Teaching Evaluations of Sudip Gupta Course Name University Level Average Rating Equity and Fixed Income Investments Kelley School of Business, Indiana University Undergraduate 6.74/7 Intermediate Corporate Finance Kelley School of Business, Indiana University Undergraduate 6.3/7 Foundations of Finance Stern School of Business, New York University Undergraduate and MBA 6.2/7 International Finance RH Smith School of Business, University of Maryland Undergraduate 4.47/5 Investments RH Smith School of Business, University of Maryland Undergraduate 3.75/5 Advanced Portfolio Management Indian School of Business MBA 5.5/7 Behavioral Finance Indian School of Business MBA 5.1/7 Financial Econometrics Indian School of Business Ph.D. 7/7 Graduate Econometrics I University of Wisconsin Madison Ph.D. 4.44/5 Graduate Econometrics II University of Wisconsin Madison Ph.D. 4.23/5 Microeconomics University of Wisconsin Madison Undergraduate 3.934.1/5
Transcript
Teaching Evaluations of Sudip Gupta Course Name University Level Average
Rating Equity and Fixed Income Investments
Kelley School of Business, Indiana University
Undergraduate 6.74/7
Intermediate Corporate Finance
Kelley School of Business, Indiana University
Undergraduate 6.3/7
Foundations of Finance
Stern School of Business, New York University
Undergraduate and MBA
6.2/7
International Finance
RH Smith School of Business, University of Maryland
Undergraduate 4.47/5
Investments RH Smith School of Business, University of Maryland
Undergraduate 3.75/5
Advanced Portfolio Management
Indian School of Business MBA 5.5/7
Behavioral Finance
Indian School of Business MBA 5.1/7
Financial Econometrics
Indian School of Business Ph.D. 7/7
Graduate Econometrics I
University of Wisconsin Madison
Ph.D. 4.44/5
Graduate Econometrics II
University of Wisconsin Madison
Ph.D. 4.23/5
Microeconomics University of Wisconsin Madison
Undergraduate 3.93-‐4.1/5
FOUNDATIONS OF FINANCE
FINC-UB.0002.05 Spring 2013
TR 2-3:15am (Tisch 201) Instructor: Prof. Sudip Gupta Office: 10-89 KMEC Office Hours: Tue-Thu 3:30-4:30 PM or by appointment Telephone: 212-998-0279 Email: [email protected] Homepage: Blackboard TA: Kriti Jain (email : [email protected]) Office Hours: Monday 12:30-1:30 PM (Ernst & Young Learning Centre) Course Description This course is a rigorous, quantitative introduction to financial market structure and financial asset valuation. The main topics of the course are arbitrage, portfolio selection, equilibrium asset pricing (CAPM), fixed income securities and derivative pricing. You are expected to understand valuation formulas and be able to apply them to new problems. The appropriate tools necessary for solving these problems will be developed at each stage and practiced in the homework assignments. The models we will cover have immediate applications and implications for real-world financial decisions. Every effort will be made to relate the course material to current financial news. To take this course, students must be comfortable with statistics, linear algebra, calculus, and microeconomics. Required and Recommended Materials The main textbook for the course is Zvi Bodie, Alex Kane, and Alan J. Marcus, Essentials of Investments, McGraw-Hill
Irwin, 2010. The text comes with a solutions manual for the end-of-chapter problems. Further required material is in the custom published version of selected chapters from
Stephen A. Ross, Randolph W. Westerfield, and Bradford D. Jordan, Essentials of Corporate Finance, 6th Edition, McGraw-Hill Irwin, 2008.
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The 3 chapters in this extract, along with material from the associated Student Problem Manual, are in a soft-bound book. All three books should come shrink-wrapped together in the bookstore. There is an optional book
Craig W. Holden, Excel Modeling and Estimation in the Fundamentals of Investments, 3rd Edition, Pearson Prentice Hall, 2009.
that is useful for those with limited knowledge or experience with the Excel tools used in this course. There will be lecture notes, handouts, and supplementary materials (e.g., sample Excel spreadsheets) for many classes. Lecture notes and handouts will be distributed at the beginning of class, and they will also be available on Blackboard, usually before the relevant class session. Extra copies of these materials will not be available in my office. If you miss or lose the handouts, you should print them out from Blackboard. The supplementary materials will also be available on Blackboard, as will links to other relevant information. Finally, you need a calculator for this class. It is a distinct advantage to have a financial calculator, but not an absolute requirement. However, if you plan to take other finance classes, you will get good use out of a financial calculator. Course Requirements Assignments: The assignments for the course consist of 6 problem sets, an in-class midterm examination and a final examination. Problem set questions will be handed out in class (and will be available on Blackboard). Each student should hand in an individual set of solutions with his/her name and section prominently displayed on the top. However, you may discuss the problem sets with other students as long as you acknowledge any help you receive on the front page of your solutions. Midterm and final exam questions will draw heavily from the problem sets. The in-class midterm and the final exam will consist of multiple choice questions and short problems like those on the problem sets, in the textbook, and in the lecture notes. They will be closed book exams; however, you may bring a single 8½ by 11 sheet of paper with your notes (double-sided) to the midterm and two sheets (double-sided) to the final exam. In addition, I will provide a formula sheet with all the relevant formulas. The final exam will be cumulative. There will be no make-up exams. If you know that you will be unable to make it to class on the scheduled date, let me know far enough ahead of time so that you can take the test beforehand. Other requirements: In addition to the problem sets, students should attempt to do end-of-chapter problems from the textbook. Suggested problems will be listed in the lecture notes. Answers to these problems will not be collected, and the solutions are available in the solutions manual that comes with the textbook. These problems are an excellent way to check your mastery of the material. Looking at the solution before attempting to do the problem is NOT a good way to approach these problems. Class attendance is an important part of the learning experience. I do not take formal attendance; however, keep in mind that class participation does account for 5% of the final grade. If you are not in class, you cannot participate in the discussion. If you will miss class, please inform me beforehand via email. (One
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fifth of the class participation grade, 1% of the total grade, will be given for filling out an online customized course survey at the end of the semester.) For those of you who may miss class, I will attempt to tape every class session. The URL for the streaming video will be posted on Blackboard as soon as it becomes available. However, keep in mind that viewing the video is not a good substitute for attending class. Finally, participation is an essential part of learning in this course. Students are expected to participate in all facets of classroom learning. In particular, you are expected to contribute, in a constructive manner, to classroom discussions. These contributions will make up the remaining four fifths of the class participation grade. The assigned reading should be done before the corresponding class session, and you are also expected to keep up with current business news by reading a publication such as the Wall Street Journal. I will attempt to alert you to particularly interesting news items via an announcement on Blackboard. Thus, you should make an effort to check the course page regularly. I realize that some students, for a variety of reasons, are unwilling to speak up in class. You can also receive class participation credit by alerting me (via email) to interesting articles in the business press and highlighting their relevance to the class materials. Policies and Procedures The problem sets should be handed in before the end of the class session in which they are due. (Due dates can be found on the final page of the syllabus.) They can be given to me in class or emailed. Regardless of the method of delivery, the same deadline applies. The deadline refers to the time at which I receive the assignment, not the time at which you send it. Assignments that are late but within 24 hours of the deadline, will receive ½ credit. After 24 hours, no assignments will be accepted (unless due to documented serious illness or family emergency); it is unfair to the other students in the class. Students are expected to adhere to the NYU Stern Undergraduate Code of Conduct, a copy of which can be found at http://www.stern.nyu.edu/uc/codeofconduct. A student’s responsibilities include, but are not limited to, the following:
• A duty to acknowledge the work and efforts of others when submitting work as one’s own. Ideas, data, direct quotations, paraphrasing, creative expression, or any other incorporation of the work of others must be clearly referenced.
• A duty to exercise the utmost integrity when preparing for and completing examinations, including an obligation to report any observed violations.
Students whose class performance may be affected due to a disability should notify me immediately so that arrangements can be made to accommodate their needs in consultation with the Henry and Lucy Moses Center for Students with Disabilities (http://www.nyu.edu/csd/). I will make every effort to start and end class on time. If you arrive late, please enter quietly without disturbing the rest of the class. While in class, please be courteous to your fellow classmates and me. During lectures and discussions only one person should speak at a time. I encourage you to ask questions of your fellow students and me. I consider a good question as valuable as a good answer. In lectures, it is difficult to ask good questions unless you already have some familiarity with the material. Therefore, you should do the required reading before the relevant class session. Laptops, cell phones, Smartphones and other electronic devices are a disturbance to both students and professors. All electronic devices must be turned off prior to the start of each class meeting. I am available during the office hours listed at the beginning of the syllabus. If I have to cancel office hours I will try to make an announcement both in class and on Blackboard. If you cannot make it at these times,
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you can make an appointment to see me at another time. I am usually in the office every day. You can also take a chance and just drop by my office. However, even if I am in my office, I may have to turn you away if I am busy. Grading Policy The final grade will be calculated as follows: Class participation 5% Problem sets 15% Midterm exam 35% Final exam 45% At NYU Stern we seek to teach challenging courses that allow students to demonstrate differential mastery of the subject matter. Assigning grades that reward excellence and reflect differences in performance is important to ensuring the integrity of our curriculum. As such, following faculty guidelines, grades for this course will follow approximately the following distribution: A’s (A/A-) 25-35% B’s (B+/B/B-) 50-70% C’s and below 5-15% Note that while we use these ranges as a guide, the actual distribution for this course will depend upon how well the class actually performs in the course.
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Course Outline The problem sets are listed in the session when they are due (see the last page for dates). BKM refers to Bodie, Kane and Marcus, Essentials of Investments, and RWJ refers to Ross, Westerfield, and Jordan, Essentials of Corporate Finance. Readings should be done prior to the class session in which the material is discussed.
Session Date Topics Assignments 1 Tue. Jan 29 Introduction
Course overview
2 Thu, Jan 31 Financial Instruments & Markets
Skim: BKM 1-3
3 Tue, Feb 5 Time Value of Money PV, FV, r Annuities, perpetuities
Read: RWJ 4, 5.1-5.2
4 Thu Feb 7 Performance Measurement Compounding Investment evaluation (NPV,IRR)
Mutual funds, hedge funds and performance evaluation
Skim: BKM 4, 18 Problem Set 6
28 Thu, May. 9 Review/Problem Session Study!
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Assignment Due Dates Assignments (problem sets, exams) are due on the following dates. Problem sets are due before the end of the corresponding class session. Assignments that are late but within 24 hours of the deadline, will receive ½ credit. After 24 hours no assignments will be accepted (unless due to documented serious illness or family emergency). There will be no make-up exams. Any changes to this schedule will be announced in class and on Blackboard.
