded funds, commodities, currencies, futures and options.
This course will emphasize the application of analytical methods to actual securities. Students who undertake this course are expected to have a fundamental background in basic finance. A basic background in accounting and investments is also expected. Course work will include projects and assignments which will require some familiarity with micro-computers and the use of spreadsheets. In addition, class members will need to acquire skills in using data bases to gather needed information for course projects and assignments. Every class member should have a financial calculator with time value of money functions (e.g. present values and yield-to-maturity) and know how to use it.
The instructional format will include lecture and small group discussion sessions. Topics from the text, class projects, portfolio simulation, and articles from financial press will form the basis for class discussions. Active participation in discussions is a course expectation and requirement.
COURSE PREQUISITES
Students are required to have practical or case study experience and working knowledge of the following:
Prerequisite: Graduate Standing, all Foundation courses and
BUS 731, Financial Management
Students will be able to:
The goal of this course is for each student to develop a thorough understanding of investments. The requirements for this course provide the opportunity to learn how to make rational investment decisions.
The specific objectives of this course are for each student to be able to:
(1) Text: Custom text that is a
combination of three texts the INVESTMENTS (CUSTOM) Author: REILLY ISBN: 9781111030148. Students can only get this textbook from the
UWOshkosh University Bookstore.
Each of the three texts has a companion web site. The texts and their web sites are:
Reilly, Frank
K. and Edgar A. Norton. Seventh Edition, Investments,
(South-Western a division of Thomson Learning, 2006). Text’s web
site for updated material is http://reilly.swcollege.com
Reilly, Frank K. and Keith C.
Brown, Ninth Edition Investment Analysis and Portfolio Management, (Cengage Learning, 2009).
Click
here for Text Web site:
Strong, Robert, Fourth edition of Practical Investment Management. (South-Western a division of Thomson Learning, 2007). Click here for Text Web site:
2. Required
subscriptions to Stock-Trak. Students can register for these simulations
using the following two links (one will cost $6.00 and the other one
will cost $26.96):
http://v2.stocktrak.com/public/members/registrationstudents.aspx?p=732fall09bh
http://v2.stocktrak.com/public/members/registrationstudents.aspx?p=732fall09
3. Academic and financial press articles distributed by e-mail, D2L, or in class. Although I am not requiring students to have a subscription to The Wall Street Journal, university students do receive a reduced price. You are eligible to subscribe at the special educational rate of $34.95 for 15 weeks. Go to the link http://subscribe.wsj.com/semester to submit your WSJ subscription.
4. Financial calculator that can do TVM calculations. If you do not have one, I recommend (not require) the Texas Instruments BAII Plus Professional. Below are links to a tutorial for the TI BA-II Professional calculator: http://education.ti.com/educationportal/sites/US/nonProductMulti/training_online_tutorials.html?bid=3, http://clem.mscd.edu/~mayest/calculators/baiiplus.htm, http://education.ti.com/guidebooks/financial/baiipluspro/BAIIPLUSPROGuidebook_EN.pdf
COURSE GRADE: The course grade will be determined as follows:
20% First Exam on October 21, 2009
30% Final Exam on December 16, 2009
20% Individual Term Paper (2 copies) due on December 2with
critique due December 9th (Paper Topic due on November 4)
20% Stock-Trak 10 weekly updates and The Final Report, which is due on December 9th
10% Contribution and Professional Evaluation
Other Important dates:
No Class on November 18th (additional D2L discussions and other online assignments)
Assignment of Letter Grades:
|
Allocation of
Letter Grades |
||||
|
A |
Scores of 93% or higher |
|
B− |
Scores from 80% to 82% |
|
A− |
Scores from 90% to 92% |
|
C+ |
Scores from 78% to
79% |
|
B+ |
Scores from 88% to 89% |
|
C |
Scores from 70% to
77% |
|
B |
Scores from 83% to 87% |
|
F |
Scores less than
65% |
DESCRIPTION
OF COURSE REQUIREMENTS
1. Exams.
Two class exams will be administered during the semester. Exams will
include short-answer and multiple choice questions. Some of the questions
or parts of questions will be quantitative.
2. Individual Term Paper Project. Students turn in two copies of term paper. One copy is read and evaluated by the instructor. The second copy is read and critiqued by other students in class (see Critique of Term Paper Assignment H). Students turn in their selected topic November 4, 2009. Students will chose ONE of the following paper topics:
a. Economic and Industry Analysis (outline is provided as a guide, I have an updated version in D2L),
b. Industry or Company Analysis (outline is provided as a guide, I have an updated version in D2L),
c. Create portfolio that is consistent
with a mutual fund objective and evaluate the portfolio’s performance over a month.
