RitterFIN 367 – Fall 2014page 1

Finance 367
Investment management
(Unique # 03720)
Fall 2014

ProfessorJohn T. Ritter

ClassTBD

Class HoursTuesday and Thursday 8:00 – 9:30

Office6.210 GSB - Walkway

Office Hours Tuesday and Thursday 7:00 – 8:00 a.m. or by appointment

Phone 512-799-7749 (c)

E-Mail

Course Web Pagevia Canvas

Teaching AssistantI prefer that you see me with questions

Course Objectives

This course is designed to be a survey of the field of investments. The course will focus on the application of financial theory to the issues and problems of investment management. In particular, you should leave this class understanding the components used to put together a portfolio. This requires you to understand many different types of investable assets (bonds, stocks, mutual funds, and derivatives), how they are combined to form a portfolio, and how they are each affected by the overall economy. In addition, there is background and fundamental information which is necessary to understand. This information includes topics such as types of markets, how to place orders, behavioral finance and what stock indices represent.

Prerequisites

Finance 367 is a Restricted Course for students who are currently enrolled in a major program in the College of Business and Administration. Note that several prerequisites apply for this course and are published in the Course Schedule. Prior completion of Finance 357 or Finance 357 H, Statistics 371G or Statistics 371 H are among these requirements. In addition, proficiency in mathematics and spreadsheet packages (Excel) is assumed. Students who are uncertain as to whether they satisfy these requirements should notify the instructor.

What this Means:

1)I will not teach you how to use your financial calculator – I assume you know how to use it as it was required for FIN 357.

2)I will not cover basic Present Value, Net Present Value, or Future Value theory or concepts in class as again this was taught in FIN 357.

3)I will not cover basic statistical methodology in class such as mean, standard deviation, correlation, linear regression, covariance, etc. You have been exposed to this before and it is covered again in the text book.

I know it has been a long summer and what you learned last year has remanded itself to the farthest reaches of your minds. So, if enough students request an overview of these concepts I will set up a refresher session on these topics outside of class during the first few weeks of class.

Materials

Textbook: Investments, 10h Edition by Bodie, Kane & Marcus (McGraw Hill, 2011) – available at the Co-Op

Supplementary Readings & Lecture Slides: All supplementary readings listed in the syllabus and lectureslides will be available on-line on Canvas. Lecture Slides (if any) will be available following the class. Lecture Slides are meant as an outline to reduce the amount of rote copying of definitions and formulas but certainly not as a self-contained lecture summary. Reading the lecture slides without attending class will most likely be of little benefit.

Additional Readings: Additional readings regarding current events may be made available as Handouts or posted on-line via Canvas.

Book for Project:“The Essays of Warren Buffett: Lessons for Corporate America” by Warren Buffett and edited by Lawrence Cunningham (3rdEdition). I don’t care which version they are all about the same if you want to save money by buying a 2nd edition. You must buy this on your own – it is sold by Amazon (and others).

Calculator: You will need a business calculator for this class. The calculator should have the following keys: IRR, n, i, PV, PMT, FV, and CF. As long as those keys are present, the calculator is fine. If you may consider taking the CFA exam in the future, I recommend the HP 12c (this calculator is the finance industry standard and one of only two calculators that may be used on the CFA exam). The other calculator which is permissible for the CFA exam is the Texas Instruments BA II Plus. You should bring a financial calculator to every one of our class meetings I will ask you to use it – frequently.

Strongly Recommended: Bloomberg.com, WSJ, Financial Times, The Economist, or some other Financial News source

Professionalism Policy

The highest professional standards are expected of all members of the McCombs community. The collective class reputation and the value of the program’s experience hinges on this. Faculty are expected to be professional and prepared to deliver value for each and every class session. Students are expected to be professional in all respects. This Includes:

-Being on-time and in your seat when class starts

-Staying until the end of class

-Being constructive to the learning environment

-Being “present” in the class and focused on class material. This includes, but is not limited to no internet, no email, no cell phones, no laptops, no texting, and no talking to your neighbor about last night.

-Coming prepared to contribute to the class

-Communication with the professor

Think about this class as though it were a job, and this is a bi-weekly meeting with a senior executive at your firm. Would you show up late, unprepared, be texting during the meeting? Of course not! Professionalism in class is a good discipline to prepare you for the real world. As the semester progresses, you will realize that I will hold you to a very high standard, but I will hold myself (and how this class is presented) to an even higher one.