Assignment Due Date
Problem Set 1 Tue, Feb. 12
Problem Set 2 Tue., Feb 26
Problem Set 3 Tue., Mar. 12
Midterm Exam Thu, Mar 14
Problem Set 4 Thu, Apr. 4
Problem Set 5 Thu, Ap. 18
Problem Set 6 Thu, May 2
Final Exam Tue, May 21
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F420: EQUITY AND FIXED INCOME INVESTMENTS Fall 2015
Professor Sudip Gupta
SYLLABUS
Office: HH 6169 Phone: (812) 855-‐2005 Class Location: HH 209 Class Time: Section 2649: M/W 2:30-‐3:45
Section 6900: M/W 4:00-‐5:15 Office Hours: M/W 1-‐2 PM or by appointment Email: [email protected] Web Page: https://oncourse.iu.edu
COURSE DESCRIPTION Welcome to Equity and Fixed Income Investments. This course builds directly on F303, but offers a more nuanced, more detailed view of the two primary questions in investments and asset pricing: (1) What is the appropriate tradeoff between Risk and Return? and (2) Are markets efficient, or are there abnormal returns to be made? The first question is normative and is based on theory. The second is positive and is based on empirical data. In reality, any test of the second question is also a test of the first. This “joint hypothesis” problem means that the answer to the second question may never be fully settled. However, we can have a lot of fun examining the evidence (and maybe make a lot of money!). We will introduce several new topics and will delve more deeply into others. Additionally, group assignments are designed to encourage students to apply the tools of modern finance to real world scenarios.
COURSE OVERVIEW This course builds up on F303 and provides a rigorous treatment of advanced concepts of equity and fixed income investments. These are some (not all) of the major areas we will be covering: ● Arbitrage and limits to arbitrage ● Hedge funds and their performance ● Equity Premium and its evolution through time ● Asset pricing models, especially multi-‐factor models ● Methods to generate the yield curve and term structure of interest rates from real-‐life bonds ● Convexity and Duration of Bonds ● Bond Investment Strategies ● Bonds with Embedded Options ● Securitization ● Mortgage Backed Securities
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REQUIRED MATERIALS: Textbook, Clicker, and Subscription to StockTrak.com (by group): TEXTBOOKS We will be using selected chapters from the book “Investments” by Bodie, Kane and Marcus, 9th edition. This book is typically used in MBA classes and upper level undergraduate classes. However, the textbook is on the expensive side. With this in mind, I’ve provided three options:
1. Custom Textbook (select chapters from “Investments” plus 4 Harvard Business School cases) available at the
bookstore at cheaper rate than option 3 below. 2. eBook (electronic version) of the custom textbook available online (link in the resource section of the Oncourse
webpage). This can be downloaded in pdf format, or viewed online. 3. “Investments”, Bodie, Kane, and Marcus, 9th edition, available on amazon.com plus the 4 individual Harvard
Business School cases which cost about $7 each from Harvard Business Publishing’s website. There also appears to be a Kindle version of the full textbook for around.
These are the same versions that were used last year, so used copies may be available elsewhere. The textbook publisher has a website (http://mhhe.com/bkm) which includes practice questions and spreadsheets as well as other resources for the text. In addition to the textbook, we will be examining four case studies as described below.
CLICKERS I will frequently ask clicker questions to the entire class. All students are asked to respond to these questions using their clickers. Two points will be given for a correct response and one point for an incorrect response (and zero for no response). You will need to register your clicker in Oncourse. No allowance will be made for forgotten clickers, battery failures, or events (e.g., interviews, etc.) that might lead you to miss class. It is your responsibility to make sure that you have a functioning clicker device available for class and to accept any tradeoffs that you make in missing class. EACH DAY WILL BE EQUALLY WEIGHTED REGARDLESS OF HOW MANY QUESTIONS THAT DAY. However, the bottom 10% of scores will be dropped from your grade. In addition to graded questions, clickers will be used to elicit opinions, and to evaluate group presentations (described below). You are not allowed to submit clicker responses for a classmate. Students who engage in such practices will receive zeros for ALL questions for the entire semester.
Clickers were required for the integrated core, so you should be familiar with them. If you need to purchase one, they are available at the bookstore, or online. You may also be able to find a used one or rent one from the bookstore. The model we will be using is the Turing Technologies “ResponseCard RF LCD” but the basic clicker (ResponseCard RF) will also work. THE SMART PHONE APP IS NOT SUPPORTED BY THE WIFI IN THE CLASSROOM.
STOCKTRAK SUBSCRIPTION (by group) We will complete several assignments as group of about 4-‐6 students (we need 8 groups per section). One of the assignments will be a portfolio management simulation using the website stocktrak.com. Each group will be required to register for the “Silver” service level. The assignment is briefly described in the next section.
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ASSIGNMENTS/GRADING: CASES: We will be examining four Harvard Business School case studies during the semester. You are expected to form groups of about 6/7 students (we need 8 groups total per class), answer the questions that will be distributed regarding the cases, come to class prepared to discuss your answers, and hand in a one to two page write-‐up with your group. In addition to handing in the write-‐up, there will be three roles on the day we discuss the case:
1. “Analysts” (as a group)
As a group, you will be required to present (via PowerPoint) the results of your analysis to the rest of the class (and more specifically, to the “management”) for ONE case during the course of the semester.
2. “Management” (as a group) As a group, you will be required to play the part of the “management” during ONE of the other group’s presentations. This entails asking critical questions about the case, the assumptions, the conclusions, the recommendations, and the overall analysis.
3. “Shareholders” (as individual students) ALL STUDENTS will evaluate the performance of the Analysts and Management. Each individual student (not group) will be required to submit an evaluation (1-‐10, with 10 being the highest) of the performance of both the “analysts” and the “management”. This will be done in class using your clicker, so be sure to bring it to class. Part of the grades of the “analysts” and “management” will be based on these evaluations, and part of your grade will be based on submitting this evaluation.
Additionally, every student will be required to evaluate the contribution of each other student in his/her group at the end of the semester (1-‐10, with 10 being the highest). The final grade for each case will be based on the group’s performance evaluations (for those presenting or acting as management), the case write-‐up itself, and the contribution of the individual student as rated by the rest of the group.
The case studies we will be examining this semester are:
1. Harvard Management Co. and Inflation-‐Protected Bonds (9-‐201-‐053) 2. Dimensional Fund Advisors (9-‐203-‐026) 3. Multifactor Models (9-‐207-‐056) 4. Strategic Capital Management (9-‐202-‐024)
Please note that I will not adjudicate any intra-‐group disputes. Learning to cope with intra-‐group conflicts is part of your training.
EXAMS: You will be required to take three exams. The first two exams will be given during normal class time, and the third will be given during the finals week. All of these are closed books and closed notes exams with the following exception: you will be allowed one 8 ½” X 11” sheet of paper on which you can include important formulas, etc. The midterm exams will only focus on the material covered in class since the previous exams but the final exam will be comprehensive (i.e. cumulative) from all the material covered in class. If needed, these details may be modified.
CLICKER QUESTIONS: The material covered is complex and needs prior readings from the textbook. You are required to read the chapter covered in class before the lecture. The goal is to maximize the efficiency of the time spent in class. To encourage you to come to class prepared, several questions will be asked in the course of most of the lectures. Students are to respond using their own clicker (as described earlier). Two points will be awarded for correct answers and one point for incorrect answers. Zero points will be awarded for those not answering due to a problem with the clicker, an absence, or for simply not answering. To accommodate legitimate emergencies, the lowest 10% of the sessions will be dropped at the end of the semester from each student’s grade.
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STOCKTRAK GROUP ASSIGNMENT: As explained above, each group is required register for an account at stocktrak.com – a virtual trading room simulator. This assignment will allow students who have strong opinions (in either direction) on the Efficient Markets Hypothesis to put their (synthetic) money where their mouths are. Groups will be allowed to trade two securities -‐ a “risk free” asset and a “market portfolio” – as frequently (up to 200 trades) or infrequently as desired. The basic benchmark will be the return on the market portfolio, but groups will also be evaluated against each other. At the conclusion of the exercise, groups are required to summarize their performance and strategy in a document. More details will be provided when the assignment is given.
WHAT HAVE I LEARNED?: Near the end of the semester, each individual student will be required to write and turn in a short document summarizing two or three PRINCIPAL things that they have learned (not a summary of the class, but what you have learned). This helps to internalize the concepts and helps me understand which elements of the class made the most impact. This will be worth a very small part of your final grade.
GRADING
Exams Midterm Exam 1 20% Midterm Exam 2 20% Final Exam (Comprehensive, i.e. cumulative) 25%
Clicker Questions Several questions each lecture (lowest 10% dropped) 9% Cases 4 cases (@ 5% each) 20% StockTrak project Based on Performance and write-‐ups 5% What Have I Learned? 1% TOTAL
100%
GRADE POLICY: Grading is done on a relative basis (curve). Following standard finance department policy, the average GPA will fall between 2.70 and 3.00. The class curve is based on total points for the course across the three sections.
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ADDITIONAL ITEMS: NEWS ARTICLES: We will begin many lectures with a discussion of a current topic, which may (or may not) be related to the lecture. The article will be provided the day before class (or earlier). Come to class prepared to share your thoughts. Feel free to suggest an article that you find interesting.
CLASS COMMUNICATION: PowerPoint lectures, case questions, class syllabus and other printable material will be made available on Oncourse. You may find it helpful to print out class notes prior to class to aid in taking notes during lecture. No laptops are allowed. In class exercises and additional explanatory notes will not be distributed or posted. It is your responsibility to recover them from your colleagues if you missed class.
ANNOUNCEMENTS: All announcements (especially regarding the exams) will be posted on the course webpage. It is important that you check this page regularly. It is your responsibility to keep yourself informed of important developments pertaining to the course. Please also enter your photo, email address and any other required information to this web page.
POLICIES: 1. Class attendance is strongly encouraged. You should attend the class at the scheduled time. Late arrivals or early
departures are discouraged and because we will be asking question throughout the lectures, they could be reflected in your class grade. This policy avoids the problem of having people wander in and out in the middle of the class and disturb the lecture.
2. I fully appreciate that job interviews will occasionally conflict with class periods, but your efforts to minimize this conflict are greatly appreciated.
3. Bring a calculator to every class session. It will be useful when we do live exercises in class. 4. We will try to stick to the course outline schedule; however, it may be necessary to sometimes make
adjustments. 5. Please remember to turn off your cell phones, both during regular classes and during exams. 6. I do not schedule make-‐up exams. If you miss a mid-‐term exam, the grade portion of that exam will be
cumulated to the grade portion of your final exam (for example, if you miss one mid-‐term exam, your final exam will be worth 31.25% of your grade instead of 25%). Make-‐up final exams will be given only for family or medical emergencies. There is no guarantee that the make-‐up final will have the same difficulty and the same type of questions as the common exam.
