Instructor/TA Info. Course Information. Instructor Information. Description. Materials. Prerequisites. Learning Outcomes

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1 Instructor/TA Info Instructor Information Name: Scott Condie Office Location: 136 FOB Office Phone: Office Hours: Tue, Thu 1:30pm-2:45pm Or By Appointment Course Information Description The course will explain the role and functioning of asset markets from an economic perspective. Successful completion of the course will provide the student 1. an understanding of the role of financial markets for saving and diversification, 2. knowledge of the pricing models used in the financial industry for equities, fixed income instruments and several types of derivatives, 3. the application of these instruments to the current financial environment. Materials Image Item Vendor Price (new) Investments (McGraw-Hill/Irwin Series in Finance, Insurance and Real Estate) by Bodie, Zvi McGraw-Hill/Irwin; Edition 9 ( ) ISBN: BYU Bookstore Price (used) Prerequisites Economics 380, 382 and 388. Learning Outcomes Econ 450 students will be able to 1. Understand and derive the fundamental relationship between risk and return that is implied by the Capital Asset Pricing Model (CAPM). Students should also know the assumptions necessary for this model to hold and be capable of identifying when potential investment projects satisfy these assumptions. 2. Use linear regression to calculate an asset s historical sensitivity to broad market indices, its implied historical mispricing and an estimate of the asset s idiosyncratic risk. Students should also be capable of performing hypothesis testing on these values. 3. Replicate traditional tests of the CAPM using currently available data.

2 4. Be capable of collecting and analyzing asset market data to estimate the efficient frontier of risky assets using either Excel or another software package. Students should also be able to understand the efficient frontier mathematically and the reasons that it is useful. 5. Calculate the present value of a stream of payments given an appropriate discount factor. Students should know how to use the CAPM to derive potential discount factors for payment streams. 6. Calculate the yield to maturity of a stream of payments given an observed price. Students should also understand the relationship between the coupon rate of traditional bonds, their price and their yield to maturity. 7. Calculate forward rates for all future periods given the observed yield curve. 8. Understand the liquidity preference theory of bond markets as well as the expectations hypothesis. They should also be able to price complicated payment streams using observations of the yield curve and the expectations hypothesis. 9. Calculate the duration and modified duration of a stream of payments and use these to calculate optimal hedges given an arbitrary position in the fixed income market. 10. Calculate and understand bond convexity and its role (along with duration) in hedging. 11. Price forward contracts by arbitrage given a risk-free rate. 12. Price futures contracts whose payoffs are not correlated with the market reinvestment rate. 13. Understand currently used hypotheses regarding futures contract pricing. 14. Understand the structure of call and put options. 15. Price put options given a call option (and vice versa) using the put-call parity relationship. 16. Apply the Black-Scholes option pricing formula to price call and put options given beliefs about the volatility of the underlying asset. 17. Apply the Black-Scholes option pricing formula to calculate the implied volatility of an asset given its price. Program graduates will be further prepared to pursue a life of continued learning, analytic and critical thinking, and adjusting to changing information, needs, and challenges. Program graduates will be prepared and qualified to pursue graduate studies in economics, business, finance, law, public policy, and related disciplines. Program graduates who choose economics as a terminal degree will be prepared to accept productive jobs in consulting, business, finance, management, and related fields. Program graduates will be able to conceptualize a wide range of constrained optimization problems in economics and related fields and will be able to apply formal mathematical analysis to evaluate these problems. Program graduates will be introduced to and become knowledgeable in one or more fields of economics including: history of economic thought, antitrust and regulation, law and economics, international trade theory, economic development, economic growth, monetary theory and policy, and natural resource and environmental, financial, labor, health, and agricultural economics. Grading Policy Grades will be based on students' relative performance on assigned problem sets, two midterms, a comprehensive final exam and a course project. Problem sets will be handed in to the TA's box in 130 FOB. They are due at 4 p.m. on the date listed on the syllabus. You are highly encouraged to form study groups although homework must be turned in individually. The course project will test some of the theories developed in class. A description of the project will be available through Learning Suite. The due date for the project is listed in this syllabus. Please note the due dates for the midterm and final exams. Makeup exams will not be given.

