UNIVERSITY OF MASSACHUSSETSDARTMOUTH

College of Business

Department of Accounting and Finance

Spring 2010

COURSE:Investment Analysis, FIN 383-Section 01, TR 3:30-4:45

Class location:Textile Building 201

PREREQUISITES:FIN 312 and junior standing

INSTRUCTOR: DuongNguyen, Ph.D.

OfficeRoom 220, College of Business

Phone(508) 999 – 8070

Website

OFFICE HOURS:Monday 11:00-12:00 and 1:30-4:30

Wednesday 11:00-12:00 and 1:30-4:30

and also by appointment

COURSE DESCRIPTION

This course will mix both description and theory. On the descriptive side we will cover the purpose and operation of securities markets in the United States and around the world. On the theoretical side we will cover how we should evaluate investment opportunities to develop a portfolio that satisfies your risk-return objectives. The quantitative material will draw heavily on college level algebra and statistics. You will find this class quite challenging if your algebra and statistics skills are not up to par.

COURSE OBJECTIVES

The objective of this course is to discuss the material of practical use for students whether they plan to pursue a career of an investment professional or want to be a sophisticated individual investor. Here are some of the learning outcomes for the course:

  1. To understand the organization and function of primary and secondary securities markets.
  2. To analyze the characteristics of the major stock and bond market indices in the United States and internationally.
  3. To calculate the expected and historical rates of return for an individual asset or a portfolio of assets.
  4. To calculate the risk of an individual investment or a portfolio.
  5. To understand the factors which determine the required rate of return for an investment.
  6. To understand the role of asset allocation in investment planning, and to understand why investment goals change over a person’s lifetime and circumstances.
  7. To understand the advantages of global diversification.
  8. To understand the Markowitz portfolio theory.
  9. To understand theoretical pricing models such as the Capital Asset Pricing Model (CAPM) and the Arbitrage Pricing Theory (APT)
  10. To analyze the major determinants of an economy’s long term and short term growth and discuss indicators that can be used to forecast economic variables.
  11. To understand the basic features of bonds which affect their risk, return and value.
  12. To understand and compute the expected rates of return on bonds, and the value of bonds, and to and examine the characteristics that cause changes in a bond’s price.
  13. To conduct industry and company analysis, and to estimate the intrinsic value of a company.

COMPETENCIES AND CONTACT HOURS

The student will be introduced to:
The profession of investments and opportunities for investment personals / 1
The student will understand:
Nature of investments and investment alternatives / 2
Relationship between risk and return from investments / 6
Portfolio selection and capital market theory / 6
Market efficiency / 3
Valuation of Bonds and Stocks and investment strategies / 6
Market and Industry analysis / 6
Fundamental and Technical analysis / 6
The student will be able to:
Analyze stocks and bonds and make recommendation for investments / 6
Construct portfolios with desired risk and return characteristics / 3

Total

/ 45

TEXTBOOK AND REQUIRED MATERIALS

(1)Essential of investments by Bodie, Kane, Marcus, custom version, 8th edition
ISBN: 9780390230713

A customized version of this book is available in the UMD book store

(2)Financial Calculator (Texas Instruments BA II Plus, recommended)

(3) Stock Trak registration

(4) Wall Street Journal (recommended)

Financial calculator is a must in this class. You will not be able to do the assignments or the exams without one. I strongly recommend all of you get familiar with the calculator by reading the manuals posted on my website.

ATTENDANCE

  • Regular attendance and participation is essential for success. All assigned material should be carefully read and end-of-chapter exercises should be attempted before each class meeting.
  • If you miss any material, it is your responsibility to obtain the information from another student.
  • Do not consistently arrive late or leave early. If you have to leave or enter the room while a discussion or presentation is in progress, be quiet and discreet. A continued absence or several absences will adversely impact your grade.
  • Do not conduct private conversations while class is in session. However, participation in class discussions is expected.