VIDEO: Portions of this course may be subject to electronic proctoring. Video cameras may be used to monitor the room during student assessment activities, including but not limited to, exams, tests, and quizzes. Video recordings may be used to investigate or support disciplinary action. All access to and use of video equipment and recordings will follow applicable IU policies.
ACADEMIC HONESTY AND DISCIPLINE: Students are expected to adhere to the Student Honor Code. This class has zero tolerance for academic misconduct. The attempt of any student to present the work of another as his or her own, or to present any work not honestly performed, or to pass any examination by improper means is a most serious offense and will be treated with extreme prejudice. The aiding and abetting of a student in any dishonesty is likewise held to be a great breach of discipline. In addition, activities not related to the class, such as cell phone conversations, chatting, internet-‐surfing, tweeting, facebooking, blogging, etc., are strictly prohibited.
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COURSE OUTLINE The class schedule is tentative. I will make every effort to maintain the class schedule that follows. However, it may be necessary to make adjustments as the class proceeds.
Date Lecture# Topic Resources Aug 24 1 Syllabus and Introduction Class Notes Unit A: Equity Investments Aug 26 2 Learning About Return and Risk from the Historical Record BKM Ch. 5 Sep 2 3 Asset Allocation, Optimal Risky Portfolio Class Notes Sep 7 4 Labor Day No Class Sep 9 5 StockTrak Project Introduced/Group Time (computer lab) Room BLCG 0015 Sep 14 6 International Diversification BKM, Ch. 25 Sep 16 7 Case 1 -‐ Harvard Management Company Class Notes Sep 21 8 The CAPM (Review from 303) BKM, Ch. 9 Sep 23 9 APT and Multifactor Models of Risk and Return BKM, Ch. 10 Sep 28 10 Review for Midterm 1
Sep 30 Midterm 1 Oct 5 11 The Efficient Market Hypothesis BKM, Ch. 11 Oct 7 12 Behavioral Finance and Technical Analysis BKM, Ch. 12 Oct 12 13 Case 2 -‐ Dimensional Fund Advisors Class Notes Oct 14 14 Arbitrage/Limits to Arbitrage BKM Ch. 3 & 12 Oct 19 15 Empirical Evidence on Security Returns BKM, Ch. 13 Oct 21 16 Mutual Funds/Performance Evaluation BKM, Ch. 4 &24 Oct 26 17 Case 3 -‐ Multifactor Models Class Notes Oct 28 18 Mutual Funds/ETFs BKM, Ch. 4 &24 Nov 2 19 Hedge Funds 1 BKM, Ch. 26
Nov 4 20 Hedge Funds 2 Class Notes Nov 9 21 Review for Midterm 2 Nov 11 Midterm 2 Unit B: Fixed Income Investments Nov 16 22 Bond Prices and Yields BKM, Ch. 14 Nov 18 23 Case 4 -‐ Strategic Capital Management Class Notes Nov 23 24 The Term Structure of Interest Rates BKM, Ch. 15 Nov 30 25 Managing Bond Portfolios BKM, Ch. 16 Dec 2 26 Securitization/ Mortgage Backed Securities/Sub-‐Prime Crisis Class Notes Dec 7 27 Securitization/ Mortgage Backed Securities/Sub-‐Prime Crisis Class Notes Dec 9 28 Review for Final Class Notes
comprehensive Dec 14 May 6 May 8
Final Exam for 2:30 PM Section@ 12:30-2:30 P.M., Mon., December 15
Dec 14
Final Exam for 4: 00 PM Section@ 5 P.M.-7:00 P.M., Mon.,
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IMPORTANT DATES: Please note the following schedule of assignments and exams and avoid any conflict with your personal schedules (interviews, trips, etc.).
Date Activity Sep 9 Sep 15 Sep 16 Sep 30 Oct 12 Oct 26 Nov 11 Nov 18 Nov 17 Dec 2 Dec 9 Dec 14 Dec 14
First Day Clickers Used Stock Trak Project Begins Case 1 -‐ Harvard Management Company Midterm Exam 1 in class Case 2 -‐ Dimensional Fund Advisors Case 3 – Multifactor Models Midterm Exam 2 in class Case 4 -‐ Strategic Capital Management Stock Trak Project Ends Final StockTrak Write-‐up Due (by beginning of class) “What have I learned?” Due (by beginning of class) Final Exam for 2: 30 PM Section@ 12:30-2:30PM Final Exam for 4 PM Section@5 pM-7PM
UNDERGRADUATE PROGRAM LEARNING GOALS F420 contributes to achieving the following undergraduate program learning goals: (1) quantitative analysis and modeling, (2) global awareness, (3) critical thinking and decision making, (4) innovation and creativity, (5) communication, and (6) team membership and leadership. The course teaches quantitative analysis and modeling by teaching how to choose the optimal mix of stocks in order to maximize the Sharpe Ratio, how to solve for a factor mimicking portfolio, how to form a long-short portfolio in order to exploit a mispricing, how to evaluate the performance of mutual funds based on several different performance measures, how to calculate a Bond’s convexity, and how to infer forward rates from the term structure of interest rates. The course teaches global awareness by teaching about interest rate parity and about the effects of globalization on the benefits of diversification. The course teaches innovation and creativity AND critical thinking and decision making through (a) 4 case studies and (b) a trading simulation. In the case studies, the students must examine the evidence, consider the questions asked, and provide answers backed by a detailed analysis. In the trading simulation, students formulate their own trading strategies and consider the possible strategies of other students in the class. The course teaches communications by requiring both written reports and PowerPoint presentations. The course teaches team membership and leadership through two major group projects.
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APPENDIX Undergraduate Program Learning Goals
Learning Goal 1: An Integrative Point of View Graduates of the Kelley School of Business Undergraduate Program will be able to evaluate and make business decisions from an integrative point of view, one that reflects an understanding of mutually interdependent relationships among competitive and environmental conditions, organizational resources, and the major functional areas of a business enterprise.
Learning Goal 2: Ethical Reasoning Graduates of the Kelley School of Business Undergraduate Program will be able to recognize ethical issues, demonstrate familiarity with alternative frameworks for ethical reasoning, and discern tradeoffs and implications of employing different ethical frames of reference when making business decisions.
Learning Goals 3: Critical Thinking & Decision Making Graduates of the Kelley School of Business Undergraduate Program will be able to use a variety of research methodologies to identify and critically evaluate implications of business decisions for organizational stakeholders (e.g., customers, colleagues, employees, stockholders, suppliers, foreign governments, communities, cultures, regulatory agencies) and the natural environment.
Learning Goal 4: Communication Graduates of the Kelley School of Business Undergraduate Program will be able to communicate effectively in a wide variety of business settings (e.g., live, virtual, synchronous and asynchronous), employing multiple mediums of communications (e.g., written, oral and visual).
Learning Goal 5: Quantitative Analysis and Modeling Graduates of the Kelley School of Business Undergraduate Program will be able systematically apply tools of quantitative analysis and modeling to make recommendations and business decisions.
Learning Goals 6: Team Membership & Leadership Graduates of the Kelley School of Business Undergraduate Program will be able to collaborate productively with others, functioning effectively as both members and leaders of teams.
Learning Goal 7: Respect, Inclusiveness & Valuing People Graduates of the Kelley School of Business Undergraduate Program will be able to create and sustain personal and work environments that are respectful and inclusive, valuing the contributions of all persons.
Learning Goal 8: Personal and Professional Development Graduates of the Kelley School of Business Undergraduate Program will be prepared to become the “authors” of their own futures, make informed and deliberate choices about personal and professional development, assume responsibility for their decisions, take pride in excellence, contribute to community, and demonstrate college-level mastery of the skills needed for pursuing and managing a career as a business professional.
Learning Goal 9: Global Awareness Graduates of the Kelley School of Business Undergraduate Program will be conversant with major economic, social, political, and technological trends and conditions influencing foreign investment and development of the global economy and demonstrate an understanding of the cultural, interpersonal and analytical competencies required for engaging in global business activities.
Learning Goal 10: Innovation and Creativity Graduates of the Kelley School of Business Undergraduate Program will know how to respond to the need for innovation or creativity by engaging in ongoing learning, broadening their points of view, exploring cross-contextual links, and consulting with others.
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F305: Intermediate Corporate Finance
Spring 2015
Professor Sudip Gupta
INSTRUCTOR INFORMATION Office: HH6169 Phone: Email: Web Page:
COURSE INFORMATION Location: HH 3006 Class Time: M/W 9.30 -‐ 10.45 AM, 11:15-‐12:30 PM 2.30 -‐ 3.45 PM, 4.00 -‐ 5.15 PM Office Hours: M/W 1-‐2 PM or by appointment Web Page: https://oncourse.iu.edu. COURSE MATERIALS
F305 Intermediate Corporate Finance Course Packet This course packet contains selected chapters from several textbooks in a customized publication. It should be available with other textbooks in the bookstores.
Excel Modeling in Corporate Finance (Craig Holden) PREREQUISITES The prerequisite for this course is taking and passing I-‐CORE. PURPOSE This course provides an in-‐depth understanding of the way companies make decisions and how value is created in a business. We will build on the time value of money concepts and risk/return analysis that you have learned in earlier finance courses, and make extensive use of the accounting concepts from your 200 level account courses, especially the organization of the balance sheet and income statement. By the end of this course, you should be able to:
1. Evaluate corporate projects and make decisions based on financial data. 2. Analyze a firm’s financial statements. 3. Value a firm. 4. Understand how corporate decisions impact the value of the firm. 5. Develop complex spreadsheet models in Excel.
CLASS FORMAT The course is a mix of lecture/discussion and computer labs. I expect students to come to class prepared for active participation. Participations can be in the form of questions, answers to questions, or bringing related outside materials to the attention of the class. Class attendance is strongly encouraged and is required during group presentations. You should attend the class at your scheduled time. To make the most efficient use of limited class time, students who miss a class or are late are responsible themselves for getting notes, assignments, and announcements from their classmates or from ONCOURSE. Handouts may be obtained from me outside of class.
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We do problems in class, so bring a calculator. A basic financial calculator is best, though a good basic scientific calculator that does powers is fine. CLASSROOM ETIQUETTE
• Please remember to turn off your cell phones, both during regular classes and during exams. • Laptop computers or any handheld electronic devices are NOT allowed in the classroom. • When attending classes held in the computer lab, please act in a mature fashion: no emailing,
social networking, surfing of web pages, etc., i.e., activities that distract you and (more importantly) other students sitting near you.
