Capital Markets and Investments Revised January 11, 2012 Professor Mark Zurack Berkeley Columbia Executive MBA

Transcription

1 Capital Markets and Investments Revised January 11, 2012 Professor Mark Zurack Berkeley Columbia Executive MBA Course Description This course has two purposes: (1) To introduce the principles of asset valuation from an applied perspective, and (2) To introduce different techniques to manage investment portfolios. It is designed to provide you sufficient background to understand current events in Global Markets, take more advanced Markets classes, as well as give you a framework to manage your own assets. The course breaks down into four areas: Asset Allocation Reviews different quantitative techniques used to measure returns and risk. Compares long term behavior of different asset classes and how investors allocate their wealth across Asset Classes. Equity Markets Covers theory on valuing individual stocks as well as constructing stock portfolios. We also touch on the different forms of both active and passive investing. Fixed Income Markets Basic bond valuation focusing on the term structure of interest rates as well as notion of forward rates as well as the evaluation of credit and call risk. Compares risk and return of different types of fixed income securities like Government Bonds and Bills, Corporate Bonds, Mortgages and other Asset Backed Securities. Derivative Markets The valuation and use of futures and options markets are introduced. The materials will be delivered through a combination of lectures, guest speakers, case studies and readings. Reading Materials Investments Zvi Bodie, Alex Kane, and Alan J. Marcus, ninth edition (BKM) The Practical Guide to Wall Street: Equities and Derivatives Matthew Tagliani, 2009 Selected Readings Bound as a Casebook (Assignments to be handed out) 1

2 Focus on Excel Although my Excel skills are below any of yours, I want you to actively use Excel functions as much as possible in this course. For that reason, I will reference Excel functions in my class notes as often as I can. Grading 50% of the grade will be based on class participation and completion of assignments and 50% on the results of a take-home final. All assignments must be completed in writing and most should be done in groups with each group member contributing to every group assignment. Collaboration across groups is not allowed. I reserve the right to downgrade (including failing) any student who misses a significant number of classes. Office Hours/Teaching Assistant/Review Classes My office is in the Executives-in-Residence area, located in Uris 211. Please call Julie at to schedule an appointment in person, on the phone, or via computer. Samantha Gordon (sgordon12@gsb.columbia.edu) will also be available to answer any questions you have on the course material or the Assignments. Course Outline 1. Course Introduction/Asset Allocation (01/12 1:00 PM 4:00) After a brief discussion on the structure of the course, the class begins by exploring the metrics used to evaluate public investments. We go over return measures like Arithmetic and Geometric averages, and risk measures like Variance, Standard Deviation and Correlation. We then define what an Asset Class is and the different Asset Classes used to construct an investment portfolio. This second part of the class explores the process of determining what percent of an overall portfolio should be allocated to each asset class. This requires understanding not only the returns and risk of each asset class, but also how the correlation of different asset classes affects the overall risk of the portfolio. Chapter 5, p ; p BKM Glossary, BKM The Market Portfolio Issues in Strategic Asset Allocation MSCI Developed, Emerging and Frontier Markets 2. Asset Allocation/Introduction to Equities/Single Stock Valuation (01/12 4:30 PM 7:30) After completing our discussion on Asset Allocation, the class starts by introducing a general approach to equity investing. 2