(ask instructor for details and use undergraduate project as a guide) Not a choice
this term because of Stock-Trak portfolio simulation.
d. Analysis of asset allocation from either an historical point of view or from an investing across the life-cycle point of view. The impact of investment location (taxable, traditional IRA, Roth IRA) can be investigated as well.
e. A detailed analysis of how portfolio managers use financial derivatives.
f. An detailed analysis of one of a finance
debacles/bubble/ etc. include potential causes, the impact, the government
reaction, and the long-term impact on markets (e.g., Barings Banks, State of
Wisconsin Pension Fund, Orange County, NASDAQ bid/ask spread, Solomon Brother Treasury
Auction Scandal, P&G's and Gibson Greeting Cards use of derivatives, Strong
Mutual Funds “late trading” and “front-running”, Enron, Tyco, WorldCom,
sub-prime market, Madoff Scandal, Bear-Stearns
Collapse of March 2008, Lehman Brothers Bankruptcy, Primary Reserve Money
Market Fund breaking the buck in 2008, Stimulus Bill (ARRA) of 2009, GM
Bankruptcy and cash for clunkers program, etc.)
g. .Investigate the impact
of the tax legislation on Investments. For example, what is the impact of the decision between buying stock
and bonds?
h. An analysis
of the impact of Sarbanes-Oxley on equity markets.
i.
The impact of the Lehman
Brothers bankruptcy announcement on September 15, 2008
j. An
Analysis of potential causes of the financial crisis of 2008.
j .Special instructor approved topic; e.g., review of
on-line financial data sources or internet data sources.
k. Empirical
Analysis of stock market data such as one of the following suggestion
topics:
Professor French’s web site of key market
data may be used (link: http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html
)
EMPRICAL RESEARCH PROJECT SUGGESTIONS (If you think you want to earn a Ph.D. in business someday these type project may be of interest to you):
As a general guideline: samples must contain at least 5 years of data and at least 50 firms in the final sample.
1. Analysis of returns for closed-end funds around their ex-dividend dates
2. Analysis of the premium and discounts for closed-end funds, do they revert toward their NAV
3. Do U.S. multinational companies provide more diversification benefits than domestic companies?
4. What is the relationship between stock returns and macro-economic variables?
5. Do dogs of the Dow strategies work in rebalancing months other than January?
6. Do ADRs provide more diversification benefits than domestic companies?
7. Are stock returns related to beta measures provided by Compustat, NASDAQ.com, etc.
8. What day of the month has the highest rate of return. Is there more risk on those days?
9. Are stock returns related to P/Es, P/B, dividend yield?
10. What are the financial (and/or non-financial) characteristics of firms that go bankrupt? Can we predict bankruptcy?
11. What are the financial characteristics of firms that are merged? Can we predict mergers?
12. What portion of beta is related to business risk?
13. What portion of beta is related to financial risk (use of debt)?
14. What is the exchange rate risk of Multinational Companies (MNC)?
15. Do firm's with high returns in one year continue to have high returns in the next year?
16. Do firms with high returns continue to have high returns in the next 2 years, 3 years, 5 years?
17. Do firms with high research and development costs produce high returns in the future?
18. Does firm size explain the differences in the total returns across firms?
19. Here's one that my grain trading friend always says, "Buy the rumor, sell the fact"
20. What is the relationship between value-at-risk measures and stock prices?
21. Can value-at-risk help corporations determine their optimal capital structures?
3. Stock-Trak Project requires weekly trades and a final report.
Two portfolios are tracked for each student. One portfolio is a buy and hold portfolio (passively managed portfolio) comprised of mainly Exchanged Traded Funds, ETFs, while the second portfolio is actively managed given weekly requirements. The portfolio has a total return objective (see Reilly-Norton Chapter 5, pp. 119-120. The weekly required transaction requirements may be modified during the term. The following allocations are based on the Investment Policy Statement of the UW Oshkosh Foundation.