Grading

Your grade in the course will be determined as follows:

Mid-Term Exam (Classes 1 through15)20%

Final Exam (Comprehensive):30%

Book Review of “The Essays of Warren Buffet”15%

Weekly Problem Sets15%

Group Project – Portfolio Management20%

Letter grades for the course will be based on the student’s ranking in the course relative to other students (i.e., the curve) as shown to the left. In general, there will be about 30% A’s, 40-50% B’s, 20-30% C’s or below. Plus/minus grades will be assigned for the final grade (there is no A+ though). With that said, grades are typically curved up substantially at the end of the semester. Curves are done for the class as a whole, not for individuals. In other words, someone with a final course grade of 88 will not get a higher grade than someone with a course grade of 89 as long as that person is eligible for the curve. Also, there will be a uniform grading average target for all 367 classes which will be somewhere between 3.2 & 3.4 which equates to roughly a B+ on the above scale. Finally, be vigilant of your final grade. If you receive a grade that does not look right, let me know.

Appeals: There are no verbal appeals of grade changes. You should submit a written statement explaining the problem within one week of receiving your grade and we will be happy to re-grade any exam or assignment. The entire exam or project will be re-graded and the score may increase, remain the same, or even decrease.

Late Assignments: Assignment turned in after the start of Class will lose 25% of the grade. After 1 day, an assignment will not be accepted.

Bad Questions: Unfortunately, there are poorly written questions that find their way into exams from time to time. If more than 80% of the class misses a question, it will automatically be deemed a ‘bad question’ and removed from consideration.

Fairness to Students: I strive to treat students with dignity and fairness. This does not mean that I will agree with your ideas or opinions. If you feel that I have been unfair in any way, please let me know. It takes courage to do so.

Make-Up Work: There are no do-overs in the business world. Likewise, there are no make-ups or extra-credit given in this class.

Class Preparation

It is particularly important to me that you prepare for class, arrive on time, stay for the entire class, keep your laptops and other non-necessary electronics closed and most of all respect your peers. Being prepared for class means that you have read the assigned materials and that you have worked any assigned problems. That way, you will have thought about the material already. I donot collect homework. The problem sets will be accessed online and will be automatically graded. I will go over most of the problems in class starting with the ones most missed by the class. Please note that the problem sets are only available until midnight before class. Please do not procrastinate. Once the deadline has passed, there will not be an opportunity to make up. There are 118 points out of 100 assigned, which allows you to make up for other grades with an exceptional job on the homework. It also allows you to miss a few assignments and still receive a 100.

You may access this courses Connect material via the following link:

Class Participation

Class participation and questions are encouraged! If you have a question, you can be assured that someone else in the class has the same question, so ask. However, participation will not always be voluntary. This is why it is important to come to class prepared. Class contribution consists of positive and constructive comments, questions, remarks, and answers in class.Effective contribution means participating such that your answer or question moves our analysis and understanding forward.In addition, as with your future employer, your participation includes participating in the class in an ethical and upstanding manner. Any violations of the honor code or inappropriate attitude in class will be met with zero tolerance, removal from the classroom, and potential prosecution under University guidelines.

Attendance Policy and Late Policy

I expect you to attend class and I expect you to be on time. I understand that things happen – you oversleep, a bus runs late, you’re sick, etc. When students don’t come to class tend to receive grades of D or F on the exams. When students arrive late, they are generally confused and tend to disrupt other students and the teaching of the class. I will not take attendance. However, I will cover a significant number of topics in class that are not covered in the text book. So skip class at your own risk.

If you need to leave the class early for any reason, please let me know before the beginning of the class period and leave quietly so as not to disturb the other members of class.

Students should attend the class section to which they are registered. I only teach 1 section. My class will cover different topics than or topics in a different order than other professors.

Preparing for the Exams

You need to read each chapter and do the homework problems. I will teach you material in class and then you will need to spend time working AFTER class. You will need to review what we did in class and work problems. Working problems is essential. You should read the textbook when you are having difficulty understanding my notes and problems. I have also provided a number of other background readings for areas that are of particular difficulty that can be found under Class Readings on Canvas. If you still have questions, please come see me during my office hours as soon as possible.

This class utilizes a lot of non-textbook readings. These readings are used to enhance and expand on the text book readings and provide additional real world application for the discussions. You will not be tested on anything in the non-textbook readings that is not specifically discussed in class. This means you do not need to memorize all of the facts and ideas in these readings. However, you do need to read them in order to be able to actively discuss them in class.

