Textbooks/Readings. The main text for this course is the 9th edition of Essentials
of Investments by Zvi Bodie,. Alex Kane and Alan J. Marcus (although the 8th ...
Economics 225: Financial Markets & Investments Spring 2014 Tuesday &Thursday afternoon Sarah Pearlman Office: Blodgett 134A E-mail:
[email protected]
Office Hours: Tues 5-6pm, Wed. 1-3 pm and by appointment
Overview This class is designed to give students an overview of the fundamental elements of finance. We will examine the different types of financial assets, how to calculate and compare their returns, the markets in which they trade, the optimal way to combine them, and the determination of their prices. We will also discuss the relationship between risk and return, the principal-agent problem in financial markets, and the Efficient Markets Hypothesis. Emphasis will be placed on the real world applications, as the knowledge obtained will be helpful beyond the course itself. The aim is to provide tools that will help students make more informed financial decisions, in both professional and personal contexts. Prerequisites While there are no formal prerequisites listed in the course catalogue, this course will use some calculus and basic statistics, so a course such as Econ 209 is strongly recommended. I assume students have familiarity with basic statistical concepts such as mean, standard deviation, covariance and correlation coefficient. If you have never seen these concepts or feel uncomfortable with them, this class will prove difficult. Textbooks/Readings The main text for this course is the 9th edition of Essentials of Investments by Zvi Bodie, Alex Kane and Alan J. Marcus (although the 8th edition is fine). The supplementary text for the course is The Wall Street Journal Guide to Money and Investing by Kenneth Morris and Virginia Morris. This book is an excellent reference guide that should serve you well not only during the class but well beyond. I will also hand out supplementary pages from the 6th edition of Investments by Bodie, Kane and Marcus. This is the advanced version of our textbook and provides a more thorough discussion of portfolio theory. Finally, I will hand out readings from newspapers and magazines. These are designed to give real world examples and reinforce the relevance of the material from class. All articles and additional chapters will be posted on Moodle under the “Readings” topic. Requirements: In order to be as fair and impartial as possible I base grades on students’ knowledge and understanding of the material as demonstrated in problem sets and exams completed during the course. There will be no individual opportunities for extra credit. If at any point during the semester you face circumstances which prevent you from attending lecture and
1
completing problem sets and/or exams on time and to the best of your ability, please contact or see me as soon as possible. Breakdown of the Final Grade is as follows: Problem Sets 33% Class Participation 5% Take home Midterm 26% Take home Final 36% You are accountable for material presented in class. I encourage to you get to know someone else in the class, so that if you are unable to attend one or several lectures you can copy the notes. My notes will not be made available. Group Problem Sets There will be seven problem sets during the course. I want you to work in groups for the problem sets. Groups can be as large as 2 people. You may talk with members of other groups, but each group must turn in an original problem set. If two groups turn in the same answer for a question, I will divide the total points evenly across the groups. You will be allowed to drop the lowest problem set grade at the end of the semester. The problem sets are designed for you to work through the material and gain a better understanding of the concepts presented in lecture. I view this as an important part of the learning process and thus the problem sets, combined, account for 33% of the total grade. Problem sets will be graded on a combination of accuracy and effort. Problem sets will be handed back with typed solutions the class after you turn them in. The policy for late problem sets is: Same day anytime after class: 1/3 off Any later: no credit No exceptions will be made for late problem sets (except for documented emergencies). If you cannot make it to class to turn in your problem set please email it to me, leave it in my mailbox in the economics department office or under my office door. The economics office is open until 3:30 pm. Note: Although I will try to adhere to the schedule outlined in the syllabus, we may deviate from the problem set due dates listed below. Please adhere to the due dates listed on the problem sets that I hand out in class and post on Moodle. Class Participation In order to allow more time for discussion of the material, I will assign problems for you to do for class. These are meant to ensure that everyone is on the same page for the lecture. They are also meant to reduce the amount of material presenting in lecture. Exams The will be two take-home exams, a midterm and a final. The midterm will account for 26% of the final grade and will be distributed on Tuesday, March 4. You will have 48 hours to complete the exam, and it is due Thursday, March 6. The final will account for 36% of the 2
