FINA 385 - fina 385 PDF

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F i nanc e D epar tm ent

F I N A N C E T H E O RY I FINA 385 • WINTER 2019 Gregory Lypny

[email protected] • (514) 848-2424; 2794 Lectures: Tuesdays, 8:45 a.m. to 11:30 a.m., MB 3.445 Office hours: Mondays, 1:30 p.m. to 4 p.m., MB 11.307 !

CONTENTS Course Outline About Finance Theory I!

1

Quick Start!

1

Readings!

1

Topics!

2

Grading!

2

Academic Integrity!

2

Assignments Assignment 1—Portfolio Performance!

4

Assignment 2—[Topic TBA]!

8

More Interactive Files and Wolfram’s CDF Player!

9

Finding Articles Online!

11

Tips and FAQs!

15

Grade Conversion!

16

Course Description from the Calendar!

17

Plagiarism!

17

⊶ !1 ⊷

COURSE OUTLINE ABOUT FINANCE THEORY I This is the first of two intermediate courses on financial economic theory that build upon topics you covered in Analysis of Markets (COMM 220) and Introduction to Finance (COMM 308). We’ll look at the allocation of capital in financial markets and the determination of the relative prices of financial assets. Your goal should be to think about economics scientifically, and to pick up some practical mathematical and research skills along the way.

QUICK START You can find most of what you’ll need for the course in the downloads folder on our Moodle page. Download my notes and slides. Install Wolfram’s (Mathematica) free player software from www.wolfram.com/cdf-player. You’ll need it to work with my demos and some other files that I created using Mathematica.

READINGS My class notes are the main text for the course and are required reading. Lypny, Gregory, 2018, Economics Class Notes. There is a chapter on each topic we’ll be covering, along with homework exercises, references to journal articles, which are required reading, and optional readings from the following textbooks for those who would like to review or look something up. Varian, Hal, Intermediate Microeconomics: A Modern Approach. W.W. Norton and Company, New York. ISBN 0-393-97830-3. Any edition is fine. Referred to as Varian. [COMM 220 and FINA 385] Bodie, Z.; A. Kane; A.J. Marcus; S. Perrakis; and P.J. Ryan, Investments. McGrawHill Ryerson, Toronto. Any edition is fine. Referred to as Bodie et. al. [FINA 385] Fabozzi, Frank, J.; Edwin H. Neave, and Guofu Zhou, Financial Economics. John Wiley & Sons, Inc. Hoboken, New Jersey. Referred to as Fabozzi et. al. Any edition is fine. [FINA 385]

⊶ !2 ⊷

TOPICS The chapter numbers refer to my class notes. Do the homework exercises and read the articles at the end of each chapter. 1.! Portfolio Theory!

ch. 11

2.! Choice Under Certainty!

ch. 12

3.! Choice Under Uncertainty!

ch. 13

4.! Equilibrium in Capital Markets!

ch. 14

5.! Derivative Securities!

ch. 15

GRADING Assignment 1!

10%!

Tuesday, February 5th by 5 p.m.

Assignment 2!

10%!

Tuesday, April 2nd by 5 p.m.

Test!

40%!

Tuesday, February 19th in class

Final Exam!

40%!

To be announced

The test is multiple-choice, and covers topics 1 and 2. There is no makeup for the test. If you don’t write it, its weight will be added to the final exam. If for unseen circumstances the test cannot be held on February 19th (for example, my being arrested and not granted bail), it will be held on Tuesday, March 5th. My test and exam are not common with the other sections of FINA 385.

ACADEMIC INTEGRITY Your work must be your own. Doesn’t matter whether it is an assignment or an exam. It’s that simple. Read the university’s policy on academic integrity at concordia.ca/students/academicintegrity. University policy on plagiarism is reproduced in this document under “More”.

