Finance 397 - McCombs School of Business



INVESTMENT MANAGEMENT: Spring 2015Professor: Dr. Paul IrvineE-Mail: p.irvine@tcu.eduProfessor: Dr. Ronnie R. Shah E-Mail: Ronnie.shah@mccombs.utexas.eduTeaching Assistant: ?Course ObjectivesIntroduce the concepts and theories of modern investment financeUnderstand how to apply these theories to real world financeReview market efficiency and academic challenges to market efficiencyExpand the student’s knowledge of security analysis, concentrating on models of the intrinsic value of securitiesProvide an overview of best practices for portfolio management and implementationText Investment Analysis & Portfolio Management by Reilly and Brown.? Cengage Learning, 10th Edition.ISBN Course Structure and GradingThe course consists of lectures, projects, class case discussions, midterm and a final exam. Lectures: The lectures are designed to provide an understanding of the major elements of investment finance research. The emphasis is on the logic underlying each concept, on how each concept is used in finance, and on how the concepts are interrelated. The lectures are not note taking drills; rather, they are dynamic sessions in which information is presented by the instructor via visual aids and through direct interaction with the class.Case Discussions: No written analysis will be required to be turned in but you should have prepped the case before class and be prepared to discuss your analysis of the case. Instructors may cold call students to give their analysis of the case. You may work with your study group in preparing the case analysis. Stock Trak Project (100 Points):Case Studies (50 Points Each):Midterm Exam (200 points): Final Exam (300 Points): Class Participation (100 Points):Financial Calculator for Exam: For this course, you will need a financial calculator.??It will be primarily be used for exams so?you do not need to buy anything elaborate - just the basics.? Any financial calculator that has at least the keys of "FV, PV, PMT, N, and I" will suffice.? These keys stand for FV Future Value, PV Present Value, PMT Payment,?N Number of Periods, and I?Interest Rate.? While the specific type of calculator is up to you,?one?suggested calculator from?is the BA II Plus from?Texas Instruments (TI) that has been popular due to its fairly straight forward instructions.? Prices generally run from $20 USD and up from sources such as EBay.Session 1: Irvine February 7 (Afternoon)Financial Markets and Financial AssetsThe course will begin with an overview of the different financial instruments that are often classified into asset classes. What are the rates of return on these asset classes? How do financial securities trade? Mutual FundsProfessor Irvine’s Guide to Personal Investing: An overview of investment assets and asset returnsReilly and Brown Chapters 2, 3February 8 (Morning)Mutual Funds, Hedge Funds, Professional Investing We will discuss the various forms of mutual funds and hedge funds and their relative success in financial markets. SSRN (Irvine), Case on Jeff Vinik and Fidelity Magellan and Brown Chapters 16, 24Assign Stock Trak Project: Initial PortfolioSet up an initial well-diversified Stock Trak portfolio in your investment group.Session 2: ShahSaturday February 21 (Afternoon)Efficient Capital Markets and Modern Portfolio TheoryHow efficient is the market? Is there any evidence that the market is not efficient? Does this evidence represent a profit opportunity for investment managers? The concept of mean-variance efficiency and the efficient frontier. Forming the efficient portfolio from a list of assets. Diversification. Reilly and Brown Chapters 6, 7Haugen: Finance from a New PerspectiveStock Trak check-in: Benchmark performance, Sharpe ratio performance. Session 3: Shah Friday March 6 (Evening)The Market Price of RiskThe Capital Asset Pricing Model. We will talk about conclusions that can be drawn from tests of the Capital Asset Pricing Model and discuss alternative models.Reilly and Brown Chapters 8, 9Dimensional Case StudyStock Trak check-in: Purchase a firm or set of firms based solely on its characteristics. Evaluate performance relative to S&P 500 next Shah class.Saturday February 7 (Morning)Financial Statement Analysis Understanding financial reporting and how information from financial statements can be used to estimate future earnings. Discussing the function of security analysts in the stock market. Reilly and Brown Chapter 10Numeric Investors Case StudySession 4: Shah Friday March 13(Evening)Security ValuationWe will look at a number of valuation models including the dividend discount model, comparable multiple valuation, Free Cash Flow to Equity and the Ohlson model.Reilly and Brown Chapter 11Guest LecturerStock Trak check-in: Purchase a firm or set of firms based on your financial analysis and valuation. Evaluate performance relative to S&P 500 next Shah class. Assignment: Discuss which was the best performing style. Which was the most comfortable to use (i.e. did you trust style-only valuation). Saturday March 14 (Morning) Midterm Exam: TBD Personal Finance and Portfolio Management We will better understand how both professional investors and individual investors build financial portfolios. Reilly and Brown Chapters 2, 16, 19 Stock Trak check-in: Information Ratio performance. Session 5: IrvineSaturday March 28 (Morning) Futures and OptionsThis section is intended to introduce the students to the futures and options. We cover the basic contracts and how to apply them. This year we will cover introductory derivatives pricing.Reilly and Brown Chapters 20. 21. 22Stock Trak Check-in: Option Trades. Session 6: Irvine Friday April 10 (Evening)Fixed Income SecuritiesThis section moves beyond basic bond valuation to more advanced topics in fixed income. The term structure of interest rates, duration and convexity will be covered.Reilly and Brown Chapter 16, 24OrAnalysts and Earnings The importance of earnings reports as cash flow indicators. How the market responds to earnings reports. Estimated expected earnings. Analysts estimation of expected earnings. Sell-side analyst job function and place in the capital markets. Post earnings announcement drift strategies. Dealing with negative earnings. Earnings management and manipulation.Numeric Investors Case Study. As earnings momentum is one of their major investment strategies, we can revisit this case here if necessary.Reilly and Brown Chapter 14. Particularly 14.5.Saturday April 11 (Morning)Performance MeasurementWhat is the difference between active management and passive investing? How do we use benchmark portfolios to evaluate portfolio manager performance and compensation? Reilly and Brown Chapter 16, 24OrValuation II – Other Equity Valuation TechniquesThis section discusses how to get estimates of the discount rate, the growth rate and security pricing by comparable ratios. How do we build a Free Cash Flow to Equity model? We apply some of the knowledge gained in Session 3 to popular investment strategies and explore some alternative valuation techniques.Reilly and Brown Chapter 14.Session 7: Irvine/Shah Saturday April 25 (Afternoon)Final Exam: 1 PM – 4 PMReferences1. Haugen “Finance from a New Perspective” Financial Management, Vol. 25. No. 1, Spring, 1995.2. Esty, B. C. "What Determines Comparability When Valuing Firms with Multiples." Journal of Financial Education 26 (Fall 2000): 24-33.Useful Web sites1. You can also go to and register manually.Students with Disabilities Any student with a documented disability who requires academic accommodations should contact Services for Students with Disabilities at 512-471-6259 (voice) or 1-866-329-3986 (Video Phone) as soon as possible to request an official letter outlining authorized accommodations. For more information, please visit the Division of Diversity and Community Engagement website HolidaysBy UT Austin policy, you must notify your instructor of your pending absence at least fourteen days prior to the date of observance of a religious holy day. If you must miss a class, an examination, a work assignment, or a project in order to observe a religious holy day, you will be given an opportunity to complete the missed work within a reasonable time after the absence.Academic DishonestyThe University Honor Code states: "The core values of the University of Texas at Austin are learning, discovery, freedom, leadership, individual opportunity, and responsibility. Each member of the University is expected to uphold these values through integrity, honesty, trust, fairness, and respect toward peers and community". A fundamental principle for any educational institution, academic integrity is highly valued and seriously regarded at The University of Texas at Austin. More specifically, you and other students are expected to maintain absolute integrity and a high standard of individual honor in scholastic work undertaken at the University . At a minimum, you should complete any assignments, exams, and other scholastic endeavors with the utmost honesty, which requires you to:Acknowledge the contributions of other sources to your scholastic effortsComplete your assignments independently unless expressly authorized to seek or obtain assistance in preparing themFollow instructions for assignments and exams, and observe the standards of your academic disciplineAvoid engaging in any form of academic dishonesty on behalf of yourself or another student For the official policies on academic integrity and scholastic dishonesty, please refer to Chapter 11 of the Institutional Rules on Student Services and Activities instructor of this class will not tolerate any kind of dishonesty. If there is evidence of such kind of inappropriate behavior, he will make sure that it is disciplined to the maximum extent possible. ................
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