Exams

The Mid-Term examwill be held online and will cover material covered up to that point in class. (Through Class #15). The midterm will be available beginning Monday October 20th and be available through midnight of the 21st. Once you start the exam, you will have 2 hours to complete it. It will be open book. However, you will not have time to look up answers and complete the exam. Further, most of the questions are algorithmic, which means the questions you receive will not be identical to others.

The Final Exam will be comprehensive and will cover material from lectures, class discussions, assigned readings, and guest lectures. Exams will strive to test the comprehension level, not merely memorization skills. Exams tend to include most of the material that I have taught (rather than just a few big questions). The tests will include both qualitative and quantitative material. The qualitative questions are usually short answer or multiple-choice. The difficulty level of the multiple-choice questions is intended to parallel the level of question that you could face on the CFA® exam.

I do not release old exams. I have found that releasing old exams is problematic because (1) it results in people studying “to the exam” rather than studying to learn; and (2) students inevitably feel that old exams are easier than the current exam. In addition, I do not allow students to keep their exams. This maintains the fairness of exams, since you know that no one has seen old exams. You will have ample opportunity to review your exam during the week following the reception of the grade.

Book Review Project

This project is intended to further your Investments education and to help you to realize that you can continue to educate yourself when you graduate. For your project, I want you to write a paper about “The Essays of Warren Buffett: Lessons for Corporate America” by Warren Buffett and edited by Lawrence Cunningham (3rdEdition). Your paper should be a well-written, coherent summary that addresses the following topic: “Key Takeaways from ‘The Essays of Warren Buffett’”.

There are two reasons that I have you do this project: (1) people love this book; and (2) there is probably no better way to learn about the market and investing than by reading Buffett’s letters to his shareholders. This book consolidates key points from letters. If you have further interest, all of his letters are available online at

Your paper cannot be longer than five pages plus a cover page. In the business world, getting your point across succinctly and concisely is highly valued. Doing so takes time. Pascal is quoted as saying, “I would have written you a shorter letter if I only had more time.” Five pages is the total (other than the cover) regardless of whether you call something an appendix or anything else. I will stop reading at five pages. Anything after that point will not be considered.

The goal of your paper should be to allow someone who has not read this book to fully understand what it is about. A good paper clearly distinguishes thoughts. Your paper should evidence that fact that you have read the entire book.

The project is not a grade differentiator. The reality is that the exams will result in grade differentiation. The project is a learning exercise and the grading scale is normally pretty tight (usually 88 - 94). With that said, every so often someone turns in something that results in a significantly lower grade. The fact that the grade range is normally tight is not intended to diminish the importance of this assignment. This assignment is to be done alone.

Examples of times that people receive low grades include when someone clearly has not read the entire book or turns in a paper that is full of grammatical errors. If you have not read the entire book, the highest grade you can receive is 50 (and that score isn’t likely). But, if you read the book and you feel like you have made a good-faith effort, you should not worry. You will know if you fall into one of the “troubled” categories.

Group Project

Details of this will be handed out separately and are posted on Canvas.

Tentative Class Schedule

All readings correspond to “Investments” 10th Edition by Bodie, Kane, & Marcus (McGraw Hill, 2012). Readings are to be read ahead of class. All classeswill be held in GSB 5.142A on Tuesdays & Thursdays from 8:00 to 9:30.The following Schedule is Subject to Change. Check Canvas for any updates and the latest version.