⊶ !3 ⊷

ASSIGNMENTS This section explains your assignments. Assignments are always due by 5 p.m. and must be submitted through Moodle, never by email. Late assignments are not accepted. You are allowed to submit as many times as you want up to the deadline. That means that you can do a trial submission early on to see how it works. Don’t be a knucklehead by trying to submit at 4:58 p.m. on the day your assignment is due. It will end in tears. Read the assignment instructions carefully. An assignment may require you to submit your answers to questions using a Moodle form, upload a PDF file containing a written report, and sometimes upload a CSV file containing data or the results of an analysis. If the assignment is a written report, put your student number somewhere on the first page but do not add your name.

⊶ !4 ⊷

ASSIGNMENT 1—PORTFOLIO PERFORMANCE Does how a portfolio is rebalanced make a difference for its performance? Have a look this question by comparing the performance of a portfolio that has been rebalanced every month each of three ways. The first way is not to rebalance at all, that is, to simply buy and hold. The investment weights for a target expected return are estimated, the portfolio is formed, and that’s it. The weight of each asset in the portfolio will drift on its own according to its return relative to the return of the entire portfolio. Another way to rebalance is to reset the weights of the assets to their initial estimates. Call this static rebalancing because the investment weights are kept the same every month. The last way you’ll consider is to estimate new investment weights for every month by moving your estimation window forward by one month as each month passes. Call this dynamic rebalancing. There are countless other ways to rebalance, but we have to draw the line somewhere. You can find the stocks for your portfolio and your target expected return in the table, which starts on pages 6 and 7. If your student ID is not in the table, use the stocks and return assigned to ID 20000000 in the first row. You can find the stock returns in “Stock Returns.csv” in the downloads folder on our Moodle homepage. This is the same data file used in your homework exercises. The returns cover 72 months, 2008 through 2013. Use 48 months for estimating the investment weights for an efficient portfolio having the target expected return you have been assigned. Use the remaining 24 months, 2012 and 2013, as the investment period. For dynamic rebalancing, move the 48-month estimation window forward by one month for each month that goes by in the investment period. This means that the weights applied each month of the investment period are estimated using the previous 48 months. It is a rolling window estimation. Summarize your portfolio’s performance for the three approaches in a table like this one.

PORTFOLIO PERFORMANCE! JANUARY 2012 THROUGH DECEMBER 2013 NO REBALANCING! (BUY AND HOLD)

STATIC! REBALANCING

DYNAMIC! REBALANCING

Mean Return

Q1

Q2

Q3

Standard Deviation

Q4

Q5

Q6

Annual Return

Q7

Q8

Q9

Negative Months

Q10

Q11

Q12

N = 24 months. Mean and Standard Deviation are monthly. Annual Return is the annualized holding period return for the 24 months. Negative Months is the fraction of months that the portfolio’s return was negative.

⊶ !5 ⊷

In addition to the table, plot the portfolio frontier based on the estimates of the weights you obtained from the initial estimation window (months 1 through 48). Make sure to add separate points for the expected return and standard deviation of the target portfolio based on the initial estimation window, and the portfolio’s actual mean and standard deviation under the three approaches to rebalancing of the investment period. Include a short descriptive caption under the plot, which should include the annual return for each approach. The plot and its caption should tell anyone viewing it everything they need to know.

DEADLINE 5 p.m. Tuesday, February 5th, 2019

SUBMITTING YOUR WORK! Submit your work at our Moodle homepage. Use the Performance Results questionnaire to submit the 12 values, Q1-Q12, from your results table, and your estimates of the six initial investment weights for a total of 18 questions. Use the Upload Frontier Plot form to submit your frontier plot in PDF.

GRADING Out of 20. Eighteen marks for the questions on your results and two marks for your plot.

TIPS • Make sure to use the stocks and target return assigned to you. You will be graded on those. • Submit calculations with 6-decimal point precision, e.g., 0.037824 = 3.7824 per cent. • Do not round values that you need to use in subsequent calculations. If you need values for x and y to calculate z, do not round the values of x and y. • Don’t forget that there is a spreadsheet that illustrates holding period return in the Computing Toolshed folder.