CLASS COMMUNICATION Assignments, lecture notes, groups, and other useful material will be available on the course web page at https://oncourse.iu.edu. On the days that we meet in the computer lab, you will be required to download spreadsheets off the web page. There are numerical problems from the course packet to help you with the materials in the class. You can find the solutions to most problems at the back of the course packet. These assignments are not meant to be turned in. Any important announcements (especially regarding the exams) will be made on the web page. So be sure to check this page regularly. It is your responsibility to keep yourself informed of important developments pertaining to the course. Keeping your email account updated with the University is very important. GRADING Grading is done on a relative basis. Following the Finance department policy, the average GPA for all four sections will fall between 2.70 and 3.0. Grades will be determined as follows:
Exam 1 19% Exam 2 19% Exam 3 24% Two Group Projects
Grade appeals must be submitted in writing within one week after the grade is distributed. EXAMS There are three non-‐cumulative exams. The first 2 (mid-‐term) exams are given during normal class time and the third exam is a departmental final exam given during the finals week. Exams are closed-‐book and closed-‐notes. You will be provided with a sheet containing required formulas at the time of the exam. This course is not about memorizing formulas; it is about understanding and applying key concepts in corporate finance.
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We cover more and more difficult topics as we progress through the semester. It is possible that you might find mid-‐term 2 and final exam difficult in comparison with mid-‐term 1. Two remarks on exams: First, no computers or programmable calculators are allowed. Second, you may use a financial calculator, but you must nevertheless convince me that you know what you are doing: just writing down a result or the variables you keyed in is not convincing, you should write down both the correct formula and the correct result. If your answer seems unconvincing, you won’t get full credit, even if the numbers are right. Exams are mandatory. Exceptions are given only for family or medical emergencies, in which case prior notice and hard evidence are required. For example, it is not enough to show me a slip proving that you visited a clinic. A signed note from the doctor/nurse on an official letterhead providing the advice of rest is valid. If you have to miss a mid-‐term exam because of these emergencies, then the grade portion of that exam will be cumulated to the grade portion of your final exam (i.e., the final exam will be worth 43% of your grade instead of 24%). If it is the final exam, then a make-‐up final can be arranged. However, there is no guarantee that the make-‐up final will have the same difficulty and type of questions as the common exam. PROJECTS
• There are two group projects. In the first project, you will analyze a corporate project and determine the best investment for a firm. In the second project, you analyze a firm, prepare its pro-‐forma statements, and determine its value. Both projects will incorporate spreadsheet modeling using Excel.
• Please set aside enough time to work on the projects. Most of them involve valuations of
businesses or business segments which are not straightforward.
• Projects are to be handed in at the beginning of class on their due dates. No credit will be given for late projects.
• The projects will be done in groups of 6 or 7 members. You may pick your own groups and
should turn in a group request. I reserve the right to redistribute groups and make changes to make sure that all groups have between 6 and 7 people. Anyone not turning in a request by the due day will be assigned to a group for the entire semester.
• You are to work on each project with your own group, not with other groups. Please note that I
will not adjudicate any intra-‐group disputes. Learning to cope with intra-‐group conflicts is part of your training. Of course, for each project, you will get an opportunity to submit a confidential evaluation of your group members (Specific guidelines for the evaluation will be provided later). Each student’s project grade will be adjusted to reflect these evaluations.
• These projects are expected to be professional work. Presentation is important. In general, I
should be able to pick up the project and follow the analysis easily without referencing the assignment. I expect that these projects will take you several hours. At a minimum:
o All text should be typed in double-‐space and presented in a case-‐like format.
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o Spreadsheets and graphs should fit on one page or separated in a logical manner. They should be visually appealing, easy to read and incorporated into the text.
o You should include a cover page with each person’s name and project title. o You should have subsections labeled with brief descriptions immediately preceding the
spreadsheet and qualitative analysis. o All spreadsheets should be labeled with a title and description. o An Excel formula sheet attached in an appendix (i.e. re-‐print with formulas showing by
using Tools/Options/View/Formulas and lengthening cells if you use Excel 2003, or Formulas/Formula Auditing/Show Formulas for Excel 2010). You should also print this to expose the column and row headings (letters and numbers in Excel).
o The project should be stapled or in a folder. PRESENTATION Each group will present Project 2 during the last week of class. The presentations should be brief and focus on the analysis. The grade for the presentation will be based on how well you defend your firm valuation and the quality of the presentation. You are required to attend and participate during group presentations on all presentation days, including the day(s) that your group does not present. Attendance on presentation days will be reflected in both your participation and project grade. IN-‐CLASS GROUP ASSIGNMENTS AND PARTICIPATION There is only one way to learn valuation concepts, and that is by repeatedly applying them to solve real-‐ life problems faced by businesses. Every new concept we learn will be applied to a real-‐life example (a small numerical problem, a mini-‐case, or a full-‐fledged case), which we will collectively solve in the class. Every now and then, I will assign one of these in-‐class examples as an in-‐class assignment, and will give each group 10-‐15 minutes to collectively solve the problem on a piece of paper. I will then grade your submission, which will contribute to the “in-‐class group assignments and participation” component (8% weight) of your overall grade. It is, therefore, important that you turn in your group request by the due date (see IMPORTANT DATES below), so that the groups can be in place when we meet during the following class. You are expected to attend the class, actively participate in these exercises, and take down notes. Solution to in-‐class examples or group assignments will NOT be available at the course web page. Note that the in-‐class assignment is not a surprise quiz; it is only meant to be an active participation exercise, and will be graded accordingly. Needless to say, if you miss a class, you will miss out on any in-‐ class group assignments assigned that day. Regardless of the reasons for your absence, there will be no make-‐up assignments. IMPORTANT DATES Please note the following schedule of assignments and exams to avoid any conflict with your personal schedules (interviews, trips, etc.).
01/21: Group Request Due 02/11: Exam 1 02/25: Project 1 Due 03/11: Project 2 Company Request Due
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03/30: Exam 2 04/29: Project 2 Due 04/29: Group Presentation 05/05: Exam 3 (Departmental Exam, 12:30-‐2:30 p.m., Tues., May 5.)
ACADEMIC HONESTY AND DISCIPLINE This course is a finance major core and sets a high standard. Therefore I expect high discipline of this class.
• Students are expected to adhere to the Student Honor Code. This class has zero tolerance for academic misconduct. The attempt of any student to present the work of another as his or her own, or to present any work not honestly performed, or to pass any examination by improper means is a most serious offense and will be treated with extreme prejudice. The aiding and abetting of a student in any dishonesty is likewise held to be a great breach of discipline, and is considered as academic misconduct.
• Any academic misconduct activities will result an F course grade automatically at least. Video cameras may be used to monitor the room during student assessment activities, including but not limited to, exams, tests, and quizzes. Video recordings may be used to investigate or support disciplinary action. All access to and use of video equipment and recordings will follow applicable IU policies. BUSINESS SCHOOL UNDERGRADUATE PROGRAM LEARNING GOALS This course helps you achieve the learning objectives set by the school wide program (see the Appendix at the end of this syllabus). Specifically:
1. Team Work – There are two group projects and one group presentation that makes up 30% of your grade for the course.
2. Presentation – Project 2 will be presented to the class and accounts for 5% of your grade. 3. Computer Applications – The course will have a heavy emphasis on developing applied
spreadsheet models. We will do this by in-‐class demonstrations, two group projects that require spreadsheet modeling, and 6 class sessions that meet in the computer lab and provide hands on computer applications.
4. International – The in-‐class case requires a breakdown of domestic and international growth analysis. Additionally, other class examples and current events will draw on international firms and themes.
5. Ethics – This is not explicitly taught in the course, but obviously, you are expected to abide by the honor code.
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CLASS SCHEDULE • The class schedule is tentative. I will make every effort to maintain the class schedule that
follows. However, it may be necessary to make adjustments as the class proceeds. • All listed reading assignments are in the custom published textbook. BS refers to the Benninga
and Sarig text, RWJordan refers to the Ross, Westerfield and Jordan text, and RWJaffe refers to the Ross, Westerfield and Jaffe text.
• The recommended problems and their solutions are either available in the textbook or available on the course web page. These assignments are not meant to be turned in.
Class
Number
Units and Topics Covered Required Reading
and Assignments
Recommended Problems (with Solutions) and Spreadsheet Exercises
UNIT A: CAPITAL BUDGETING 1 (01/12) Introduction
• Syllabus • Valuation Basics and Goal of
Financial Managers
RWJaffe Ch 1
2 (01/14) Review Financial Tools • Time Value of Money (TVM) • Inflation
28 (04/27) Payout Policy (II): The Real World • Dividend Clienteles • Signaling • Discuss The Dividend Cut
RWJaffe Ch 19
29 (04/29) Group Presentations Mandatory Attendance Day
PROJECT 2 DUE
30 (04/29) Group Presentations Mandatory Attendance Day
Tues, May5 12:30-‐2:30PM
Exam 3: Unit C Practice Exam 3 (web page)
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APPENDIX Undergraduate Program Learning Goals
Learning Goal 1: An Integrative Point of View Graduates of the Kelley School of Business Undergraduate Program will be able to evaluate and make business decisions from an integrative point of view, one that reflects an understanding of mutually interdependent relationships among competitive and environmental conditions, organizational resources, and the major functional areas of a business enterprise. Learning Goal 2: Ethical Reasoning Graduates of the Kelley School of Business Undergraduate Program will be able to recognize ethical issues, demonstrate familiarity with alternative frameworks for ethical reasoning, and discern tradeoffs and implications of employing different ethical frames of reference when making business decisions. Learning Goals 3: Critical Thinking & Decision Making Graduates of the Kelley School of Business Undergraduate Program will be able to use a variety of research methodologies to identify and critically evaluate implications of business decisions for organizational stakeholders (e.g., customers, colleagues, employees, stockholders, suppliers, foreign governments, communities, cultures, regulatory agencies) and the natural environment. Learning Goal 4: Communication Graduates of the Kelley School of Business Undergraduate Program will be able to communicate effectively in a wide variety of business settings (e.g., live, virtual, synchronous and asynchronous), employing multiple mediums of communications (e.g., written, oral and visual). Learning Goal 5: Quantitative Analysis and Modeling Graduates of the Kelley School of Business Undergraduate Program will be able systematically apply tools of quantitative analysis and modeling to make recommendations and business decisions. Learning Goals 6: Team Membership & Leadership Graduates of the Kelley School of Business Undergraduate Program will be able to collaborate productively with others, functioning effectively as both members and leaders of teams. Learning Goal 7: Respect, Inclusiveness & Valuing People Graduates of the Kelley School of Business Undergraduate Program will be able to create and sustain personal and work environments that are respectful and inclusive, valuing the contributions of all persons. Learning Goal 8: Personal and Professional Development Graduates of the Kelley School of Business Undergraduate Program will be prepared to become the “authors” of their own futures, make informed and deliberate choices about personal and professional development, assume responsibility for their decisions, take pride in excellence, contribute to community, and demonstrate college-‐level mastery of the skills needed for pursuing and managing a career as a business professional. Learning Goal 9: Global Awareness Graduates of the Kelley School of Business Undergraduate Program will be conversant with major economic, social, political, and technological trends and conditions influencing foreign investment and
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development of the global economy and demonstrate an understanding of the cultural, interpersonal and analytical competencies required for engaging in global business activities. Learning Goal 10: Innovation and Creativity Graduates of the Kelley School of Business Undergraduate Program will know how to respond to the need for innovation or creativity by engaging in ongoing learning, broadening their points of view, exploring cross-‐contextual links, and consulting with others.