Due Dates
Mid-Term Exam – October 21, 2014
Book Report Due – November 26, 2014
Group Project Due – December 5, 2014
Final Exam – Based on UT Schedule
Connect Problems – Due before each class / Thursday, August 28
Class#1
The Investment Environment
Textbook: Chapter #1
Readings: None
Video: How the Economic Machine Works by Ray Dalio – Bridgewater Associates
Online Problem Set: 5 Q’s in Connect
Tuesday, September 2
Class #2
Asset Classes & Financial Instruments
Textbook: Chapter #2
Readings: JPM Guide to the Mkts 3Q14
AMZ Facts & Methods (2 articles)
Online Problem Set:10 Q’s in Connect / Thursday, September 4
Class #3
How Securities are Traded
Textbook: Chapter #3
Readings: Embracing Complexity
Online Problem Set: 10 Q’s in Connect
Tuesday, September 9
Class #4
(No Class)
Mutual Funds & Investment Companies
Textbook: Chapter 4
Readings: ETF Market Structure….
Online Problem Set: 16 Q’s on Connect
(Optional Makeup class on September 12) / Thursday, September 11
Class #5
Risk, Return & the Historical Record
Textbook: Chapter 5
Readings: Understanding Expected Returns.
Online Problem Set:10 Q’s on Connect
Tuesday, September 16
Class #6
Capital Allocation to Risk Assets
Textbook: Chapter 6+ Appendices
Readings: Does Asset Allocation Explain…
Online Problem Set: 19 Q’s on Connect / Thursday, September 18
Class #7
Optimal Risky Portfolios
Textbook: Chapter 7 + Appendices
Readings: None
Online Problem Set: 18 Q’s on Connect
Tuesday, September 23
Class #8
Index Models
Textbook: Chapter 8
Readings: None
Online Problem Set:12 Q’s on Connect / Thursday, September 25
Class #9
Capital Asset Pricing Model
Textbook: Chapter 9
Readings: None
Online Problem Set:22 Q’s on Connect
Tuesday, September 30
Class #10
Arbitrage Pricing Theory & Multifactor Models
Textbook: Chapter 10
Readings: Factor Investing: When Alpha becomes Beta
Online Problem Set:11 Q’s on Connect / Thursday, October 2
Class #11
The Efficient Market Hypothesis
Textbook: Chapter 11
Readings: The Fallibility of Efficient Markets
Online Problem Set: 10 Q’s on Connect
Tuesday, October 7
Class #12
Behavioral Finance
Textbook: Chapter 12
Readings: Demographics of Overconfidence
Behavioral Sciences 101
Problems: 10 Q’s on Connect / Thursday, October 9
Class #13
Empirical Evidence on Security Returns & International Diversification
Textbook: Chapters 13 & 25
Readings: International Diversification Works
Problems: 6 Q’s on Connect
Tuesday, October 14
Class #14
Portfolio Performance Evaluation
Textbook: Chapter 24
Readings: None
Problems: 12 Q’s on Connect / Thursday, October 16
Class #15
Investment Policy & Process
Textbook: Chapter 28
Readings: Elements of an IPS
Problems: 2 Q’s on Connect
Tuesday, October 21
Class #16
The All Weather Portfolio – A Different Perspective
Textbook: None
Readings: Bridgewater All Weather Strategy
Problems: None
Online Midterm Exam due by 11:59 PM / Thursday, October 23
Class #17
Financial Statement Analysis
Textbook: Chapter 19
Readings: None
Problems: 8 Q’s on Connect
Tuesday, October 28
Class #18
Financial Statement Analysis – II & Macro & Industry Analysis
Textbook: Chapter 17
Readings: None
Problems: 12 Q’s on Connect / Thursday, October 30
Class #19
Bond Prices & Yields
Textbook: Chapter 14
Readings: None
Problems: 25 Q’s on Connect
Tuesday, November 4
Class #20
Term Structure of Interest Rates
Textbook: Chapter 15
Readings: None
Problems: 18 Q’s on Connect / Thursday, November 6
Class #21
Managing a Bond Portfolio
Textbook: Chapter 16
Readings: What Practitioners need to know about Duration & Convexity
Problems: 18 Q’s on Connect
Tuesday, November 11
Class #22
Equity Valuation Models
Textbook: Chapter 18
Readings: Note on Cash flow Valuation Methods
What’s it Worth
Problems: 17 Q’s on Connect / Thursday, November 13
Class #23
Option Markets & Trading
Textbook: Chapter 20
Readings: None
Problems: 10 Q’s on Connect
Tuesday, November 18
Class #24
Option Valuation
Textbook: Chapter 21
Readings: None
Problems: 38 Q’s on Connect / Thursday, November 20
Class #25
Forward and Futures Markets
Textbook: Chapter 22
Readings: None
Problems: 6 Q’s on Connect
Tuesday, November 25
Class #26
Futures, Swaps, & Risk Management
Textbook: Chapter 23
Readings: None
Problems: 16 Q’s on Connect / November 27, 2014
Thanksgiving Break
Tuesday, December 2
Class #27
Ethics
Textbook: None
Readings: CFA Code of Ethics
The Ethical Mind
Problems: Buying Lubrizol – Case Study / Thursday, December 4
Class #28
Theory of Active Portfolio Management
Textbook: Chapters26 & 27
Readings: Engineering Targeted Returns & Risks
The Right Answer to the Wrong Question
Problems: 11 Q’s on Connect

THIS OUTLINE SHOULD BE CONSIDERED REPRESENTATIVE OF THE MATERIAL WE WILL COVER DURING THE SEMESTER; IT IS SUBJECT TO CHANGE UPON PROPER NOTIFICATION – WHICH INCLUDES POSTING ON Canvas and / or inclass NOTIFICATION.