3 We then focus on ways to value individual equities. We start by describing basic measures like market vs. book and intrinsic value, then explore the use of dividend discount and price/earnings models. Chapter 18, BKM Valuation Triangulation 3. Going from Stocks to Portfolios (01/13 8:30 AM 11:30) This class explores the process of constructing an investment portfolio. We start by reinforcing the virtues of diversification then describe how portfolios are constructed. We explore the Capital Asset Pricing Model (CAPM), a theory which is the basis of modern investing. We then discuss how investment managers who do not believe the market is efficient use quantitative techniques to optimally trade off risk and return. Chapter 9, BKM 4. Passive Equity Portfolio Management (02/02 4:30 PM 7:30) After reviewing Assignment 2 and completing our discussion on portfolio construction we describe how to manage a passive portfolio, focusing on the use of Exchange Traded Funds. Assignments Assignment 2 Yale Case/Stock Selection Model Yale University Investments Office: August 2006 The Endowment Model of Investing: Lessons From 2008 Chapters 4 & 6 Tagliani 5. Equities Trading/Current Issues in Equities Trading and Finance (02/03 8:30 AM 11:30 AM) This class starts by demonstrating why trading is an important part of the investment process. We review who the main participants are in trading equities and what function they serve the marketplace. We then cover how to trade stocks, focusing on the different types of orders that are placed and how those orders are executed. We then explore different places where trades take place like the NYSE, NASDAQ, Electronic Communications and Crossing Networks and how institutions using Block and Algorithmic Trading. 3

4 After completing our discussion on trading, this class discusses how investors leverage long positions and establish short positions in the stock market. We then review historical events like the "Flash Crash" of 2010 that have resulted in regulatory change to Equities Markets. Chapters 3 & 11 Tagliani Mechanics of the Equity Lending Market 6. Introduction to Fixed Income Markets and Bond Pricing (03/14 9:00 AM 12:00 PM) After reviewing Assignment 3, the course leaves Equities and moves into Fixed Income Markets. We start by reviewing the different types of securities that exist in fixed income markets. Then we show why a bond s price must be the present value of its coupons and return of principal. We review the relationship of prices and yields. We end with a discussion of reinvestment and early unwind risk Assignments Assignment 3 Portfolio Construction/Indexes and ETFs Chapter 14, p BKM 7. The Term Structure of Interest Rates/Fixed Income Duration and Convexity (03/14 1:00 PM 4:00) We start by introducing the notion of the term structure of interest rates. We then discuss forward rates, their computation, interpretation (expectations hypothesis) and how they may be created by detailing a series of transactions which has the effect of locking in a specific forward rate. We use this knowledge to understand the expected future return of owning bonds. We then introduce the notion of duration as a measure of bond price sensitivity to interest rate changes. We examine how this measure can be used to assist in the risk management of a portfolio of bonds. Related to duration is the concept of convexity, which provides further insight into the risk management of bond portfolios. Chapters BKM 4

5 8. Call and Credit Risk/Futures Markets (03/15 1:00 PM 4:00) Non-government bonds expose an investor to two risks that do not exist with Government bonds, call and credit risk. The class starts by evaluating call risk, that is the risk that the issuer will call the bond before it matures. This forces the investor to reinvest cash when yields are generally lower. Megan McClellan from JP Morgan then reviews how an investor evaluates credit risk and how that risk translates into a higher yield than what is paid on a comparable Treasury. During the second half of the class I introduce Derivatives, starting with futures. My discussion on futures will focus on Stock Index Futures, with specific discussion focusing on how futures are traded and valued. Guest Speaker: Megan McClellan, JP Morgan Chapter 14, p , BKM Chapter 7, p , p Tagliani 9. Futures and Swap Markets/Options Introduction and Valuation (04/12 4:30 PM 7:30) This class begins with a discussion led by Michael Liou on how equity swaps are used to leverage long positions on individual stocks and establish short stock positions. The course then moves to options trading, strategies and valuation, the later topic can get fairly complex. Although options pricing cannot be explained without any formulas, I try to provide you intuition on what drives pricing leaving out the higher mathematics. Assignments Assignment 4 Fixed Income Review Guest Speaker: Michael Liou, ex. Goldman Sachs Chapter 8, p Tagliani Chapter 9, p , Tagliani The New CBOE Volatility Index VIX 10. Options Valuation/Options Strategies (04/13 1:00 PM 4:00) After completing our discussion on Options Valuation, we discuss strategies. Options are used by different types of institutional and individual investors, each uses the products to accomplish a different business objective. This class gives you a broad overview of the strategies most frequently followed. 5

6 Tutorial on Using Options in Active Strategies Ten Ways Fundamental Investors Use Options 6