TENTATIVE COURSE SCHEDULE

Meeting / Topic / Chapter / Homework and Excel cases (required) / Chapter exercises
(optional)
01/26/10 / Class Introduction
Investments: background and issues / 1
01/28/10 / Investments: background and issues
Financial securities / 1
2
02/02/10 / Financial securities / 2
02/04/10 / Securities markets / 3 / Q: 1-19
02/09/10 / Securities markets / 3 / HW1 due
02/11/10 / Bond prices and yields / 10
02/16/10 / Follow Monday's schedule (no class)
02/18/10 / Bond prices and yields / 10 / HW2 due / Q: 1-30
02/23/10 / Bond prices and yields / 10
02/25/10 / Mutual fund and other investment companies / 4
03/02/10 / Mutual fund and other investment companies / 4 / HW 3 due / Q: 1-14
03/04/10 / Wrap up and Review
03/09/10 / Exam 1 / 1, 2, 3, 4, 10
03/11/10 / Risk and Return / 5 / Excel case 1 due / Q 1: 20
03/16/10 / Spring break (no class)
03/18/10 / Spring break (no class)
03/23/10 / Risk and Return / 5
03/25/10 / Efficient diversification / 6 / HW 4 due / Q: 1-19
03/30/10 / Efficient diversification / 6
04/01/10 / CAPM and APT / 7 / HW5 due / Q: 1-25
04/06/10 / CAPM and APT / 7
04/08/10 / Efficient markets / 8 / HW6 due
04/13/10 / Wrap up and Review
04/15/10 / Exam 2 / 5, 6, 7, 8
04/20/10 / Equity valuation / 13 / Excel case 2 due
04/22/10 / Equity valuation / 13 / Q: 1-16
04/27/10 / Macroeconomics and industry analysis / 12 / HW7 due / Q: 1-10
04/29/10 / Financial Statement Analysis / 14
05/04/10 / Technical analysis / 9 / HW8 due / Q: 1-15
05/06/10 / Technical analysis / 9 / HW9 due
05/11/10 / Wrap up and Review / Excel case 3 due
Stock Trak Project due
Check calendar / Exam 3 / 12, 13, 149

EXAMS, HOMEWORKS, PROJECTS AND GRADES

There will be three exams. They are both multiple choiceand problem/essay-typed questions. The exams are not comprehensive, although some material will carry through.

There is no point for end-of chapter exercises. However, it is recommended that all of you should do themfor better understanding about the class materials and for preparation of the exams. The solutions for the homework are posted on my website.

There will be 9homework and 3 excel case studies. They are counted toward your final grades. The homeworkand excel cases will be posted on my website. The purposes of case studies are to get you familiar with financial functions in Excel and help you understand more about lectures with practice problems. Therefore, it is expected that you use as many Excel functions as you can, try to get Excel to do all the calculations.

Check the syllabus for the due dates. Late homeworkand cases will not be graded.

Attendance will count 5% in your total grade. To have this 5%, you should not miss more than 4class meetings. I will hand out the sign-in sheet in every class meeting. If the sign-in sheet, for some reasons, is not distributed to you, you should come ask me after the class. I will base on these sheets to determine the grade for attendance at the end of the semester.

Exam 1: 22%

Exam 2: 22%

Exam 3: 23%

Homework and excel cases18% (1.5% each)

(9 homework and 3 excel cases)

Stock Trak Project10%

Attendance5%

Total:100%

The distribution grade for attendance as follows

Attendance gradeNo. of meetings missed

5%<=4

4%5

3%6

2%7

1%8

0>8

Your grade will be based on the following schedule

A+ (98-100); A (92-97); A- (90-91);

B+ (86-89); B (80-85); B- (77-79);

C+ (72-76); C (66-71); C- (61-65);

D+ (55-60); D (50-54); F (0-49)

Absolutely no incomplete grades or make-up examinations will be given unless a medical or personal EMERGENCY precludes the completion of the exam. Students who are eligible for makeup need to finish the makeup within 48 hours of the scheduled time. Otherwise, missing an exam on the scheduled date will automatically earn a zero score.

