MBA Course in Investment Management

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Jamal Munshi PhD, All rights reserved

The course
Finance is essentially the study of risk and of investor choices in risk-return space. In this course we address this question head-on. We also introduce the students to the no-arbitrage principle (NAP) of Finance and apply it to fixed income securities and derivatives. Students use NAP to price futures and the binomial model to price options and gain a depth of conceptual understanding of securities and their markets. Students are expected to have completed courses in the fundamentals of finance, accounting, and statistics. The course is quantitative in nature and it requires proficiency in mathematics and in Microsoft Excel. Proficiency in written English is also important.
Textbook
Robert A Taggart, Jr, Quantitative Analysis for Investment Management
Prentice Hall, ISBN 0133196909
Classroom activities
There are 8 class meetings on 8 consecutive weeks, one day per week, and one scheduled final examination period.
There may be up to three activities per meeting
Activity #1: Quiz on previous topic: 1 hour
Activity #2: Lecture on new topic: 1.5 hours
Activity #3: Workshop on new topic: 1.5 hours
Meeting #1
Workshop #1: Coupon bonds and strip market arbitrage.
To prepare for workshop #1 please read chapter 1.
Meeting #2
Quiz #1: Strip market arbitrage.
Workshop #2: Bond duration and interest rate futures.
To prepare for workshop #2 please read chapters 2 and 3.
Meeting #3
Quiz #2: Interest rate risk
Workshop #3: The DCF model for stock valuation.
To prepare for workshop #3 please read chapter 4.
Meeting #4
Quiz #3: Stock valuation.
Workshop #4: The binomial option pricing model.
To prepare for workshop #4 please read chapter 5.
Meeting #5
Quiz #4: Option pricing.
Workshop #5: Portfolio theory and utility maximization.
To prepare for workshop #5 please read chapters 9 and 10.
Meeting #6
Quiz #5: Portfolio theory.
Workshop #6: CAPM.
To prepare for workshop #6 please read chapters 10 and 11.
Meeting #7
Quiz #6: CAPM.
Workshop #7: Portfolio management.
To prepare for workshop #7 please read chapter 12.
Meeting #8
Quiz #7: Portfolio management.
Workshop #8: Evalutation of portfolio performance.
To prepare for workshop #8 please read chapter 13.
Scheduled final examination period
Quiz #8: Evalutation of portfolio performance.
Semester project (select one)
Excel model for stock option pricing: report and presentation
Excel model for portfolio utility maximization: report and presentation
Assignment types
The class is divided into groups. Workshops and semester projects are group assignments. They are carried out cooperatively by group members working as a team. The instructor serves as an ex-officio member of each group. Quizzes and examinations are individual assignements. Please do these on your own. You are expected to complete your quiz without using your book or notes. Please turn in your workshop before you take the quiz. For group assignments submit one paper per group. For individual assignments submit one paper per student.
Missed workshops and quizzes
Once per term, the student may carry the weight of a missed workshop forward to the next workshop. Once per term, the student may carry the weight of a missed quiz forward to the next quiz. There is no provision for make-up workshops or quizzes.
Evaluation of learning
8 Workshops x 4 points each = 32 points
8 In-class short quizzes x 8 points each = 64 points
Semester project = 4 points
Total = 100 points
Letter grade: 90-100 = A, 80-90 = B, 75-80 = B-, 60-75 = D, else F
Outcomes
After completing this course you should be able to
  • Carry out valuation and yield computation of strips given the yield curve.
  • Understand coupon bonds as a portfolio of strips and be able to assess valuation and yield accordingly.
  • Understand and apply the concept of inter-market arbitrage.
  • Understand and apply the “no arbitrage principle” for markets at equilibrium.
  • Be able to form synthetic zero coupon bonds by combining positions in the coupon bond market.
  • Design arbitrage strategies when the coupon bond market and the strip market are not at equilibrium.
  • Understand how interest rate futures markets work and be able to hedge your position in the bond market with interest rate futures.
  • Understand the unique relationship between the yield curve and interest rate futures and be able to design arbitrage strategies when the strip market and the futures market are not at equilibrium.
  • Understand and apply the DDM for stock valuation under the constant growth assumption.
  • Use the PVGO principle to evaluate how managers add shareholder value by investing in high IRR projects.
  • Understand and apply the dynamics among dividend policy, capital structure, and growth rate.
  • Understand stock options, the source of their value, and their market dynamics.
  • Understand and apply the no-arbitrage relationship between the options market and the stock market.
  • Use the binomial model of contingent claims to price put and call options and to understand that options derive their value from uncertainty.
  • Conceptualize and apply the concept of risk as uncertainty and its metric as the variance.
  • Understand the concept of utility maximization and apply this concept to mean-variance space in terms of risk aversion.
  • Understand the concept of covariance and its application in portfolio theory and diversification.
  • Carry out optimization of a portfolio of risky assets.
  • Carry out optimization of a portfolio of risky assets and a risk-free asset
  • Develop a conceptual understanding of CAPM and EMH.
  • Apply CAPM and EMH to equilibrium pricing of risky assets.
  • Apply CAPM and EMH to develop risk adjusted measures of portfolio performance.

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