INVESTMENT MANAGEMENT: Spring 2015

INVESTMENT MANAGEMENT: Spring 2015

Professor: Dr. Paul Irvine

E-Mail:

Professor: Dr. Ronnie R. Shah

E-Mail:

Teaching Assistant:

Course Objectives

Introduce the concepts and theories of modern investment finance
Understandhow to apply these theories to real world finance
Review market efficiency and academic challenges to market efficiency
Expand the student’s knowledge of security analysis, concentrating on models of the intrinsic value of securities
Provide an overview of best practices for portfolio managementand implementation

Text

Investment Analysis & Portfolio ManagementbyReilly and Brown.Cengage Learning, 10th Edition.

ISBN

Course Structure and Grading

The 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 soyou 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 IInterest Rate. While the specific type of calculator is up to you,onesuggested calculator fromis the BA II Plus fromTexas 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

February7 (Afternoon)

Financial Markets and Financial Assets

The 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 Funds

Professor Irvine’s Guide to Personal Investing: An overview of investment assets and asset returns

Reilly and Brown Chapters 2, 3

February 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

Reilly and Brown Chapters 16, 24

Assign StockTrak Project: Initial Portfolio

Set up an initial well-diversified Stock Trak portfolio in your investment group.

Session 2: Shah

Saturday February 21 (Afternoon)

Efficient Capital Markets and Modern Portfolio Theory

How 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, 7

Haugen: Finance from a New Perspective

Stock Trak check-in: Benchmark performance, Sharpe ratio performance.

Session 3: Shah

Friday March6 (Evening)

The Market Price of Risk

The 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, 9

Dimensional Case Study

Stock 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 10

Numeric Investors Case Study

Session 4: Shah

Friday March 13(Evening)

Security Valuation

We 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 11

Guest Lecturer

Stock 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: Irvine

Saturday March 28 (Morning)

Futures and Options

This 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. 22

Stock Trak Check-in: Option Trades.

Session 6: Irvine

Friday April 10 (Evening)

Fixed Income Securities

This 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, 24

Analysts 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 Measurement

What 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, 24

Valuation II – Other Equity Valuation Techniques

This 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 PM

References

1. 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 sites

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

Religious Holidays

By 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 Dishonesty

The 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 efforts

Complete your assignments independently unless expressly authorized to seek or obtain assistance in preparing them

Follow instructions for assignments and exams, and observe the standards of your academic discipline

Avoid 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

The 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.