DISABILITY SERVICES

If a student has a disability and needs assistance, please notify the Instructor and contact the Office of Disability Services for Students to make arrangements for the appropriate modification and/or assistance.

RELIGIOUS HOLIDAYS

Any student may request to be excused from a scheduled exam to observe a religious holy day of their faith. The student must notify the instructor and arrange to take the exam in advance of the regularly scheduled exam date.

MISCELLANEOUS

Cell phones and beepers are to be turned off or set to “silent mode” during class and exams.
The last day to drop the course with a grade of “DR” or “WI” is: Check school calendar.

POLICIES FOR ALL EXAMINATION – READ CAREFULLY

  • All examinations will start at the scheduled time.
  • Exams are to be completed individually. You are not to discuss any question with any individual.
  • Make sure that your calculator works and you have extra batteries available. A non-working calculator will be no excuse for a make-up test.
  • You may be asked to produce a photo ID during the examination.
  • Bring at least two sharpened No. 2 pencils.
  • Students are permitted the use of a calculator and a formula sheet.
  • Tests will typically consist of multiple choicesand essay questions
  • You must hand in the examination, answer sheet and formula sheet at the end of the examination.
  • If you do not hand in your examination before the scheduled end time, one point will be deducted for every extra minute. Ten minutes after the end time, I will assume you have not taken the test and get a score of zero.

ACADEMIC MISCONDUCT

Every student must respect the right of all to have an equitable opportunity to learn and honestly demonstrate the quality of their learning. Therefore, all students must adhere to a standard of academic conduct, demonstrating respect for themselves, their fellow students, and the educational mission of the University. As a student in the College of Business taking this class:

  • I will not represent someone else’s work as my own
  • I will not cheat, nor will I aid in another’s cheating
  • I will be honest in my academic endeavors
  • I understand that if I am found responsible for academic misconduct, I will be subject to the academic misconduct procedures and sanctions as outlined in the Student Handbook

Failure to adhere to the guidelines stated above may result in one of the followings:

  • Expulsion: Permanent separation of the students from the University, preventing readmission to the institution. This sanction shall be recorded on the student transcript
  • Suspension: Temporary separation of the student from the University for a specific period of time

By taking this class, I promise to adhere to UMass Darthmouth Student Code of Academic Integrity. For details on the policy and procedure, please check the Student Handbook.

Stock-Trak Project

In order to gain some valuable insights about investment, you will be required to work in a team of two persons or work on your own in managing a simulation portfolio of $500,000 via Stock-Trak. The Stock-Trak account will allow you to buy, sell, buy on margin, and sell short most common stocks, stock options, and mutual funds. You can also buy and sell certain index options, bonds, futures, and international stocks. In addition, Stock-Trak allows the possibility to place market orders, limit orders, and stop orders. The maximum number of trades is limited to 200. This simulation is set up for the 12 weeks of class.

You need to go to print out the registration materials/trading rules. Following the “Read Rules” link in the left hand column of the home page, directs you to the same link. After printing out the trading rules, go to the following link to register for your account

Trading can begin Feb 01st and will end April 26th.

It is important that you read the Rules before you do anything.

At the end of the semester, you are required to submit a written report which should include the followings:

  1. Investment Objective: you are required to construct a policy statement which specifies your investment goals/objectives. When constructing the policy statement, the most basic place to start is an analysis of your risk tolerance and desired return on your portfolio. You have 12 weeks to earn a return on this portfolio.

There are 2 steps in constructing your investment policy.

(1) Asset Allocation: determine how many percent of your money should be invested in stocks, how many percent in bonds, futures, options, real estate, etc. Since this is an introduction to investment class, we consider only 3 major assets: stocks, bonds, and cash

(2) Security analysis: After the asset allocation step, you have to decide which type of securities you should invest in each asset categories. For example, should you invest in small or big stocks, high growth or low growth stocks, etc.