Robert H. Smith School of Business, University of Maryland
(Sections: 0101 (MW 9:30-10:45), 0201(MW 11-12:15), 0301 (MW 2-3:15) Office hours: M 1:00 – 2:00 pm or by appointment.
Learning Objectives: This course will provide an understanding of the international economic and financial environment and its unique challenges that is necessary for successful financial management of a Multinational Corporation. In particular it will enable students to understand the mechanism and theories of exchange rate determination, the exposure of companies to exchange rate risk and the management of such exposure as well as a few major policy issues in the era of globalization. Prerequisites: Students will be expected to be familiar with the basic concepts in economics, finance, and statistics. They should be conversant in using Excel or some other spreadsheet program and should be prepared to use the Internet intensively. Description: The emphasis in the course will be that on practical learning, so that students not only learn the concepts but also learn to use them in real life decision-making situations. Case studies and class discussions will, therefore, be an essential part of the pedagogy. For each section of the course, the instruction format would involve one or more lectures that would introduce the main concepts followed by one or more case discussions depicting situations in that area. The course will have a supporting web site (on Blackboard) providing easy and continuous access to handouts, PowerPoint presentations, problem sets and data for the classes as well as links to relevant websites. Readings: (1) The textbook for this course is International Financial Management (5th Edition) by Cheol
Eun and Bruce Resnick (E&R). (2) In addition we shall use The Lexus and The Olive Tree by Thomas L. Friedman (F) as
supplementary reading. (3) Lecture notes: will be posted on the course web page latest by the night before the class.
It is highly recommended that you print out the relevant lecture notes before coming to class. Some of the material on the lecture notes might not be covered in the book.
(4) I would strongly urge the students to regularly read the Financial Times and the Economist. Supplementary handouts will be circulated in class or made available on the course website as necessary.
Evaluation: The components of the grade will be as follows: Class participation : 10% Group Project & Assignments: (15%+15%) 30% Mid-term : 30% Final : 30%
Robert H. Smith School of Business, University of Maryland
There will be one midterm exam in class and a final exam. The final exam is non-cumulative and both exams are closed book and closed notes. However, you can bring one 8.5”x11” sheet of notes for these exams. There will be no make-up exam for the midterm. You may use a financial calculator that can do standard financial calculation such as present and future values of annuities, but devices with spreadsheets or devices with internet/phone-service are not allowed.
Problem Sets I will assign occasional problem sets, mainly from the book. No late submission of the assignments would be acceptable. These assignments and the case work will be graded and would count 15% towards the final grade. Besides its relevance towards the final grade, the assignments should improve your understanding of the material covered in the class and would help you in the mid-term and final exam too. We will go through some of these problems in class. Group Case Work The case assignment is a group work. You should form a group of 4/5 students to submit the case. This will train you how to handle real world situation better. We shall go through the case in details in class.
Academic Integrity The University's Code of Academic Integrity is designed to ensure that the principles of academic honesty and integrity are upheld. All students are expected to adhere to this Code. The Smith School does not tolerate academic dishonesty. All acts of academic dishonesty will be dealt with in accordance with the provisions of this code. Please visit the following website for more information on the University's Code of Academic Integrity: http://www.studenthonorcouncil.umd.edu/code.html On each exam or assignment you will be asked to write out and sign the following pledge. "I pledge on my honor that I have not given or received any unauthorized assistance on this exam/assignment"
Students with special needs Any student with special needs should bring this to my attention as soon as possible, and no later than the second week of class.
Robert H. Smith School of Business, University of Maryland
Tentative Schedule (Subject to change, Please keep note of announcements in class and in the blackboard)
International Financial Management (446): Tentative schedule* Dates Topic Primary Readings**
26-Jan Introduction to the International Economy
& the MNC E&R Ch 1
28-Jan Trade & The International Monetary System
E&R Ch 2
2 –Feb Balance of Payments E&R Ch 3 4-Feb Foreign Exchange Market E&R Ch 5 9-Feb Case: China to Float or Not to Float (A) HBS: 5-06-060 11-Feb International Parity Conditions E&R Ch 6 16-Feb International Parity Conditions (contd.) E&R Ch 6 18-Feb Futures and Options on Foreign Exchange E&R Ch 7 23-Feb Futures and Options on Foreign Exchange
(contd.) E&R
Ch 7 25-Feb E&R Ch 11 2-Mar E&R Ch 12 4-Mar E&R Ch 13 9-Mar Mid Term Review 11-Mar Mid Term Examination in Class 16-Mar Spring Break 18-Mar Spring Break 23-Mar Exposures: Transaction Exposure , E&R 25-Mar Economic Exposure E&R 30-Mar Translation Exposure E&R 1-Apr Contd. E&R 6-Apr International Bond and Equity Market, E&R 8-Apr Financial Crisis, Lessons and G20 E&R 13-Apr Currency derivatives: Swaps E&R 15-Apr International Portfolio Investment, FDI E&R 20-Apr International Capital Structure &
29-Apr Case: FX Hedging Strategies in GM*** Case: Heritage Fund : Media and Corporate Governance in Russia***
HBS
4-May Project presentations 6-May Project presentations 11-May Final Review
Robert H. Smith School of Business, University of Maryland
* Subject to change ** Additional readings may be provided later,***One of the two would be discussed, to be announced later, HBS: Harvard Business School Case
Group Project: BMGT 446 Exploring International Investment Opportunities for General Electric
The Assignment:
Your group has just landed a coveted assignment from one of the world’s most famous companies, General Electric (GE), to do an exploratory analysis of investment opportunities in a particular country. The champagne has hardly stopped flowing from the party last night that you have started wondering how to deliver what has been asked of you. With offices in over 70 capitals of the world, GE is no newcomer to international business and with operations in industries ranging from aircraft engines to TV broadcasting to financial services; it is also a company of amazing breadth and diversity. You know that if you can live up to GE’s expectations then this assignment will open up new vistas for your company. A failure, on the other hand, may prove to be fatal to your reputation. A glance at your desk calendar tells you that the deadline for delivering the report as well as the presentation – May 11th – is only a couple of months away. The more you think about it, the more does the overwhelming nature of the task dawn on you from behind the mist of the initial euphoria. Concerned, but far from alarmed, you leaf through the fax from GE to find out more about the assignment.
The nature of the assignment appears to be quite broad and open. You are asked to
explore the opportunities and threats of further investment in any one “growth” industry in your assigned country (regardless of whether GE is already active in that area or not) that GE may find worthwhile for further research. GE wants you to look at both the macroeconomic picture of the country outlining the various opportunities and risks involved as well as take a closer look at the industries concerned. Suggested areas to examine at the country level include exchange rate movements, financial market maturity and depth, macroeconomic growth and market potential and the general socio-political environment of the country including the issues of property rights. At the industry level, you are asked to look at the trends and major legislations and economic reforms affecting the sector in question. Since this is a preliminary study for GE and one of many focusing on countries around the globe, the travel budget sanctioned does not cover a trip to your assigned country. You realize that this is going to be an obstacle for your fact finding mission but being well aware of the massive information available on the Web, you know that you can get around it.
As for the format of the report you only find the perplexing phrase ‘concise but
comprehensive’ to describe it in the text. As you begin to grow frustrated, you suddenly find an ‘Appendix’ page in the bundle of fax sheets describing the format in somewhat greater detail. The page is attached at the end of the assignment.
Robert H. Smith School of Business, University of Maryland
Suggestions:
Each group should focus on one particular country. You know that since the top management of GE is well aware of most of the regular reports and newsletters published by important investment banks and publishing companies, any attempt at largely reproducing such a ‘country report’ may prove to be suicidal. There is no harm, however, to glean information from such reports if they are easily accessible.
While the deadline is over a month away, your more experienced colleagues warn you that such assignments are deceptively time-consuming and in order to do a good job of it you should clearly plan your work on this project in different stages from now till submission. It would be dangerous to have not gathered all the data by the last week before submission should have nothing but the final editing of the report to be done.
Summing up While you now fully appreciate the challenges involved in this assignment, you are also confident that between you and your group members, you’ll make a positive impression on GE’s top management with your report. After all this is the kind of challenge that your education at University of Maryland has prepared you for and you can hardly wait to get on with the task. Therefore, bon voyage!
__________________
Robert H. Smith School of Business, University of Maryland
Appendix on Format of the Consulting Report to General Electric Inc.
The report is expected not to exceed 20 pages in length (including all tables and exhibits). A concise and informative Executive Summary at the beginning proves very helpful to the reader. Logical flow and intelligent use of graphs and other visual presentation tools where relevant, increase the effectiveness of the report. GE will particularly appreciate creativity in information gathering, processing and presentation.
Providing the source of your information is essential and a detailed list of all such sources – books, articles in periodicals, web sites etc. – must appear at the end of the report. It is all right for this reference list to fall beyond the page limit prescribed above.
While there is no correct form of the report or the topics to be covered, below is a suggested list of contents. This list is provided only as a guide and the coverage in your report should not be limited by this list nor is every item on the list necessarily applicable to your case.
List of topics:
Country level:
• The socio-political investment climate and risk factors in the country o Property rights
• Economic resources o Main industries, composition of exports and imports
• Macroeconomic conditions: o Growth rate, current account balance, inflation, unemployment etc.
• The exchange rate regime and chances of large future movements • International capital mobility laws, restrictions on foreign direct investment,
repatriation of profits and foreign ownership of shares in domestic companies • Level of maturity in the financial markets
o Width, depth, liquidity and volatility in major stock markets etc.
Industry level:
• Growth in the industry and growth in demand for the product • Advantages of investing in the chosen industry in the country
o E.g. low wages, large pool of educated labor or natural resources availability etc.
• The nature of competition – national and international • Risk factors involved in investing in the industry
o Exposure to foreign exchange movements o Hedging possibilities and probable strategies
Robert H. Smith School of Business, University of Maryland
Peer Evaluation: This project would fetch best rewards for you if you all work in a group putting in adequate efforts. To provide incentives for optimum efforts I shall hand you a peer evaluation form at the end of the project. Each of you would evaluate your other group members’ contribution towards completing the project.
