Capital Markets (FINC 950) DRAFT Syllabus Prepared by: Phillip A. Braun Version: 6.29.16
Syllabus 2 Capital Markets and Personal Investing This course develops the key concepts necessary to understand financial markets, using, where possible, the perspective of personal investing Particular personal investing topics that will be covered include: Retirement planning The costs of investing in mutual funds Mutual funds vs. exchange traded funds Indexed funds vs. actively managed funds Hedge funds vs. mutual funds How to select bond mutual funds How to measure mutual fund performance Different ways to buy and sell stocks Short selling and margin trading Learning what a Smart Beta fund is, and whether and how to invest in them Managing different types of risks (e.g. foreign currency risk) with futures contracts
Syllabus 3 Financial Markets and the Pricing of Securities This class provides students with a structure for thinking about financial markets and the pricing of financial securities The financial securities that will be studied and priced include stocks, bonds, futures and options The class teaches how to address investment problems in a systematic manner using case studies Case studies will be used to examine issues in the selection and implementation of investment strategies In the process, the class examines current academic work about financial markets and their applications to investing
Prerequisites Syllabus 4 The prerequisites for this course are: Knowledge of probability and statistics through multivariate regression Fin I or Accelerated Finance Basic Excel (as used in Fin I) is necessary for some problems and cases we will do If more advanced Excel concepts are needed, they will be taught as part of this class
Grading Structure Syllabus 5 Task 8 Group Case Assignments 4% Each Percent of Grade 32% 1 Individual Problem Set 24% Final 44%
Course Outline, Recommended Readings, and Cases
Course Outline Syllabus 7 The class is divided up into eight modules A module represents the collection of material for a specific financial topic(s), not a class period or class week Most modules will have a problem set and a case or two This is the list of the topics and cases that will be covered for each module and recommended (optional) readings
Syllabus 8 Module 1: Introduction to Financial Markets Role of financial markets What is a financial instrument Bonds, stocks, futures/forwards, options, currencies, and commodities Main financial markets NYSE, NASDAQ, etc. OTC bond market Derivatives CME Group, CBOE OTC FX market Commodities markets Market participants: Players Dealers Brokers Broker/Dealers Module 1 readings Trading and Electronic Markets: What Investment Professionals Need to Know
Module 1 Case Syllabus 9 Managing a 401(k) Account Focuses on an individual's decision to participate in his firm's 401(k) plan and how to invest his contributions. Plan participants have a choice of 10 mutual funds with different investment strategies. Includes data from Morningstar on the composition and performance of the different funds and information on different asset allocation strategies provided by the fund administrator, T. Rowe Price Subjects covered: Asset allocation; Asset management; Investments; Mutual funds; Pension plans; Personal finance; Retirement
Syllabus 10 Module 2: Investors & Alternative Trading and Strategies Market participants: Investors Institutional investors Pension funds Mutual funds Exchange traded funds Hedge funds Retail investors Market microstructure issues Order types Components of trading costs Trading strategies Technical Passive Active
Syllabus 11 Module 2: Investors & Alternative Trading and Strategies Module 2 readings Introduction to Mutual Funds (HBS case) Note: Disclosure, regulation, and Taxation of Hedge Funds versus Mutual Funds in the US (HBS case) The Wolf Hunters of Wall Street Trading and Electronic Markets: What Investment Professionals Need to Know
Module 2 Case Syllabus 12 Exchange-Traded Funds at Vanguard Vanguard Group management, led by CEO John Brennan, was considering whether to launch exchange-traded funds (ETFs) in early 2000. ETFs, first created in the early 1990s, combined aspects of traditional mutual funds and closed-end funds. Because ETFs were exclusively index-tracking products, Vanguard, the largest index mutual fund company, had some potential expertise in managing ETFs. However, entering this market would present also unique challenges for Vanguard. Vanguard had a philosophy espousing low-turnover investing, while ETFs enabled short-term trading. The company would also need to develop a distribution network for ETFs. Finally, since Vanguard's mutual fund investors owned the company, management considered whether existing shareholders would benefit from an ETF product launch Learning objective: To educate students about how exchange-traded funds (ETFs) work, their differences from other types of funds, and the strategic issues for ETFs going forward
Syllabus 13 Module 3: Modern Portfolio Theory Introduction to risk and return Indirect utility function Introduction to asset allocation Capital asset allocation Minimum-variance frontier Module 3 reading Down or Out: Assessing the Welfare Costs of Household Investment Mistakes
Module 3 Case Syllabus 14 Partners Healthcare Focuses on the portfolio allocation decision of a passive fund manager. Provides a setting to study portfolio theory, including mean-variance analysis, the capital Learning objective: To expose students to the principals of portfolio theory and capital markets. Subjects covered: Analysis; Capital markets; Portfolio management Case readings Correlation and Volatility Dynamics in REIT Return s Performance and Portfolio Considerations Role of Commodities in Investment Portfolios Strategic Asset Allocation: Determining the Optimal Portfolio with Ten Asset Classes