3 University Policies Honor Code In keeping with the principles of the BYU Honor Code, students are expected to be honest in all of their academic work. Academic honesty means, most fundamentally, that any work you present as your own must in fact be your own work and not that of another. Violations of this principle may result in a failing grade in the course and additional disciplinary action by the university. Students are also expected to adhere to the Dress and Grooming Standards. Adherence demonstrates respect for yourself and others and ensures an effective learning and working environment. It is the university's expectation, and my own expectation in class, that each student will abide by all Honor Code standards. Please call the Honor Code Office at if you have questions about those standards. Sexual Harassment Title IX of the Education Amendments of 1972 prohibits sex discrimination against any participant in an educational program or activity that receives federal funds. The act is intended to eliminate sex discrimination in education and pertains to admissions, academic and athletic programs, and university-sponsored activities. Title IX also prohibits sexual harassment of students by university employees, other students, and visitors to campus. If you encounter sexual harassment or genderbased discrimination, please talk to your professor or contact one of the following: the Title IX Coordinator at ; the Honor Code Office at ; the Equal Employment Office at ; or Ethics Point at or (24-hours). Student Disability Brigham Young University is committed to providing a working and learning atmosphere that reasonably accommodates qualified persons with disabilities. If you have any disability which may impair your ability to complete this course successfully, please contact the University Accessibility Center (UAC), 2170 WSC or Reasonable academic accommodations are reviewed for all students who have qualified, documented disabilities. The UAC can also assess students for learning, attention, and emotional concerns. Services are coordinated with the student and instructor by the UAC. If you need assistance or if you feel you have been unlawfully discriminated against on the basis of disability, you may seek resolution through established grievance policy and procedures by contacting the Equal Employment Office at , D-285 ASB. Academic Honesty The first injunction of the Honor Code is the call to "be honest." Students come to the university not only to improve their minds, gain knowledge, and develop skills that will assist them in their life's work, but also to build character. "President David O. McKay taught that character is the highest aim of education" (The Aims of a BYU Education, p.6). It is the purpose of the BYU Academic Honesty Policy to assist in fulfilling that aim. BYU students should seek to be totally honest in their dealings with others. They should complete their own work and be evaluated based upon that work. They should avoid academic dishonesty and misconduct in all its forms, including but not limited to plagiarism, fabrication or falsification, cheating, and other academic misconduct. Plagiarism Intentional plagiarism is a form of intellectual theft that violates widely recognized principles of academic integrity as well as the Honor Code. Such plagiarism may subject the student to appropriate disciplinary action administered through the university Honor Code Office, in addition to academic sanctions that may be applied by an instructor. Inadvertent plagiarism, which may not be a violation of the Honor Code, is nevertheless a form of intellectual carelessness that is unacceptable in the

4 academic community. Plagiarism of any kind is completely contrary to the established practices of higher education where all members of the university are expected to acknowledge the original intellectual work of others that is included in their own work. In some cases, plagiarism may also involve violations of copyright law. Intentional Plagiarism-Intentional plagiarism is the deliberate act of representing the words, ideas, or data of another as one's own without providing proper attribution to the author through quotation, reference, or footnote. Inadvertent Plagiarism- Inadvertent plagiarism involves the inappropriate, but non-deliberate, use of another's words, ideas, or data without proper attribution. Inadvertent plagiarism usually results from an ignorant failure to follow established rules for documenting sources or from simply not being sufficiently careful in research and writing. Although not a violation of the Honor Code, inadvertent plagiarism is a form of academic misconduct for which an instructor can impose appropriate academic sanctions. Students who are in doubt as to whether they are providing proper attribution have the responsibility to consult with their instructor and obtain guidance. Examples of plagiarism include: Direct Plagiarism- The verbatim copying of an original source without acknowledging the source. Paraphrased Plagiarism-The paraphrasing, without acknowledgement, of ideas from another that the reader might mistake for the author's own. Plagiarism Mosaic-The borrowing of words, ideas, or data from an original source and blending this original material with one's own without acknowledging the source. Insufficient Acknowledgement-The partial or incomplete attribution of words, ideas, or data from an original source. Plagiarism may occur with respect to unpublished as well as published material. Copying another student's work and submitting it as one's own individual work without proper attribution is a serious form of plagiarism. Schedule Date Column 1 T - Sep 03 Th - Sep 05 Math and markets: BKM 1-4, B 1-3 M - Sep 09 T - Sep 10 Th - Sep 12 T - Sep 17 Th - Sep 19 Index models: BKM 8 APT and factor models: BKM 10, B 7-8 F - Sep 20 T - Sep 24 Th - Sep 26 APT and factor models: BKM 10, B 7-8 CAPM: BKM 9, B 6 F - Sep 27 T - Oct 01 Th - Oct 03 CAPM: BKM 9, B 6 EMH and Behavioral Economics: BKM 11-12

5 T - Oct 08 Th - Oct 10 Review EMH and Behavioral Economics: BKM Bond prices and yields: BKM 14, B 12 F - Oct 11 T - Oct 15 Th - Oct 17 Bond prices and yields: BKM 14, B 12 Bond prices and yields: BKM 14, B 12 F - Oct 18 T - Oct 22 Th - Oct 24 T - Oct 29 Th - Oct 31 T - Nov 05 Th - Nov 07 Term structure of interest rates: BKM 15, B 13 Term structure of interest rates: BKM 15, B 13 Term structure of interest rates: BKM 15, B 13 Fixed income portfolio analysis: BKM 16 Fixed income portfolio analysis: BKM 16 Fixed income portfolio analysis: BKM 16 Review F - Nov 08 T - Nov 12 Th - Nov 14 Forward and futures markets: BKM Forward and futures markets: BKM F - Nov 15 T - Nov 19 Th - Nov 21 F - Nov 22 T - Nov 26 W - Nov 27 Th - Nov 28 T - Dec 03 Th - Dec 05 T - Dec 10 Friday Instruction No Classes Thanksgiving Holiday W - Dec 11 Th - Dec 12 Review

6 F - Dec 13 Th - Dec 19 Exam Preparation Day Final Exam: 274 MARB 3:00pm - 6:00pm