Syllabus for BMGT 343: Investments Fall 2007
Professor Sudip Gupta Office: 4414 Van Munching Hall Phone: (301) 405-2934 Fax: (301) 405-1058 Email: [email protected] Course website: bb.rhsmith.umd.edu Class meetings: MW 11:00-12:15 Classroom: VMH 1511 (Section (0401) Office hours: M 1:00 – 2:00 pm or by appointment. Course Objectives This course will introduce you to the basics of investment management, We shall go through the basics like how does the securities market operate, how to measure risk and return, the risk return trade-off and the portfolio theory, portfolio performance evaluation, stocks, bonds and option valuation. By the end of this course, you will:
• be able to appreciate better the risk-return trade-offs facing a portfolio manager. • have learned state-of-the-art tools and techniques in portfolio management. • be able to evaluate real-world portfolios,
The course should be useful to anyone using or planning to use the financial markets: you as an individual investor, institutional investors, an investment advisor, or someone using the market to hedge risk. Prerequisites The main prerequisite is BMGT 340. In particular, you should understand what is meant by the time value of money, present value, net present value (NPV), and how these relate to criteria for making investment decisions. It is also essential that you are familiar with basic statistical concepts, such as expected value, variance, correlation, covariance, regression analysis, and that you have working knowledge of a computer spreadsheet program, such as Microsoft Excel. Course Materials
• Textbook: Essentials of Investments (Sixth Edition) by Zvi Bodie, Alex Kane & Alan J. Marcus. ISBN-13: 978-0-07-304153-7, ISBN-10: 0-07-304153-X.
• Optional Text book: Trading & Exchanges by Harris • Lecture notes: will be posted on the course web page latest by the night before the class. It
is highly recommended that you print out the relevant lecture notes before coming to class. Some of the material on the lecture notes might not be covered in the book.
• A financial calculator is highly recommended as we will be working on problems during class. Using the calculator in class will help you practice for the exams. Moreover, for your homework, all relevant financial functions are available in standard spreadsheet programs.
• Additional reading: It is recommended that you regularly follow the financial news by reading financial and economic publications such as The Wall Street Journal, The Economist, and The Financial Times.
Grading and exams The course grade will be based on the following components:
1. Midterm Exam 30% 2. Final Exam 30% 3. Case Work & Assignments 30% (10% +20%) 4. Class Participation 10%
There will be one midterm exam in class and a final exam. The final exam is non-cumulative and both exams are closed book and closed notes. However, you can bring one 8.5”x11” sheet of notes for these exams. There will be no make-up exam for the midterm. You may use a financial calculator that can do standard financial calculation such as present and future values of annuities, but devices with spreadsheets or devices with internet/phone-service are not allowed. Problem Sets I will assign occasional problem sets, mainly from the book. No late submission of the assignments would be acceptable. These assignments will be graded and would count 20% towards the final grade. Besides its relevance towards the final grade, the assignments should improve your understanding of the material covered in the class and would help you in the mid-term and final exam too. We will go through some of these problems in class. Group Case Work The case assignment is a group work. You should form a group of 4/5 students to submit the case. This will train you how to handle real world situation better. We shall go through the case in details in class. Academic Integrity The University's Code of Academic Integrity is designed to ensure that the principles of academic honesty and integrity are upheld. All students are expected to adhere to this Code. The Smith School does not tolerate academic dishonesty. All acts of academic dishonesty will be dealt with in accordance with the provisions of this code. Please visit the following website for more information on the University's Code of Academic Integrity: http://www.studenthonorcouncil.umd.edu/code.html On each exam or assignment you will be asked to write out and sign the following pledge. "I pledge on my honor that I have not given or received any unauthorized assistance on this exam/assignment" Students with special needs Any student with special needs should bring this to my attention as soon as possible, and no later than the second week of class.
Tentative Schedule Below is a tentative schedule of the class. The dates when we cover specific topics may change. However, the date of the midterm exam will not change.
Date Topics covered Reading 29-Aug Course Overview/ Statistics Review 05-Sep Markets and Trading Securities Ch. 1,2,3 10-Sep 12-Sep The Investment Process Ch. 4,17 17-Sep Risk and Return and Diversification Ch. 5,6 19-Sep 24-Sep 26-Sep 01-Oct Capital Asset Pricing Model and other Pricing Models Ch. 7 03-Oct 08-Oct 10-Oct Behavioral Finance and Technical Analysis Ch. 19 15-Oct Market Efficiency and Financial Anomalies Ch. 8 17-Oct Midterm Exam Review 22-Oct Midterm 24-Oct Performance Evaluation and Active Management Ch. 17 29-Oct 31-Oct Equity Analysis Ch. 12, 13 05-Nov 07-Nov 12-Nov Case Discussion: Dimensional Fund Analysis 14-Nov Fixed Income Securities Ch. 9, 10 19-Nov 21-Nov 26-Nov 28-Nov Options Ch. 14,15 03- Dec 05-Dec 10- Dec
Sudip Gupta Due Date: 19 Jan�10Term 7, Jan-Feb 2010
In this assignment you are going to investigate if a) using higher frequency data, and b)imposing short sale constraints improves covariance matrix estimates. Follow the instructions
below to complete the assignment.
1. Download the spreadsheet called data1.xls. This spreadsheet contains daily return datafrom 1999:01 through 2004:12 for ten stocks in the Dow 30, in addition to returns of theS&P 500 index, and the CRSP value weighted index (my market proxy from Lecturenote 3).
2. Pick at least four of the ten stocks (feel free to use all ten if you want to) as your sample.
3. As I did in Lecture note 3, use data from 1999:01 thru 2003:12 to form the covariancematrix estimates, and 2004 data for testing.
4. Form the covariance matrix of (daily) returns of your sample using i) sample covariances,and ii) covariances from the one-factor model. In other words, you need not deal withthe Ledoit shrinkage estimator at all.
5. Using the formed covariance matrices, minimize the (in-sample) tracking error of a passiveportfolio of all stocks in your sample by choosing the optimal weights using Excel�s Solver.Solve this optimization problem with and without restrictions on short sales of stocks inyour portfolio. At this point, you should have four portfolios �two of which make useof the sample covariance matrix, while the other two make use of the covariance matrixfrom the one-factor model.
6. Find the out-of-sample (i.e., 2004) tracking error of each of the optimal passive portfolios.
Now, answer the following questions:
� Comment on any change in results due to imposing short sale constraints.
� Compare the results of your analysis to those using my spreadsheet from Lecture note3 for the same sample of stocks. Comment on any change in results due to using dailydata instead of monthly data.
Please e-mail the TA: Debarshi a spreadsheet containing your name and all your analy-sis/conclusions (in a word �le may be) by 10 AM on the due date. I do not need hard copies.
Advanced Portfolio ManagementAssignment 2
Sudip Gupta Term 7, 2010
Rules
1. This assignment is due by Thursday (4th Feb �10) 5 P.M. Late submissions will not beaccepted.
2. Please do not give me hard copies of your answer sheets. Just e-mail the answer to theTA:
� A typed report (write-up) describing the assumptions you made, analysis you con-ducted and the observations and recommendations you are making. Please writeyour name and number on the report itself. This report should be a Word document( or PDF or txt or TEX etc. )
� A spreadsheet on which you performed the calculations relevant to this exercise.This should be an Microsoft Excel spreadsheet. The easier the spreadsheet is toread, the better.
3. This is an individual assignment, not a group assignment. Please answer the questionsherein as best as you can.
4. If you need to make any assumption, make them and clearly state them in your writtenreport.
5. Please follow these instructions below.
Instructions
1. In this assignment, you will evaluate the performance of two unknown equity mutualfunds, based in the U. S.
2. Download the dataset called assignment2_data.xls from the Blackboard site for ourcourse. This spreadsheet contains monthly return data for four funds, four Carhartfactors, and several BARRA indices.
3. Analyze and compare any two of the funds in the data set.
4. For the funds you choose, use any or all of the techniques/measures of portfolio perfor-mance we discussed in class. Clearly state and justify in your write-up any assumptionsyou make while evaluating these funds using performance measures.
5. Condense all the performance measures you calculated above into one rating numberbetween 1 and 5 (1 being the worst and 5 the best). How you mash down (condense) allthe measures you computed into one single rating number is up to you. Justify in words(in your report) each element of your rating procedure.
6. Recommend for or against investment in each of the two funds based on your analysis.State any caveats (cautionary notes) to your analysis that you would like to include alongwith your rating and recommendation to a prospective investor.
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Indian School of Business
Advanced Portfolio Management
Academic Year & Term: 2009 – 10: Term 7 Sections: TBA
This course deals with practical aspects of portfolio management. As this is an advanced elective, I will assume previous knowledge of materials covered in the “Investment Analysis” course.
By the end of this course, you will: • be able to better appreciate the risk-return trade-offs facing a portfolio manager.
• have learned state-of-the-art tools and techniques in portfolio management.
• be able to evaluate real-world portfolios, understand and interpret academic
research on this topic.
• Time permitting; I plan to introduce you to more advanced financial software like R (open source hence free!) and S-Plus Finmetrics. Working knowledge of these software should help you in the real world.
Readings 1. A set of lecture notes, journal articles and cases that I will assign for reading and/or analysis. 2. Most lecture notes and spreadsheets, and most journal articles I shall use in class
will be placed on the course web site at ISB-Blackboard. At the latest, some of these will be available the day before scheduled class.
3. There is no required text book for this course. The course material will largely be drawn from lecture notes provided by me based on journal articles and the following books:
• The Handbook of Fixed Income Securities, 2001, edited by Frank Fabozzi, 6th ed.,
McGraw Hill.
• Fixed Income Securities: Valuation, risk management and portfolio strategies, 2003, by Lionel Martellini, Philippe Priaulet, and St‘ephane Priaulet, Wiley.
• A Good reference text is Investments by Bodie, Kane & Marcus
I shall place these items in reserve at LRC.
Grading: There will be occasional assignments (about two), a project and two cases.
They will count towards the final grade as follows.
Component Weights Assignments 30% Project (Group) 35%. Class Participation 10% Attendance 10% Case (Group) 15% Project
The course will consist of a real life project where each group will be given a dataset and have to apply the concepts learnt in the class to device a portfolio strategy and evaluate its performance. The midterm report will be due around halfway through the class so that I can give you comments and directions. The final report will be due in the sixth week of the term, exact date will be announced later. Guest Lectures I plan to invite one or two industry professionals to talk about real life portfolio management practice related to the specific topics discussed in the class. Previous year’s guest lecturers included fixed income management head of Royal Bank of Scotland, speaker on algorithmic trading amongst others.
Student Conduct: Attendance Policy We are required to include the following mandatory ISB Attendance Policy in our course outline. Please contact the Academic Office if you have any questions.