Syllabus 15 Module 4: Advanced Capital Asset Pricing Theory Capital market line Security market line The CAPM and risk Tests of the CAPM Efficient markets theory The CAPM and mispricing Fama and French size and book to market effects Module 4 readings: The Cross Section of Expected Stock Returns The Capital Asset Pricing Model: Theory and Evidence
Module 4 Case Syllabus 16 DFA, 2002 Dimensional Fund Advisors (DFA) is an investment management firm that prides itself on basing its investment strategies on sound academic research. Many of the best-known finance research papers of the past two decades have led to DFA investment strategies. DFA began as a small-stock fund, attempting to take advantage of the "size affect" (excess performance of small stocks) that had been discovered by a number of academic researchers. Later, DFA added "value" strategies to its mix of offerings. The company was highly successful, despite missing out on the great 1990s growth-stock boom. DFA's assets under management grew from $8 billion to $40 billion between 1991 and 2002 Learning objective: To analyze recent academic research in asset pricing and how DFA has used that research as the basis of a highly successful firm. Subjects covered: Efficient markets; Investment management; Investments; Leverage; Stocks
Syllabus 17 Module 5: Arbitrage Pricing Theory (APT) Factor models Law of one price, no-arbitrage and expected returns Fama French three-factor model Carhart four-factor model Fama French five-factor model Module 5 readings: Characteristics, Covariances, and Average Returns Dissecting Anomalies with the Five-Factor Model Luck versus Skill in the Cross-Section of Mutual Fund Returns
Module 5 Case Syllabus 18 AQR s Moment Funds (A) AQR is a hedge fund based in Greenwich, Connecticut, that is considering offering a wholly new line of product to retail investors, namely the ability to invest in the price phenomenon known as momentum. There is a large body of empirical evidence supporting momentum across many different asset classes and countries. However, up until this point momentum was a strategy employed nearly exclusively by hedge funds, and thus not an investment strategy available to most individual investors. This case highlights the difficulties in implementing this "mutual funditizing" of a hedge fund product, along with the challenges that the open-end and regulatory features that a mutual fund pose to many successful strategies implemented in other contexts Case readings: Aspects of Investor Psychology: Beliefs, Preferences, and Biases Investment Advisors Should Know About Fact, Fiction and Momentum Trading
Syllabus 19 Module 6: Practical Applications of Pricing Models Measuring portfolio performance Sharpe ratio Alpha Information ratio Black-Litterman Model Benchmark portfolio Tactical asset allocation Indexing Module 6 readings: Black-Litterman Global Asset Allocation
Module 6 Case 1 Syllabus 20 Multifactor Models Students evaluate the performance of four mutual funds using fixed benchmarks, the CAPM and a multifactor model of returns Learning objective: To give students an opportunity to use multifactor models in performance evaluation and cost of capital estimation, and to consider the appropriate use of these models in efficient and inefficient markets. To allow students to consider whether investment managers should be rewarded for style exposures, and whether to use the best empirical prediction of returns or a theoretically motivated approach like the CAPM in estimating the cost of capital Subjects covered: Finance; Incentives; Investments; Markets; Motivation; Mutual funds; Performance appraisals
Module 6 Case 2 Syllabus 21 Innovating into Active ETFs: Factor Funds Capital Management LLC Kishore Karunakaran, President and COO of FFCM, faces a variety of challenges in launching an innovative investment management business in the rapidly evolving ETF space Learning objective: To examine the challenges of launching an innovative factor-based ETF platform in the investment management industry Subjects covered: Competitive strategy; Corporate strategy; Entrepreneurial finance; Finance; Financial instruments; Investment management; Investments
Module 7: Bond Pricing Syllabus 22 No arbitrage and bond pricing Introduction to the pricing of corporate bonds Duration Theories of the term structure Expectations Liquidity Market segmentation Three factor model Module 7 readings: Explorations in Factors Explaining Money Market Returns
Modules 7 Case Syllabus 23 Deutsche Bank: Finding Relative Value Trades Deutsche Bank's Fixed Income Research Group is looking for yield curve trades to pitch to clients as well as for their proprietary trading desk. The group has data on recent bond trades and a proprietary term structure model, which they can use to develop trading ideas Learning objective: To help students understand how the sales and trading function works within an investment bank. To have a qualitative discussion of the motivations and incentives of sell-side firms and the various functions within these firms as well as how these firms interact with clients. Also how to spot potential arbitrage opportunities along the yield curve
Module 8: Derivatives Syllabus 24 Introduction to futures and forwards Forward pricing on commodities, FX, and stock indexes Review of option payoff diagrams Put-call parity Binomial option pricing Module 8 readings: Option Portfolio Strategies: Measurement and Evaluation