Introduction to Investment Management


Jamal Munshi PhD, All rights reserved

The course
The undergraduate Finance major is presented with the essential concepts of risk, return, and diversification and these are then applied to the pricing of risk in efficient markets using the capital asset pricing model. These concepts are used in the context of a wide range of markets and securities that include bonds, stocks, futures, and options. 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.
Bodie, Kane, and Marcus, Essentials of Investments
McGraw Hill, ISBN 007123229X
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
Workshops and quizzes utilize selected problems from the assigned problem set. Students are requested to complete the reading assignment for Workshop #1 prior to the first class meeting.
Assignment due dates
Workshops are due at the end of the workshop period but may be turned in later at any time prior to the next quiz for half credit. Quizzes are due at the end of the quiz period but may be turned in later at any time prior to the next quiz for comments but not for credit. The term project may be turned in at any time prior to the scheduled final examination.
Meeting #1
Workshop #1: Risk and return
Reading assignment: sections 5.1, 5.2, 5.5, 5.6.
Assigned problem set: 5.1 - 5.15 and 5.18 - 5.21
Meeting #2
Quiz #1: Risk and return
Workshop #2: Diversification
Reading assignment: sections 6.1, 6.2, 6.3, 6.4
Assigned problem set: 6.1 - 6.11
Meeting #3
Quiz #2: Diversification
Workshop #3: Capital asset pricing model (CAPM)
Reading assignment: sections 7.1, 7.2, 7.3
Assigned problem set: 7.1 - 7.4, 7.6 - 7.20
Meeting #4
Quiz #3: CAPM
Workshop #4: Bonds
Reading assignment: sections 9.1 - 9.6
Assigned problem set: 9.1 - 9.33, 9.35
Meeting #5
Quiz #4: Bonds
Workshop #5: Stocks
Reading assignment: sections 12.1 - 12.5
Assigned problem set: 12.1 - 12.21
Meeting #6
Quiz #5: Stocks
Workshop #6: Futures
Reading assignment: sections 16.1, 16.3, 16.4, 16.5
Assigned problem set: 16.1, 4, 8, 9, 11, 12, 13, 14, 17, 19, 20, 23
Meeting #7
Quiz #6: Futures
Workshop #7: Options
Reading assignment: sections 14.1, 14.2, 14.3
Assigned problem set: 14.1, 2, 3, 4, 5, 6, 7, 11, 15, 17, 19, 21
Meeting #8
Quiz #7: Options
Workshop #8: Efficient market hypothesis (EMH)
Reading assignment: sections 8.1, 8.2, 8.3
Assigned problem set: 8.1 - 8.7, 8.13 - 8.23
Scheduled final examination period
Quiz #8: EMH
Semester project
Development and presentation of an Excel model to formulate an investment strategy for the problem assigned to your group.
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. 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
After completing this course you should be able to
  • Using historical data or forecast information, compute risk and expected value of returns
  • Compute expected return and risk of portfolios that combine risky assets with risk free assets
  • Understand the concepts of diversification and covariance of returns and their relationship.
  • Construct efficient portfolios and optimal risky portfolios
  • Understand and apply the capital asset pricing model
  • Use the implications of capital market theory to price risk
  • Understand and apply te no-arbitrage principle in the CAPM context
  • Carry out bond valuation and yield computations
  • Identify the determinants of bond ratings in terms of default risk
  • Apply the effects of callability and other bond provisions on yield
  • Apply the yield curve and its implications in the bond market
  • Use the dividend discount model (DDM) to price stocks of constant growth and multistage growth firms
  • Use P/E ratio analysis in stock pricing in the DDM context
  • Value a futures position under various spot market conditions
  • Formulate futures market strategies for hedging
  • Describe the relationship between futures market, spot market, and bond market prices at no-arbitrage equilibrium
  • Formulate arbitrage strategies to exploit market anomalies
  • Compute equilibrium futures price at no-arbitrage equilibrium
  • Value an options market position under various spot market conditions
  • Formulate option market strategies for various investment objectives
  • Understand the no-arbitrage condition for options markets, stock markets, and bond markets
  • Formulate options market arbitrage strategies
  • Understand the unpredictability of securities price movements
  • Understand the efficient market hypothesis, its assumptions, and its impications
  • Formulate investment strategies that make sense in efficient markets and identifiy those that don't

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