“Attendance & Punctuality Learning is an interactive process. ISB students are admitted partly based on the experiences they bring to the learning community and what they can add to class discussions. Therefore attendance is an important aspect of studying here. You have to be present in all the classes. Absence is only appropriate in cases of extreme personal illness, injury, or close family bereavement. Voluntary activities such as job interviews, business school competitions, travel plans, joyous family occasions, etc. are never valid reasons for missing any class. The faculty with the assistance of the Academic Associate will keep track of your attendance and decide on the nature and extent of penalty for any absence from the class. Penalty may include reduction in grade.
Late arrival is disruptive to the learning environment; so you have to be in class before the scheduled time. Most courses meet twice a week during the day. Normally there are no classes scheduled on Friday or in the evenings, but there are exceptions. Class and Exam schedules are posted on the PGP intranet site. Any change in the class schedule is notified in advance. Many professors choose to base part of the course grade on class participation, which may include an attendance component. If you find it necessary to miss a class or make a late submission, you must seek permission from the instructor in advance. In case of illness, the professor may also require a letter of confirmation from a qualified doctor.”
Prerequisites
• I will assume that you are computer literate. In particular, I will use the
Microsoft Excel spreadsheet program quite extensively.
• I will assume working knowledge of basic regression. I shall provide intuitive explanations behind any advanced math used. You will not be tested on complex mathematical derivations
Tentative Course Schedule
Guest Lecturers: TBA
Project: The project will expose you to a real world application. In the project I would expect you to apply the techniques learned in this class to real world portfolio management. Each group would be treated as a portfolio management fund. I shall provide you with one data set on the first week of the class. You are most welcome to supplement this data with any other publicly available dataset with appropriate citation. Your job as a fund manager would be to define the role of the fund towards meeting various different types of investor’s needs. Specifically:
a) What kind of investors’ should invest in your fund? b) What is the Style of your fund? c) Based on historical data what would be the return for different categories of investors, why should
they invest in your fund? d) How much should be your compensation as a fund manager? Justify your answers with detail calculations. You have to submit a report with detailed analysis with the above questions in focus.
There is no final exam for this course. The final project report is due by 5 PM on11th Feb 2009 (Thursday of the sixth week of the term). I am available throughout the course to discuss your ideas and give broad directions. To ensure that you are on the right direction a mid term report outlining the broad framework and scope of the project and methodology to be used is due by 5 PM on 21st Jan 2009. There will be a short presentation by each group on the final day of the class.
Case Discussion Questions:
Dimensional Fund Advisors, 2002
The first and last paragraphs of the case make it clear that the current question on David Booth’s mind is regarding the future of DFA. Your write-up should clearly address this question. In addition, to help you focus on key issues, I have put together the following questions (in no particular order):
1. What is DFA’s business strategy? Do you think the DFA people really believe in efficient markets? 2. Do the Fama-French findings make sense? Should we expect small stocks to outperform large stocks in
the future? And value stocks to outperform growth stocks? 3. Why has DFA’s small stock fund performed so well? 4. Is DFA’s tax-managed fund family likely to be successful, or remain just a small niche market? 5. What should the firm’s strategy going forward?
Group Formation: The project and cases are group assignments. You are free to form your own groups. Each group should be of about 4/5 people.
BEFNBehavioral Finance
2010-2011Instructor: Prof. Sudip Gupta
Time and Location: To be announced
Course Description
The assumption of rationality on the part of decision makers; a building block of the theory of e¢ cient�nancial markets, has been challenged by widespread empirical irregularities. In this course, we will surveythe evidence and use psychology to guide alternative theories of �nancial markets.The �rst half of this course will study the evidence of anomalous return behavior found in the equities
markets. Psychological explanations of trading activity in equity markets will be studied. We will beginby exploring some of the evidence that contradicts the standard risk-return paradigm. Thereafter someof the psychological biases that researchers suspect are inherent to investors will be introduced, followedby some of the results from the psychology literature to explain the �irrationalities� encountered in the�nance literature. Thereafter, we will present the latest evidence on why individual investors trade and howindividual and institutional investors form their portfolios.The second half of the course extends the analysis to corporate decision making. We present the two
themes of behavioral corporate �nance: rational managers exploiting �nancial market ine¢ ciencies andmanagerial decision-making biases. We then explore the evidence for both views in the context of capitalstructure, investment, dividend, and merger decisions. The course will cover both the psychological insightsand their applications to �nance. Students who will take it will
� Improve their understanding of �nancial markets and the relation between human behavior and assetprices
� Understand and improve their own decision making processes
� Acquire marketing skills especially in the �nancial services domain.
Learning Goals
The learning goals of this course would be the following:
� Critical and Integrative Thinking
�Each student shall be able to identify key issues in a business setting, develop a perspective thatis supported with relevant information and integrative thinking, to draw and assess conclusions
� E¤ective Oral Communication
�Each student shall be able to communicate verbally in an organized, clear, and persuasive manner,and be a responsive listener.
Textbooks
The following books are optional:1. Shleifer, Andrei, 2000, Ine¢ cient Markets: An Introduction to Behavioral Finance,
Oxford University Press.2. Shefrin, Hersh, 1999, Beyond Greed and Fear, Harvard Business School Press.3. Brealey, Richard A. and Stewart C. Myers, 2003, Principles of Corporate Finance. New
York, NY: McGraw-HillMost of the required readings for class will be contained in the course pack.
Course Outline and Readings
Some material may be added or removed depending on the progress of the class. You are expected to skimthrough the abstract, introduction and the conclusion of the journal articles to get an idea before coming tothe class.
Groups:
Groups should consist of 4/5 students. Across section group formation is allowed.
We are required to include the following mandatory ISB Attendance Policy in our course outline. Pleasecontact the Academic O¢ ce if you have any questions.Attendance & Punctuality:Learning is an interactive process. ISB students are admitted partly based on the experiences they bring
to the learning community and what they can add to class discussions. Therefore attendance is an importantaspect of studying here. You have to be present in all the classes. Absence is only appropriate in cases ofextreme personal illness, injury, or close family bereavement. Voluntary activities such as job interviews,business school competitions, travel plans, joyous family occasions, etc. are never valid reasons for missingany class. The Academic Associate will keep track of attendance on a regular basis and is shared with thestudents on a weekly basis.If a student misses more than two sessions, there will be a reduction in the overall grade awarded for
that course. For instance, if a student misses three sessions in any course, s/he will obtain a letter gradelower than that awarded by the faculty for that course. With four sessions missed, the student will receivea letter grade that is two levels lower, and if a student misses 5 sessions or more, the student will receive an�F�grade for that course.If a student does not meet the minimum attendance requirement for health reasons or for grave personal
exigencies, the student may receive an adjusted grade for the course depending on the number of sessionsmissed. This will be based on submission of necessary documentary evidence.Late arrival is disruptive to the learning environment; so you have to be in class before the scheduled
time.
Tentative Course Outline
� Introduction (Do Deviations from Rationality Matter?)
� Motivating Evidence and Financial Market Anomalies
Readings:Huberman, Gur, and Tomer Regev, 2001, �Contagious speculation and a cure for cancer: a non-event
that made stock prices soar,�Journal of Finance, 56(1), p. 387-396.Ine¢ cient Markets: Chapter 5.1 and Chapter 3 (pp. 53-56)Beyond Greed and Fear: Chapter 7.
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� Limits to Arbitrage
Case Discussion: Mitchell, Mark, Todd Pulvino and Erik Staxoord, 2002, �Strategic Capital Manage-ment, LLC,�Harvard Business School Case #9-202-028.Readings:Rashes, Michael, 2001, �Massively confused investors making conspicuously ignorant choices (MCI-
� Investor Sentiment: Psychology and Applications to the �Average� Investor
Readings:Kahneman, Daniel and Mark W. Riepe, 1998, �Aspects of investor psychology: beliefs, preferences, and
biases investment advisors should know about,�Journal of Portfolio Management 24(4), p. 52-65.Daniel, Kent, David Hirshleifer, and Avanidhar Subrahmanyam (1998), �Investor Psychology and Secu-
rity Market Under-and Overreactions�, Journal of Finance 53, 1839-1885.Barberis, Nicholas, Andrei Shleifer, and Robert Vishny (1998), �A Model of Investor Sentiment�, Journal
Case Discussion: Behavioral Finance at JP Morgan, HBS Case # 9-207-084Readings:Thaler, Richard H. and Shlomo Benartzi, �Save More TomorrowTM: using behavioral �nance to increase
employee saving,�Journal of Political Economy, 112(1), p. 164-186.Haigh, Michael S. and John A. List, 2004, �Do professional traders exhibit myopic loss aversion? An
experimental analysis,�Journal of Finance, 60(1).Beyond Greed and Fear: Chapters 9-11.
� Closed End Funds
Case Discussion: Opportunity Partners: HBS Case #9-208-097
� Behavioral Corporate Finance
� Introduction
Readings:March, J.G. and Z. Shapira, 1987, �Managerial perspectives on risk and risk taking,�Management Science
33, 1404-1418.Ine¢ cient Markets: Chapter 7.
� Financial Decisions: Capital Structure
Readings:Beyond Greed and Fear: Chapter 17.Heaton, J.B., 2002, �Managerial optimism and corporate �nance,�Financial Management 31(2), 33-45.
� Financial Decisions: Analyst Forecasts, Earnings Management, and Catering
Readings:Rau, P. Raghavendra, Michael J. Cooper and Orlin Dimitrov, 2001, �A rose.com by any other name,�
Journal of Finance 56, 2371-2388.Beyond Greed and Fear: Chapter 18.
� Financial Decisions: Dividends and Share Repurchases
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Readings:Beyond Greed and Fear: Chapter 11 (p. 151-153).
� Real Investment
Readings:Kahneman, Daniel and Dan Lovallo, �Delusions of success: how optimism undermines executives�decisions,�Harvard
Business Review July 2003.Camerer, Colin and Dan Lovallo, 1999, �Overcon�dence and excess entry: an experimental approach,�
American Economic Review 89(1),306-318.
� Mergers and Acquisitions
Case Discussion : Livedoor, HBS Case # 9-206-138Readings:Malmendier, Ulrike and Geoxorey Tate, 2003, �Who makes acquisitions? CEO overcon�dence and the
market�s reaction,�working paper.Shleifer, Andrei and Robert W. Vishny, 2003, �Stock market driven acquisitions,�Journal of Financial
Economics, 70, p. 295-311.Beyond Greed and Fear: Chapter 16.
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Assignment : BEFN, Term 8 2008
Instructions: This is an individual take home assignment. There are two questions. Read carefully each of them before writing. In the last question you are asked to link your analysis to a specific theoretical model we studied in class. DO NOT REPRODUCE THE MODEL. All you have to do is to give the economic intuition of the model specifically suited to the case given here. No consultation is permitted. The numbers in the parentheses denotes the marks assigned. Your write up for the entire assignment should be at most 3/4 pages. The assignment is due on Monday the 23rd of March 2008, by 10 A.M. You have to submit the assignment to the TA: Naresh in his office. Do not hesitate to contact me or the TAs if you have questions. Just drop an email in case we are not in the office and we shall get back to you at the earliest. Good Luck!