Required weekly
Trades:
Week 1: Establishing initial positions in portfolios
Participants allocate $1,000,000 following the targets in the following table for both portfolios.
|
Asset Class |
Target |
Minimum |
Maximum |
|
U.S. Large Cap. Stocks |
40% |
30% |
75% |
|
U.S. Small Cap. Stocks |
10% |
0% |
25% |
|
Non-U.S. Stocks |
20% |
0% |
25% |
|
Fixed Income (e.g. Bonds) |
20% |
15% |
60% |
|
Real Estate |
5% |
0% |
10% |
|
Commodities, can include currencies |
3% |
0% |
10% |
|
Cash and equivalents |
2% |
0% |
15% |
Participants purchase broad index ETFs to construct a portfolio that is consistent with the target asset allocation with one exception. For the fixed income portion of the portfolio participants can use a combination of Treasury Bonds and fixed income ETFs (or Exchanged Traded Notes, ETNs). Exposure to commodities and real estate should be obtained using ETFs. Cash and equivalents is funds that remaining in Stock-Trak’s cash account (i.e. Cash Balance), which earns an annualized rate of 3%. In D2L in the contents section I have a spreadsheet, from AAII, that lists the various ETFs and a pdf file is more difficult to read (visually) but explains the basics and “What You Need to Know about ETFs”. Do not use ProShares or any other levered or short ETFs during the first week and especially for the passive portfolio. Trades must be submitted to Stock-Trak before 3 pm on Friday, September 18, 2009.
The passive (buy and hold) and active portfolios should be established with approximately the same holdings and weights (same trades and should have the same returns for the first week). The easiest way to achieve this is to submit your orders when the market is closed. (The passive portfolio should not need to be adjusted during the remainder of the term. The active portfolio’s performance will be compared to: the passive portfolio, the S&P 500, and to the other course participants (including the instructor).
Week 2: Stops, shorting and buying on margin
For the active portfolio establish at least 2 stop loss orders for the ETFs in the existing portfolio (e.g., set the stop price at about 10% or more below the current price). Students establish a margin account by borrowing funds (i.e., establishing margin loan by buying more securities than the cash that is available and/or by short selling). Specifically, buy additional shares of at least one ETF in the existing portfolio (purchased in the first week) and short sell a health care sector ETF. The sector ETF will reduce your exposure to health care. Target your portfolio value to be $1,500,000.
Week 3: Rebalancing and buying mutual funds
Replace (i.e., sell) 50% of your large cap ETFs by purchasing an index mutual fund and sell 50% of the small cap ETF by buying an actively managed small cap mutual fund(s). Students are required to rebalance the portfolio to be consistent with the asset allocation guidelines (within the minimum and maximums). That may mean selling or purchasing some additional securities.
Week 4: Adjusting sector weighting, leveraging and
buying short positions
Establish sector over-weighting and under-weightings using ETFs or mutual funds in your portfolio for at least two additional sectors. You can reverse the health care position. Increase the systematic risk of U.S. securities by selling regular broad index ETFs and purchasing levered ETFs like those from ProShares (e.g., Ultra S&P 500 with ticker of SSO). Reduce your exposure to international equities by purchasing an Ultra-Short ETF like those from ProShares (e.g., Ultrashort MSCI Japan with ticker of EWV).
Week 5: Futures
Transactions (be careful not to purchase a contract that is expiring in the
current month)
Based on your expectations for the equity market, increase (or decrease) the systematic risk of the portfolio by using index futures (by buying or selling equity index futures). If the portfolio does not have sufficient cash for the margin required by the futures contract then shares of ETFs will need to be sold. Use futures contracts to increase (or decrease) the percent of commodities and non-U.S. currencies in the active. Increase (or decrease) the interest rate risk of the active portfolio by using a bond index futures (U.S. Treasury Bond Futures).
Week 6: Basic Option Transactions (be careful not to purchase a contact that is expiring)
Purchase three individual stocks by selling the appropriate ETF(s). For each stock, purchase an out-of-the-money call. This is not an option strategy; however, I will want you to comment in your final report on the impact of buying a option compared to buying the individual stock (keep track of the returns on the stock (include dividends) and call options).
Purchase two additional individual stocks by selling the appropriate ETF(s). For each stock, purchase a put option to establish a protective put position.
Purchase two additional individual stocks by selling the appropriate ETF(s). For each stock, write a call option to establish a covered call position.
Purchase a put option for one of your ETFs to establish a protective put position (see D2L announcement note for option symbol).
Sell a call option for one of your ETFs to establish a covered call position. (see D2L announcement note for option symbol).
