Portfolio Management: MGT 549

Instructor: William Goetzmann 46 Hillhouse Avenue, telephone 432‑5950

TA: Lina Liu Room: SOM A3

Assistant: Mary Ann Nelson

Office Hours: Open door policy

Class Hours: Monday & Wednesday 1:00 – 2:20 B-60


The course will focus on the application of financial theory to the issues and problems of investment management. Topics will include portfolio optimization and asset allocation, the basics of bond pricing and debt portfolio management, the theory of asset pricing models and their implications for investment as well as techniques for evaluating investment management performance. The course will build upon the analytical skills developed in Financial Management. Prerequisites: Financial Management and a working knowledge of statistics. Spreadsheet proficiency is essential.



The articles in the syllabus represent current academic research on the topic in class. In many cases they contain information useful to completing the case, however the level of technical detail ranges considerably.  MBA students are not expected to master the material in the readings.


Required: Bodie, Kane and Marcus Investments, Irwin 5th Edition, 2002.[BKM]

Recommended: Philippe Jorion, Value at Risk.

Of interest: Burton G. Malkiel, A Random Walk Down Wall Street, W.W. Norton & Company, 1981.[BM]

Of interest: Peter Bernstein, Capital Ideas, Free Press, 1991.[PB]


Course Requirements & Grading

You may either do six cases and take the final, or nine cases and skip the final. The six cases may be analyzed & submitted in groups. If you are skipping the final, the remaining three must be turned in individually and will count for 33% of the grade. Case grades will be based upon formal as well as analytical quality. Each case write‑up should include an executive summary and clear, well‑designed exhibits. The six group cases are due by date of the in‑class discussion. The remaining three may be turned in anytime before the date of the final, if you choose this course of action.


A Word on Software

You are strongly encouraged to learn and use the Ibbotson EnCorr Analyzer and Optimizer. It is a state‑of‑the‑art investment management package.



Investment Management Course Outline




Topic or Case


Optional Background Reading


January 21


Introduction to Investment Management. Institutional overview of the investment management industry.




January 26

Why asset allocation matters. Performance of asset classes.

BKM Chapters 1‑4, Brinson, Hood and Beebower  (1986,1991)


January 28


Class speaker: Richard Kaufmann. Morgan Stanley




February 2

Efficient Frontiers: Their development, use in investment decision-making, sensitivity to estimation error.




February 4


Choosing an optimal portfolio. Safety‑first selection criteria.

Roy (1992).


February 9


Focus on liabilities: Optimization in the surplus framework.


Leibowitz, Kogelman and Bader (1994)


February 11


Case: Rivermore College Classic optimization. This data can be imported to the Analyzer via the Ibbotson Time Series Editor. Hint: Looking backwards is not the same as looking forwards.


Thaler & Williamson (1994).


February 16


Factor models and methods. Arbitrage Pricing Theory & practice. Who put the A in the APT?


BKM Chapters 8‑12,Chen, Roll and Ross (1986), Fama and French (1992), Berry, McElroy & Burmeister (1988).


February 18


Building Equity Portfolios: Value, Size and Momentum-based equity strategies.






Fama, Eugene and Kenneth French, 1992, “The cross-section of expected stock returnsJournal of Finance, 47(2) 427-465.

Fama, Eugene and Kenneth French, 1996,” The CAPM is wanted dead or aliveJournal of Finance, 51 (5) 1947-1958.

Jegadeesh, Narasimhan and Sheridan Titman, 1993, “Returns to buying winners and selling losers: implications for stock market efficiencyJournal of Finance, 48(1) March 65-91.

Rouwenhorst, K. Geert, 1998, “International Momentum Strategies,” Journal of Finance, 53(1) 267-283.           

Moskowitz, Tobias and Mark Grinblatt, 1999, “Do Industries Explain Momentum,” Journal of Finance, 54(4) August, 1249-1290.

Chen, Zhiwu, Werner Stanzl  and Masahiro Watanabe, 2002,”Price Impact Costs and the Limit of Arbitrage


February 23



No reading


February 25


Behavioral Finance: Psychological foundations, financial implications, relationship to asset pricing models.  Current applications.


Kahneman Daniel and Amos Tversky, 1974,”Judgement Under Uncertainty –– Hueristics and BiasesScience, 185 (4157): 1124-1131.

Debondt, Werner and Richard Thaler, 1985, “Does the Stock Market Overreact?” Journal of Finance, 40(3) 793-805.

Stephen J. Brown, William N. Goetzmann, Takato Hiraki, Noriyoshi Shiraishi and Masahiro Watanabe, 2002, “Investor Sentiment in Japanese and U.S. Daily Mutual Fund Flows”

Young, Lance, 2002, “Trading Activity, Price Patterns and Over-reaction


March 2


Timing and selection models. Efficient markets and arbitrageurs. The rise and fall of the efficient market theory.


Cowles, Alfred 1934, “Can stock market forecasters forecast?” Econometrica, 1 (3), 309‑324.


March 4



Fama, Eugene and Kenneth French, 1988a, “Dividend yields and expected stock returns,” Journal of Financial Economics, 22, 3‑27.

Goyal, Amit  and Ivo Welch, 1999, “Predicting the Equity Premium,” SSRN or Welch website

Goetzmann, William N. and  Philippe Jorion, 1995, “A Longer Look at Dividend Yields,”  Journal of Business, 68(4) 483‑508.

Stephen J. Brown , William N. Goetzmann and Alok Kumar, 1998, “The Dow Theory: William Peter Hamilton's Track Record Re‑Considered


March 22


Performance Evaluation Basics:

Alphas, Sharpe measures, Treynor ratios, Information ratios, how to detect timing skill: Henriksson-Merton, Treynor-Mazuy and Grinblatt and Titman.


Sharpe, William F., 1966, “Mutual fund performance,” Journal of Business, Vol. 39, No. 1, Part 2: Supplement on Security Prices. (Jan.,1966), pp. 119‑138.


Bollen, Nick and Jeff Busse, 2001, “On the Timing Ability of Mutual Fund Managers


March 24


Mutual Funds and Manager Styles


Sharpe, William F. 1992, “Asset Allocation: Management Style and Performance Measurement,” The Journal of Portfolio Management, Winter.

Brown, Stephen J. and William N. Goetzmann, 1997, “Mutual Fund Styles,” Journal of Financial Economics, 43 (3), 373-99.

· Chan, Louis, Hsiu-Lang Chen and Josef Lakonishok, 1999, “On Mutual Fund Investment Styles,” NBER working paper.

· Barberis, Nick and Andrei Shleifer, 2001, “Style Investing,” SSRN working paper.

· Brown, Keith and W.V. Harlow, 2001, “Staying the Course: The Impact of Style Consistency on Mutual Fund PerformanceUniversity of Texas Working Paper.



March 29


Case: Oxford Associates performance measurement. Hint: Follow the money!


Goetzmann & Ibbotson (1994)


March 31


Managing bond portfolios. Yield curve theories, cash flow risk and basic bond mathematics.


BKM Chapters 13‑15, Campbell (1995).


April 5


Mortgage‑backed securities. Pass‑throughs, CMO's, IO's and PO's.


BKM pp. 53‑56


April 7


Simulation ‑‑ beyond optimization. Bootstrapping methods and after tax forecasting.


Ibbotson & Sinquefield (1976)Kritzman (1993).


April 12


Case: Tuck Family Trust. Hint: Think carefully about death(s) and taxes.




April 14


Value at Risk. Simulating risk exposure. Stochastic dominance ‑‑ a useful obsession.


Jorion, Value at Risk Chapters 1‑5 & Chapter 12

Beder (1995).


April 19


Case: Leverage Brothers. Hint: Learn the art of making a C.D. F. – you'll need it.


Willemain (1994).


April 21


Options. No arbitrage foundation.




April 26


Binomial models




April 28


Case: Lookback Variable Annuities. Dynamic strategies for insurance products.


BKM 19‑20, Black (1989).


May 3


Futures markets & other derivatives. Building better baskets.


BKM Chapters 21‑ 22.


May 5



, Inc.

 Data for the case also see: Turtletrader A hedging strategy in the futures market. Discussion of the final Hint: What about the time value of money?