⊶ !6 ⊷

YOUR PORTFOLIO YOUR ID

TARGET! RETURN

STOCKS

20000000

ATA

CR

ELD

IMG

NPI

VET

0.0210

21455737

ACQ

ATA

CEU

CFP

CU

FFH

0.0210

26674461

AGI

NGD

OTC

REI.UN

VET

WTE

0.0220

26796508

BNE

BNK

BTE

CR

HNL

YRI

0.0290

27551428

ATD.B

CLS

FM

HNL

IMG

PEY

0.0210

40003075

BCB

BTE

CNR

CPG

CUS

KEY

0.0270

40004196

CPG

CRR.UN

NPI

PEY

WTE

YRI

0.0180

40005010

AX.UN

BTE

CEU

CR

CUS

OGC

0.0290

40006127

ARX

ATA

ELD

LUN

PD

WPT

0.0220

40016688

ASR

CNR

CR

CU

G

YRI

0.0190

40018961

CGX

CSU

IFC

ITP

LIF

TCW

0.0200

40020678

CHE.UN

CS

IMG

MRU

OTC

WJX

0.0210

40021272

ACQ

BIR

BNK

FM

HR.UN

TFI

0.0250

40021431

CR

CS

OTC

PRE

VET

VSN

0.0190

40024148

ASR

CEU

FNV

NPI

OTC

VET

0.0250

40026533

AUQ

CFW

FM

IPL

KEY

LB

0.0220

40028792

BEP.UN

CS

CUS

EXE

PEY

WFT

0.0150

40032026

CRR.UN

ENB

HNL

IPL

POU

YRI

0.0220

40032328

CGX

CU

LUN

NPI

NPR.UN

TCW

0.0130

40032513

CHE.UN

CWT.UN

LUN

NG

NPR.UN

NSU

0.0280

40032589

BEP.UN

CG

CHE.UN

GRT.UN

HR.UN

NAL

0.0240

40032885

ELD

EXE

GTE

SLW

WJX

WPT

0.0250

40032952

CLS

G

IFC

LB

OTC

POU

0.0180

40033931

BTE

KEY

MTL

TGL

VRX

WFT

0.0230

40034955

AX.UN

BCB

FRC

GRT.UN

OTC

PD

0.0280

⊶ !7 ⊷

YOUR ID

TARGET! RETURN

STOCKS

40044980

ABX

DSG

FNV

MTL

TRQ

WFT

0.0180

40045502

ASR

CEU

GRT.UN

HCG

SLW

TET

0.0320

40045919

BEP.UN

CU

EMA

NAL

PPL

WPT

0.0190

40048718

ATD.B

BNK

DC.A

FFH

GTE

POU

0.0240

40049613

BDI

CG

FR

FRU

GRT.UN

GTE

0.0310

40053365

CLS

CR

NGD

TDG

VRX

WPT

0.0290

40055106

ATA

BCB

BXE

LIF

TET

WJX

0.0290

40056848

AGI

CGG

OGC

SLW

TCK.B

TCW

0.0270

40057338

CEU

FRC

HCG

LIF

LUN

TCK.B

0.0310

40058257

AP.UN

BDI

GRT.UN

NSU

TRQ

VRX

0.0290

40058739

AP.UN

FNV

GRT.UN

HR.UN

PPL

REI.UN

0.0180

40060502

ARX

CG

CS

LUN

NAL

WTE

0.0210

40060989

BTE

CR

CRR.UN

HCG

NA

POU

0.0220

40060997

CUS

DSG

IFC

NA

REI.UN

VET

0.0140

40061179

AX.UN

CUS

HCG

HR.UN

NG

NSU

0.0280

40061291

ATD.B

BDI

CHE.UN

FRU

PD

TRQ

0.0240

40061296

BNK

CWT.UN

EXE

LB

NAL

PEY

0.0200

40062842

CU

CUS

DC.A

GIB.A

WPT

WTE

0.0200

40063149

BNE

CLS

FRU

GRT.UN

ITP

TFI

0.0230

40063742

BIR

DGC

EMA

EXE

GTE

YRI

0.0210

40064074

DSG

FFH

HR.UN

LNR

PPL

SLW

0.0190

40064080

BEP.UN

CRR.UN

DSG

NAL

NGD

WFT

0.0180

40071365

ENB

LUN

PRE

TFI

WPT

WTE

0.0240

40076516

CFW

CRR.UN

CUS

FFH

FNV

GIB.A

0.0190

40078107

ABX

ASR

FM

FR

VSN

WJX

0.0250

40099011

AGI

BXE

CNR

PPL

REI.UN

WPT

0.0250

⊶ !8 ⊷

ASSIGNMENT 2—[TOPIC TBA] Coming soon. I’ll let you know the assignment is ready and you can download an updated version of this document.

Deadline:!

5 p.m. Tuesday, April 2nd, 2019

Format:! !

TBA

⊶ !9 ⊷