Week 7: Advanced Option Strategies
Establish a long straddle and a short straddle for two different stocks that are not currently in your portfolio. A long straddle requires the simultaneous purchase of a call and put for the same strike price, while a short straddle requires simultaneous writing of a call and put for the same strike price.
For an individual stock not currently owned, create a Bull (or Bear) Money Spread (go to trade options − spreads and buy a call and write a call, where the call purchased as a lower strike price than the call that is sold).
Purchase 3 individual stocks (that are new to your portfolio). For each of the 3 stocks create a collar. A collar is basically a protective put plus a short call option. Alternatively, a collar can be thought of as: a covered call with downside protection. For each of the new stocks, buy an out-of-the-money put and an out of the money call for the same expiration month. For example, immediately after purchasing a stock for $100 go to trade option and then to combo and buy a put option with a strike price of $95 and write a call option for $105.
Week 8: Commodities futures, Index options, and
individual stocks
Establish a position
in at least two commodities futures.
Use index options to create a protective put on at least 10% of the equity portion of the active portfolio.
Trade at least ten individual stocks, of which, at least two are from a foreign exchange and two additional securities are ADRS trading on a U.S. exchange; otherwise, there are no restrictions beyond Stock-Trak’s margin loans (trade as much as you want but save enough transactions to close derivative positions and short positions in Week 12)
Week 9: Currency Futures and Limit orders
Establish positions
in at least two foreign currency futures.
Trade at least ten individual stocks and establish at least one limit order to buy and at least one limit order to establish a short position; otherwise, no restrictions beyond Stock-Trak’s margin loans (trade as much as you want but save enough transactions to close derivative positions and short positions in Week 12)
Week 10: Bonds and more stocks
Buy at least two corporate bonds that are available in
Stock-Trak.
Trade at least ten individual stocks; otherwise, no restrictions beyond Stock-Trak’s margin loans (trade as much as you want but save enough transactions to close derivative positions and short positions in Week 12)
Week 11: No required trades (Thanksgiving week)
Trade as much (or as little) as you want but save enough transactions to close derivative positions and short positions in Week 12)
Week 12: Close all derivatives, short and margin
positions
Rebalance the portfolio to be within the asset allocation guidelines after closing all derivative positions, and short positions, and other positions in the “margin account” so that the margin loan amount is close to zero (i.e., within a couple thousand dollars). Make trades to rebalance active portfolio to be consistent with asset allocation guidelines.
Weekly Summary of
Trading
On Wednesdays each student is required to turn-in a summary and explanation of their Stock-Trak trading activity in the active portfolio for the prior week (1 or 2 brief paragraphs).
The summaries are
turned into the dropbox in D2L as a word file and
must contain the students name, id, and indicate the report week. Each student
summary requires:
·
descriptions
and justifications of specific trades made,
·
a
comparison of the returns of the active portfolio, the passive portfolio and
the S&P 500
·
an answer to the
question “This week the most important insight that I experienced was . .
. . ” and
·
proper cites of sources used in gathering the information
used in the trade decisions.
Final Stock-Trak Report
The final Stock-Trak report will
include a performance analysis (including attribution analysis and Sharpe
Ratios) that compares the active portfolio to the passive portfolio. A summary of the individual stock trades and
their performance is required. The top five portfolios based on Sharpe ratio (or Portfolio value if
Sharpe ratios are negative) will receive 5 bonus points each and the bottom
five performers will lose 5 points (this is to prevent excessive risk
taking). Students with portfolios with excessive margin loan balances (i.e.,
greater than $10,000) or with open positions in a derivative security will not
be eligible for the bonus points but will have 5 points deducted from their
score.
Template/Outline
Appendices should include:
Class
and/or group discussion: Some
class meetings (or D2L discussion) will include a discussion of
articles from the financial press or academic articles
4. Contribution & Professional Evaluation.
Contribution to the course
and Instructor's Professional Evaluation: More than just attending class is required for this portion of
your grade. Students are required to be prepared and alert during all
class meetings (this includes: turning
off your cell phone and other electronic devices). Students, who arrive late for class and those
who leave during class are disruptive to the overall learning environment. Any lack of effort on any course
requirement or detraction to the learning environment will be reflected in the
contribution grade. During the semester students may be required to turn-in a
self evaluation and/or a peer evaluation. The contribution grade is the
professor's subjective
evaluation of how well a student knows course material and how the student
used that knowledge to improve the learning environment of all students.
Students
can make a contribution to the course in a number of different ways including: