Syllabus 3491 020618 PDF

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FNCE 3491 Investments

Meir Statman Winter 2018

Office Hours: Office: Telephone: Email:

By appointment Lucas Hall 321L (408) 554-4147 [email protected]

Description Investment knowledge is important to investment professionals, such as portfolio managers and financial advisers. They must know how to evaluate and select stocks, bonds, options and other securities, and how to guide investors to fitting portfolios and good investment behavior. Investment knowledge is also important to all of us as individual investors. The world of investment is changing rapidly as investment responsibilities and power move into the hands of individuals. The typical retirement plan is now a 401(k) type defined contribution savings plan where individuals make investments decisions and live by their outcomes. This course is centered on evidence-based knowledge of investments and investment behavior. It presents side by side standard and behavioral investment theory, evidence, and practice. These include analysis of wants and cognitive and emotional shortcuts and errors, portfolios, life-cycles of saving and spending, asset pricing, and market efficiency. These also include analysis of financial markets, such as stock exchanges, and securities, such as stocks, bonds, options, and futures.

Learning objectives: Upon completion of the course student would be able to: 1. Explain the foundation blocks of investments and investment behavior, including rational and normal behavior, standard and behavioral portfolios, standard and behavioral life-cycles of saving and spending, standard and behavioral asset pricing, and standard and behavioral market efficiency 2. Use evidence-based knowledge of investments and investment behavior to pursue wants while avoiding cognitive and emotional errors.

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3. Be able to ascertain the value of securities such as stocks, bonds, options, and futures and their place in their portfolios and investment strategies 4. Be able to improve the management of their own retirement savings and teach others to do the same

Textbooks and other course materials Bodie, Kane, and Marcus (BKM), Essentials of Investments, 10th edition ISBN-13: 978-0077835422 Statman, Finance for Normal People ISBN 978-0-19-062647-1 Think about the textbooks as background information. I would expect you to know the materials we discuss in class but not all the materials in the books. In-class exams would not include questions on materials not discussed in class. Nevertheless, I’d welcome questions about materials in the textbooks as well as questions about issues you read in print and online, or hear from family and friends. All other course materials are on the course page on Santa Clara’s CAMINO network. They include materials for assignments (questions and data), the solutions manual (Instructor manual) of BKM and questions manual (Student manual) of Statman. Your course grade will be based on 2 in-class exams and 2 take-home exams, (22.5%) each, and timely submission of assignments showing conscientious work, regardless of whether the answers are correct (10%). The in-class exams will be on Tuesday February 13 and Thursday March 15 (which is also the last day of the course). I will determine the dates of take-home exams later, but you will have at least one week from the date I assign each take-home exam and the date you are expected to turn it in. I will post sample questions and answers to the in-class exams on Camino. You can bring with you to each in-class exam a financial calculator (basic one that includes square-root function but nothing more advanced. Answers to in-class exams will require nothing beyond square-root) You can also bring 5 double side pages of notes (10 pages of notes overall). But the notes must be handwritten or typewritten by YOU. No photocopies of the textbook, solution manual, etc. (My estimate is that you will not need these pages during the exam, but preparing them is an excellent study tool and they will reduce anxiety before each inclass exam and during it.)

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StockTrak, an investment simulation, is part of the course. We will use it to learn about securities, such as stocks, bonds, options and futures, how markets operate, market efficiency, and more. For Stocktrak, go to: ht t p: / / www. st ockt r ak. com/ member s/ r egi st er st udent ?cl assName=FNCE3491Wi nt er 18

The course includes assignments to be handed in, including assignments based on Stocktrak. Due datees are marked in bold. These assignments will be checked but not graded. I expect effort at learning from these assignments but not necessarily correct answers. We will review them in class. Your Stocktrak investment outcomes, good or bad, will not affect your grade. I note a few end-of-chapter questions and problems from the BKM book and encourage you to answer them and other questions. You can find answers and solutions in the solutions manual posted on Camino. There is no need to submit these answers and solutions. Course Outline: Due dates for assignments are bolded. Begin StockTrak investment game (1/11 or earlier) – Report on StockTrak portfolio choice is due (1/16) See attached instructions Elements of investing and investment behavior (1/9, 1/11, 1/16, and 1/18) BKM Elements of Investing Statman Behavioral People are Normal People BKM Chapter 1: Investments: Background and Issues Read entire chapter BKM Chapter 2: Asset Classes and Financial Instruments Read entire chapter and solve problems 19, 20 BKM Chapter 3: Securities Markets Read entire chapter and solve problems 12 and 15 BKM Chapter 4: Mutual Funds and Other Investment Companies Read entire chapter and solve problems 13, 15, and 16 Statman Introduction – What is Behavioral Finance Read entire chapter

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Statman Chapter 1: Normal People Read entire chapter Statman Chapter 2: Wants for Utilitarian, Expressive, and Emotional Benefits Read entire chapter Statman Chapter 3: Cognitive Shortcuts and Errors Read entire chapter Do Peach exercise Due 1/18 Do Gallup exercise Due 1/18 Statman Chapter 4: Emotional Shortcuts and Errors Read entire chapter Portfolios (1/18, 1/23 and 1/25) BKM Chapter 5: Risk and Return: Past and Prologue Read entire chapter and solve problems 5, 6 and 7 BKM Chapter 6: Efficient Diversification: Read Sections 6.1-6.4 and solve problems 8-12 Do portfolio asset allocation exercise: Due 1/23 Statman Chapter 8: Behavioral portfolios Read entire chapter Do Gold exercise Due 1/30 Do Gaps exercise Due 1/30 Statman Chapter 9: Behavioral life-cycle of saving and spending Read entire chapter Midterm report on StockTrak investment game: Due 2/6 Asset Pricing and Market Efficiency (1/30, 2/6, 2/8, and 2/13) BKM Chapter 7: Capital Asset Pricing and Arbitrage Pricing Theory Read Sections 7.1-7.4 and solve problems: 3 and 12 Statman Chapter 10: Behavioral asset pricing Read entire chapter

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BKM Chapter 8: Efficient Market Hypothesis: Read entire chapter and solve problems 13, 15 and 21. Statman Chapter 11: Behavioral market efficiency Read entire chapter Do CAPM and 3-factor exercise: Due 1/25

Debt securities (2/13 and 2/15)

BKM Chapter 10: Bond prices and yields Read entire chapter and solve problems 4, 5, and 10 BKM Chapter 11: Managing Bond Portfolios: Read entire chapter and solve problems 2, 8 and 13

Options and futures (2/15, 2/20, 2/27, 3/1, and 3/6) BKM Chapter 15: Options Markets: Read sections 15.1-15.2 Do the options project. Begin on 2/20 or earlier, submit on 2/27 Options project: Create a position using options on StockTrak. (e.g. covered call, protective put, collar, straddle). Review it at least once a day and write down the values of each of the components of the position. Submit a table tracking the position and a one-page write-up about what the position was designed to do and what it did.

Chapter 16: Option Valuation Read entire chapter Chapter 17: Futures Markets: Read entire chapter Do the futures project. Begin on 3/1 or earlier, submit on 3/8 Futures project: Create a position using futures on StockTrak. (e.g. a hedge of an S&P 500 Index ETF and a futures contract on the S&P 500 Index, a bet on one or more futures contracts, a hedge using two different futures contracts). Review it at least once a day and write down the values of each of the components of the position. Submit a table tracking the position and a one-page write-up about what the position was designed to do and what it did.

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Security Analysis (3/8 and 3/13

BKM Chapter 13: Equity Valuation: Read entire chapter and solve problems 16, 18, and 20 Do the Golden Gate exercise: Due 3/13

Final report on investment game due on 3/15

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Stocktrak Investment Game

Register at: ht t p: / / www. st ockt r ak. com/ member s/ r egi st er st udent ?cl assName=FNCE3491Wi nt er 18

You have an initial $1,000,000 in cash and you can borrow an additional $500,000 if you buy on margin. (But you do not have to buy on margin). Combine any number of stocks, mutual funds and cash (interest bearing account) into a portfolio. Your portfolio must have at least one stock or mutual fund. The game begins on Thursday January 11, and your portfolio must be ready by then. But you can buy and sell before then. You can buy and sell stocks and mutual funds anytime. To win in this game, you have to maximize the reward to risk ratio (Sharpe Ratio). The reward is the difference between the mean of the weekly (percent) returns of your portfolio and the mean weekly rate of interest on cash. The risk is the standard deviation of the weekly portfolio returns. I will invest my money in Vanguard Total Stock Market Index Fund (VTSMX). This is a broad index fund of U.S. stocks. Please write a one or two-paragraph report on your investment strategy. (What are your investment objectives? High returns? Low risk? How do you go about it? Choosing random stocks counts as a strategy as well. If so, write why you choose randomly) Due on Tuesday 1/16. Please write a one-page report stating your original investment objectives, your success at meeting them, and any other lessons you have learned. Attach a summary of the analysis in a table as well. A midterm report is due on Tuesday February 6. A final report is due on Thursday, March 15.

Good Luck!...