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. Students learn to use optimization software and also to create their own spreadsheet optimization programs in Excel, Lotus or Quattro. The course is limited to 40 students, and second-year finance concentrators are given preference. Prerequisites: Financial Management and a working knowledge of statistics. Spreadsheet proficiency is essential.
Required: Bodie, Kane and Marcus Investments, Irwin 1996.[BKM]
Recommended: Roger G. Ibbotson and Gary Brinson, Global Investing, McGraw
Hill, 1993.[IB]
Recommended: Philippe Jorion, Big Bets Gone Bad: Derivatives and Bankruptcy in
Orange County Academic Press, 1995.
Recommended: Philippe Jorion, Value at Risk.
Of interest: Harry M. Markowitz, Portfolio Selection, Basil Blackwell, 1959,1991.[HM]
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]
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.
The cases are designed to be done using spreadsheet analysis and optimization software. The spreadsheet data is provided on the network in the directory w:\data\will or via the Website for cases. Some templates have programs, such as an optimizer or simulator. Others have only data to be analyzed. All macros in the spreadsheets must be run in Lotus, or in Quattro-Pro in Lotus 1-2-3 emulation mode. You are strongly encouraged to learn and use the Ibbotson EnCorr Analyzer and Optimizer. It is a state-of-the-art investment management package.
| Day | Topic or Case | Reading |
|---|---|---|
| January 15 | Introduction to Investment Management: Why asset allocation decisions matter. Review of mean-variance optimization | BKM Chapters 1-4, Brinson, Hood and Beebower(1986,1991) |
| January 20 | Analyzing & forecasting asset class returns. Of tulips and trumpets and Franklin's will. | I&B Parts 3 & 4, Ibbotson and Siegel, "How to Forecast Long-Run Asset Returns" |
| January 22 | Efficient frontiers in practice. Uncertainty about inputs. Extended diversification | BKM Chapters 5-7, Chopra and Ziemba (1993), Goetzmann & Edwards (1994), Michaud (1989) |
| January 27 | Safety-first selection criteria. | I&B Chapters 13-15, Roy (1992) |
| January 29 | Case: Rivermore College Classic optimization. Hint: Looking backwards is not the same as looking forwards. | Markowitz -- the whole book! (Optional, of course), Thaler & Williamson (1994) |
| February 3 | Focus on Liabilities: optimization in the surplus framework | Leibowitz, Kogelman and Bader (1994), see: Asset Liability analysis |
| February 5 | International equity returns. Re-emerging markets. Home investor biases. | BKM 26, Erb, Harvey, Viskanta (1995),Errunza (1994), Heston and Rouwenhorst (1995), Sinquefield (1996) |
| February 10 | Case: Going Global A tailor-made international portfolio | BKM Chapter 26, countrybaskets Home Page |
| February 12 | 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) |
| February 17 | Case: El Lobo. Quantifying systematic risk exposure. Hint: Try your hand at a non-linear optimizer in Excel it's there! | Berry, McElroy & Burmeister (1988). REQUIRED FOR CASE WRITE-UP! |
| February 19 | Timing and selection models. Efficient markets and arbitrageurs. The rise and fall of the efficient market theory. | BKM 12, Debondt and Thaler(1989),Cowles
(1934), Fama (1991)
|
| February 24 | Case: Fast Forward Forecasting Inc. Hint: When faced with the choice between a dollar and a t-statistic, take the dollar! | Fuller & Kling (1994) |
| February 26 | Performance evaluation & mutual funds. Games managers play. | BKM Chapter 24 |
| March 3 | Case: Pied Piper Advisors performance measurement. Hint: Follow the money! | Goetzmann & Ibbotson (1994) |
| March 5 | Managing bond portfolios. Yield curve theories, cash flow risk and basic bond mathematics. Come for the duration. | BKM Chapters 13-15, Campbell (1995) |
| March 24 | Mortgage-backed securities. Pass-throughs, CMO's, IO's and PO's. | BKM pp. 53-56, MBS Primer |
| March 26 | Case: Tuck Family Trust. Hint: Think carefully about death(s) and taxes. | |
| March 31 | Simulation -- beyond optimization. Bootstrapping methods and after tax forecasting. Stochastic dominance -- a useful obsession. | Ibbotson & Sinquefield (1976) |
| April 2 | Case: Leverage Brothers. Hint: Learn the art of making a C.D. F. -- you'll need it. | Willemain (1994) |
| April 7 | Binomial option pricing review & making sense of Black & Scholes | BKM 19-20 Finance WAT.CH Introduction to Options A web text on option pricing |
| April 9 | Case: Hermes Investors. Dynamic strategies for portfolio insurance. Hint: Would you work for a negative fee? | BKM 19-20, Black (1989) |
| April 14 | Value at Risk | Beder (1995) |
| April 16 | Case: Philippe Jorion's Orange County Case: Using Value-At-Risk to Control Financial Risk | Big Bets Gone Bad: Derivatives and Bankruptcy in Orange County. Also, see Value at Risk: A Two Day Course |
| April 21 | Futures markets & other derivatives. Building better baskets. | BKM Chapters 21- 22 |
| April 23 | Case: Oilshaft, Inc. A hedging strategy in the futures market. Hint: What about the time value of money? | Culp & Miller(1995), Edwards & Canter(1995) |
| April 28 | Course review & discussion of take-home final. Hitting the high points. | NONE |