Although it is really up to you to decide your strategies, there are some certain requirements you need to keep in mind as follows: never have more than 10% in cash. No more than 10% of your fund can be in one stock. At least 20% invested in bond (to make sure your investment strategy is not too aggressive)

Some questions you might want to consider: What is your risk tolerance (i.e., are you more risk averse person or less risk averse person, are you willing to take higher risk for higher return), What is the time horizon for investing? What are your strategies to invest your money in order to achieve the desired return within the investment time horizon.

  1. By March 2nd, at least 50% of your portfolio should be invested. Calculate the percentage of stocks, bonds, cash in the portfolio onMarch 2nd as follows
  2. %stock = (total value of stocks)/(total value of portfolio)
  3. %bond = (total value of bonds)/(total value of portfolio)
  4. % cash = 1-%stock - %bond
  5. Create a pie chart to reflect the structure of the initial portfolio. For example, if your portfolio allocates 60% stocks, 30% bond, 10% cash, the pie chart is as follows

  1. At the end of the trading period, at least 90% of your fund has to be invested. Also, there is a minimum of $5000 has to be used every week. You can buy or sell but make sure you need to trade at least $5000 every week.
  1. Over the course of the trading period, make at least 50 transactions that have to include all buy, sell, short sell, and short cover transactions at the market price. We will go into more detail of these transactions when we study chapter 3. You should print out the transaction history from your account with Stock-Trak and include it in the report
  1. Over the course of the trading period, make at least 10 limit order that includes limit-buy order, limit-sell order, stop-buy order, and stop-sell order transactions. We will go into more detail of these transactions when we study chapter 3. You should print out the limit transaction history from your account with Stock-Trak and include it in the report
  1. Pick any 10 transactions and explain why you choose to make those transactions (the explanation can come from fundamental analysis, technical analysis, or recommendation from some experts, etc.)
  1. Create a pie chart reflecting the structure of your portfolio at the end of the trading period April 26th. Again, calculate the percentage of stocks, bonds, and cash on April 26th (similar to requirement 2)
  1. Calculate your portfolio return every week and compare with the return on the market index S&P 500. Put the information in Excel. You need to graph your portfolio return and the S&P 500 index return. The y-axis is the return, the x-axis is the week.

Here is an example

date / Week / Porfolio Value / Portfolio Return / S&P 500 / S&P 500 return
Feb 01 / 0 / 500000 / - / - / -
Feb 08 / 1
Feb 15 / 2
Feb 22 / 3
Mar 01 / 4
Mar 08 / 5
Mar 15 / 6
Mar 22 / 7
Mar 29 / 8
April 5 / 9
April 12 / 10
April 19 / 11
April 26 / 12

The return is calculated as follows

Return in week 1 = (ending value – beginning value)/beginning value

= (Feb08 – Feb01)/ (Feb01)

Return in week 2 = (ending value – beginning value)/beginning value

= (Feb15 – Feb08)/ (Feb08)

and so on.

(to get the historical data on S&P 500, go to Yahoo Finance webpage, and download the historical data corresponding to your trading period and compute the weekly return of S&P500. The value you should get for S&P500 is the adj. close, the last column on the website)

  • Graph your portfolio performance with the index

  1. Write an essay evaluating the performance of your portfolio over the trading period. How does your portfolio compare with the market? Is it better or worse? Provide some explanation why your portfolio performsbetter or worse than the market (for example, did you follow your investment policy consistently (you can compare the initial structure and ending structure), what types of securities, industries you tend to invest, what transactions you earn a lot of return, what transactions you lose a lot of money, what else you should have done to improve your performance, what lessons you have learned during this portfolio simulation so you can apply to your personal investing in the future, etc.)

Top 2 accounts whose returns are highest in the class and have at least 50 transactions will have 3% bonus added to your total grade.