Econ225 Syllabus, Spring 2014
final grade. The exam will be handed out Wednesday May 14 at 9am and is due Friday, May 16, the third day of exam period, by 5pm. The due date for the take home final is set by the college and thus not flexible. Late exams will result in a loss of 50% of total points. You can use all notes, books, and solution sets for the exams. The one thing you cannot use is each other. You may not discuss or work on the exam with anyone. Violations of this constitute cheating and will be brought to the Dean of Studies office for review by the Academic Panel. Finally, if your answers look strikingly similar to any solution set answers I will take it to the Dean of Studies office for review by the Academic Panel. This is plagiarism, constitutes academic dishonesty, and will be dealt with accordingly. Make-up Exams: A student will be eligible to take a make-up exam only if (1) the student is absent from the original exam because of one of the legitimate causes listed in the Catalog and (2) furnishes documentary support for the assertion that the absence resulted from one of these causes. When a make-up exam is warranted, the student is to notify me without any delay. If a student also misses the make-up exam, then the weight that would have been given to that exam will be assigned to the weight used for that student’s final exam. If you fail to take one of the exams and are not eligible for a make-up exam, you will receive a zero score. You cannot choose to have the other exam weighted more heavily in order to adjust for the missed exam. Academic Integrity All work on problem sets, papers, and exams must be your own. If you use pieces of others’ writing, from books, articles, or papers you must put them in quotations and cite the source. Failure to do this means you are trying to pass off someone else’s work as your own. This is plagiarism, and any suspected cases will be brought to the Dean of Studies for review by the Academic Panel. If you have questions about the appropriate way to use material, please consult Vassar's Originality and Attribution: A Guide for Student Writers at Vassar College, which is on the Dean of the College and the Dean of Studies websites, or speak with me. Academic Support "Academic accommodations are available for students with disabilities who are registered with the Office of Disability and Support Services. Students in need of disability accommodations should schedule an appointment with me early in the semester to discuss any accommodations for this course that have been approved by Office of Disability and Support Services, as indicated in your DSS accommodation letter."
3
Econ225 Syllabus, Spring 2014
Course Outline 1. Introduction to Financial Markets Dates Topic 1/23 Introduction to Financial Markets & Financial Instruments Calculating security returns
Reading BKM Ch.1 BKM Ch.2, pg.26-40 The Economist “Caveat Investor” Math Review Notes
1/28
Financial Instruments Problem Set 1 handed out Graphing Stock Indexes
BKM Ch.2, pg.26-40 S&P 32-42 Handout Financial Market Notes
1/30
Markets and Stock and Bond Indexes
BKM Ch.2, pg. 40-46 S&P 94-101 Luigi Zingales “Wall Street 2015” Forbes commentary
2/4
Buying on Margin and Short Selling
BKM Ch.3.8, pg. 69-74 S&P 62-65
2/6-11
Mutual Funds and Other Investment Companies Problem Set 1 due Problem Set 2 handed out
BKM Ch. 4, Ch. 20 S&P 102-109, 116-133 The Economist “Trillion-dollar baby”
2. Risk Return Tradeoffs and Modern Portfolio Theory 2/13 Risk Return Tradeoff Review of mean, variance, standard deviation
BKM Ch.5 Warren Buffett “The Greenback Effect” Op-Ed New York Times
2/18
Risk aversion and risk premia
BKM Ch.5 Sapienza,P., Zingales, L. Maestripieri, D. “Gender Differences in Financial Risk Aversion and Career Choices Affected by Testosterone.” 2009. Proceedings of the National Academy of Science
2/20
Portfolio Risk and Hedging Problem Set 2 due Problem Set 3 handed out
BKM Ch.5. Supplemental Pages Investments
2/25
Optimal Total Portfolio Diversification
BKM Ch.5. Supplemental pages Investments
2/27
Diversification & the Optimal Risky Portfolio
BKM Ch.6 Supplemental pages Investments
4
Econ225 Syllabus, Spring 2014
3/ 1
Problem Set 3 due by noon
3/ 4
CAPM Midterm emailed
BKM Ch. 7
3/6
CAPM Midterm due Problem set 4 handed out
BKM Ch. 7
3/11-20
SPRING BREAK
3. Security Analysis 3/25 Bond Pricing- Discounting cash flows
BKM Ch.10
3/27
Bond Pricing
BKM Ch.10
4/1
Term Structure of Interest Rates
BKM Ch.10 S&P 68-93
4/3
Swaps Problem Set 4 due Problem Set 5 handed out
BKM Ch.17
4/8-10
Equity Valuation Models
BKM Ch.13 S&P 46-61
4/15-17
Efficient Markets Hypothesis Problem Set 5 due (4/16) Problem Set 6 (4/16)
BKM Ch. 8 &9 Slate article “No, You Can’t Invest Like Warren Buffett”
Options Basics
BKM Ch.15 S&P 138-157
4/24
Option Strategies
BKM Ch.15
4/29
Option Valuation Problem Set 6 due Problem Set 7 handed out
BKM Ch.16 S&P 158-175
5/1-6
Futures
BKM Ch. 17
5/8
Problem Set 7 due by noon
4. Derivatives 4/22
5