MORE INTERACTIVE FILES AND WOLFRAM’S CDF PLAYER In our Moodle downloads folder, you will come across zip archives containing files with extension cdf. CDF stands for Computable Document Format, a format used for interactive apps created in the Wolfram Language (Mathematica). To run the apps you need to install Wolfram’s free CDF Player from www.wolfram.com/cdf-player. The player app also lets you view Mathematica notebook (.nb) files. Here are some of the CDF files in the downloads folder that you may find useful. • Demos that allow you to explore models and concepts dynamically. It will be obvious from the names of the demo files which are intended my COMM 220 students or my FINA 385 students; but you are welcome to look at any you want. You can find the demos bundled in “Demos.zip”. • Homework quizzes for COMM 220. You can find them in “Homework.zip”. • The model answers to some assignments. • The questions and answers to the mid-term test. • Some of the files in “Computing Toolshed.zip”. These are Mathematica notebooks intended for FINA 385 students who are analyzing data or tinkering with computer programming. If you are a Mac user, Wolfram’s CDF Player app might not open your CDF files automatically when you double-click on them. Here’s how to fix that by teaching your Mac to recognize the cdf file extension. • Download any CDF file from our Downloads folder on Moodle • Select the file"

⊶ !10 ⊷

• Choose Get Info under the File menu in Finder or type ⌘I. This will open a window that shows info about the file • Choose Wolfram CDF Player under the “Open with:” dropdown menu • Click the “Change All…” button directly below (it will be enabled on your Mac)

Computer programming i are curious, you can install a student version of Mathematica. It is available at MyConcordia."

⊶ !11 ⊷

FINDING ARTICLES ONLINE Most of the articles for my courses are available in PDF through our library. Here’s how to get them. • Go to our library’s website. • Search by journal or periodical title.

⊶ !12 ⊷

• Click the electronic resource link for the journal. If you are off campus you will be prompted for your net name and password.

⊶ !13 ⊷

• Choose an archive, e.g., JSTOR or ABI/Inform Global. There will often be more than one that has the year you are looking for.

⊶ !14 ⊷

• Find the volume and issue. Empowering, isn’t it? I’ll let you take it from here.

⊶ !15 ⊷

TIPS AND FAQS I had some fun with the FAQs. What can I say? I’m a slave to temptation, and I figure you have a sense of humour. • Take notes, lots of notes, not dictation, and in your own words. Rework them after class. My slides are not notes; they are sparse for a reason. I avoid bulleted lists; as a matter of fact, I’m slowly weeding bullets out entirely. PowerPoint makes you and me stupid. • Do the homework for each topic as we are covering it or soon after. • Don’t memorize. Learn ...