Q1A. Would you expect investors to be more overconfident in the midst of a bull market or a bear market? Why? [20] Q1B How might an investor’s portfolio have changed from 1995 to 2000 if the investor had become overconfident? Give examples of the numbers and types of stocks in the portfolio. [20] Q1C How does the Internet influence investors in believing they have wisdom? [10] Q 2: AT&T’s Takeover of NCR Brief background: AT&T is a major telephone company in the US. The research wing of AT&T, Bell laboratories produced revolutionary breakthroughs in the field of computers as well, for example the transistor and the UNIX operating system were developed in the Bell Laboratories. The backbone of a telephone network is essentially a computer. All these led AT&T to think that it would be a premier computer company. However, a few other things influenced AT&T’s decision to enter the computer industry. AT&T fought a fierce antitrust battle with the US Justice Department in the 1950s. In 1956, when the battle ended, AT&T signed a consent decree agreeing not to market its computers outside its own company. In 1984, a landmark agreement took place and broke AT&T into seven companies. AT&T was thus not bound anymore by its 1956 agreement. AT&T entered the computer market with a line of medium range computers with UNIX as the operating system. However the rate of production was not good enough to match the market demand and by the end of 1986, AT&T’s computer division was generating losses of US$1 billion annually. By the end of 1980s, AT&T’s computer division lost between US$ 2-3 billion. On December 2, 1990, AT&T announced its intention to acquire NCR, at that time the fifth largest computer maker in the US. The intention was to benefit from the increasing demand for permanently connected networks by the banking and retailing industry. In fact AT&T’s chairman Robert Allen said “It’s a natural marriage between our communication services and network skills and their transaction service operations all over the world”. Before this big merger, AT&T was involved in a few other deals. In January 1988, it had agreed to purchase up to 20% of workstation manufacturer Sun Microsystems. One year later, AT&T took a 49% stake in AG Communication Systems, a joint venture with GTE Corp. which makes telephone switching equipment. In March 1989, AT&T acquired Paradyne Corp., a manufacturer of data communication equipment. A year later it entered into the consumer credit card business AT&T Universal card. All these projects showed early promise. However, the intended acquire of NCR was quite a big and a very different one. It was a merger between two technology companies. This merger was in the backdrop of a few recent failures in merger between technology companies. For example, a similar merger between IBM (computers) and Rolm (telecommunications) failed recently to make profit and IBM sold Rolm to Siemens and wrote off its losses. In fact when a technology analyst, Richard Schaffer asked top AT&T executives….. “It sounds like hyperbole, but no one I know can think of a single example of where a large high-technology merger has
been really successful. And it’s hard to see how AT&T’s play for NCR would be any different”1;… Nobody could give a satisfactory answer. When Robert Allen was asked to comment on the risk associated with this move and was pointed out AT&T’s recent performances in the computer arena, Allen commented on the risk attached to his strategy, and stated, “This is not a safe world. And we’re not looking for safety. Taking the easy, less risky way is not satisfactory because it won’t make it successful”2
AT&T took over the NCR by a hostile takeover. NCR shares were trading at $48 when the discussions started in Nov 1990. AT&T announced $90 per share. The proxy battle took place during the first four months of 1991. On March 28, 1991, the day of the shareholders meeting, AT&T actually paid $110 per share. In September 1991, the two companies field merger papers in Maryland, thereby concluding a $7.48 billion deal. AT&T implemented the takeover by absorbing its own computer division into NCR. NCR turned out to be big failure and could not meet its projected performance. By December 1996 AT&T lost approximately US$ 7 billion for the five years it ran NCR (later names as GIS)
Q 3.a. Identify and name the behavioral biases the AT&T managers were exposed to when they decided to acquire NCR. Justify your arguments with the information given above. [25] Q.3.b. Link your analysis to a specific theoretical model we studied in class (Do not reproduce the model!!). Name the article which developed the model to explain such a phenomenon. Argue the possible economic intuitions which may give rise to such an event. Justify your arguments with the information given above. [25]
1 Carla Lazzareschi, “High-Tech Hybrids: The Rocky Results of Such Mergers Raise Questions About AT&T’s Bid for NCR”, Loss Angeles Times, 30 December 1990. 2 Carla Lazzareschi, “At&T’s Allen bets Legacy on Computer Deal”, Loss Angeles Times, 14 May 1991
Indian School of Business Behavioral Finance Term 8
Case Instructions Strategic Capital Management, LLC
This case will be discussed in class on Tuesday, March 5, 2008. Read the case well. Identify the key questions that need to be analyzed and answered. Then, put together your analysis and recommendations in the form of a write-up. You will submit me a (group) case write-up, which is due by 10 AM on March 5. Make sure the write-up: a) Is at most 3 pages long, plus 2 pages for any exhibits, and b) Contains names of all members of your group The last paragraphs of the case pose the broad questions that Elena has in her mind. Your write-up should address this question. In addition, to help you focus on key issues, I have put together the following questions (in no particular order): 1. What are the costs/benefits of investing in a hedge fund? 2. What is the current stock market valuation of Creative Computers and of Ubid based on
the stock prices as on December 9? 3. What should Elena do? Buy Creative Computers? Buy Ubid? Buy both Creative
Computers and Ubid? Is there some other investment strategy involving Creative Computers and Ubid that you would suggest?
Your write-up need not address and answer these questions individually and sequentially. Feel free to include issues not covered by these questions, or exclude some of these issues. I am looking for your approach to problem solving rather than a “correct” answer. So, choosing a set of issues and analyzing them well is more useful than writing reams of recommendations not supplemented by analysis.
Course Objective and Key-takeaways from the course The broader learning objectives of the course are:
a) Awareness of Global Issues Affecting Business: Each student shall be able to identify key relevant global economic factors, and be able to analyze the impact of these global economic factors on businesses, and understand their interactions with domestic macroeconomic policies.
Assessment: Class project on country analysis
b) Critical and Integrative Thinking: Each student shall be able to identify key issues in macroeconomic analysis, in particular, how macroeconomic shocks affects businesses, develop a perspective that is supported with relevant information and integrative thinking, and to draw and assess conclusions. Assessment: Exams
As for specific objectives, upon completion of this course, you will be able to: 1. Read articles in the financial press critically by connecting them to macro/global
economic concepts 2. Sharpen your understanding of the fuzzy notion of “globalization” 3. Understand how national income accounting is done 4. Understand the factors that influence the economic growth of a country 5. Understand how shocks to the economy affect firm behavior 6. Understand the role of monetary and fiscal policies 7. Understand the factors affecting currency fluctuations
Course Description In this course, we will place firms and businesses in the context of the national and global economy. We will explore how “shocks” affect aggregate economic conditions nationally and globally, and the implications that follow for firms. Such an investigation is particularly relevant as the world is emerging from the worst economic crisis since the Great Depression. While we will address the recent crisis, with an eye toward the future we will also study long-run sources of economic wellbeing and the role of firms in this process. This is of particular importance for emerging economies such as India that have shaken off the recession and are looking ahead to long-run growth. If there ever was a time to study the global economic environment of the firm to make sense of the world around us, this is it. Controlled experiments are rarely possible for the macroeconomy, but the whole world is our laboratory.
What are the causes of the recent downturn, and downturns in general? Have actions on the monetary front by the Fed and central banks around the world been effective in addressing the downturn? Can fiscal policy (tax breaks and government spending) help mitigate downturns? Can interventions cause more harm than good? What are the implications of the weakening dollar (for example, relative to the Japanese Yen?) These are burning questions of the day, and while we will certainly address them. However, economies (thankfully!) expand rather than contract for a majority of the time, so we will also focus on the factors that are responsible for a country’s long-run growth and economic wellbeing. How will the industrialized countries weather competition from the fast-growing emerging economies? What are the determinants of trade and globalization? In this course, which places the firm in the context of the national and the global economy, we will shed some light on these questions. Businesses are influenced by, and in turn influence, the aggregate economy. As Michael E. Porter, the author of several books on competitive strategy, recently wrote, "... the sophistication with which companies compete is strongly influenced by the quality of the national business environment in which they operate. The business environment has much to do with the types of strategies that are feasible and the efficiency with which firms can operate." Understanding the national economic environment is therefore crucial to making informed business decisions. Given the current level of globalization, it is also important to understand the economic conditions of other countries with which you do business; the fluctuations of economic fortunes of countries around the world, the strong emergence of China and India, and the global nature of the current credit crunch, are examples of events that have important implications for American businesses. Economics is one of the foundations for other functional areas within business, such as Finance and Marketing, and understanding economic concepts will help you understand the issues involved in these more specialized fields. At the end of this course, in addition to understanding the above issues at a conceptual level, you should be able to critically evaluate macroeconomic arguments in the financial press, since such arguments are likely to influence your decision making process as executives. Toward this end, we will read and discuss such articles – on economic events in India, China, the US, Europe, and other economies – in class. The scope of the subject is truly macro and global, and even though we will cover a lot of ground, it will be unreasonable to expect us to attain a comprehensive and complete understanding of the subject during a single term. If, at the end of the course, you are left with a curiosity about the subject, and an incomplete feeling that impels you to read on your own, to try to view the world around us through the lens of theories and concepts studied in class, then the objective of this course would have been met. Part I: Macroeconomic Framework, Global Capital Markets, Exchange Rates We will start by studying the measurement of economic performance, with special reference to the Indian economy. We will develop the first building block of the macroeconomic framework – the production function – which will lead us to examine business decisions regarding capital, household decisions regarding consumption and saving, and equilibrium in the capital markets. We will study the forces that govern capital allocation and flows in the global capital market. The monetary side of the economy – how is money demanded and
supplied – will be discussed next. We will end this part by studying exchange rate determination, exchange rate systems, and financial crises. Part II: Growth, Globalization, Government Policy Analogous to the capital market studied in Part I, we will examine how businesses make labor demand decisions and households supply labor, and how equilibrium in the labor market results. We will then examine the forces that govern the long-run growth of an economy and discuss policies conducive to growth. We will provide content to the “globalization” debate by understanding the concepts underlying international trade. Discussions of government policy – monetary (interest rates and inflation) and fiscal (taxes, government spending, and deficit financing) – will follow. Mathematical Content: Modern economic research uses very sophisticated mathematical analysis. However, high-school level mathematics will suffice for this course. Graphical analysis will be extensively used. The approach will be highly analytical. Required Text Book, Required & Recommended Readings
• The required textbook is: Macroeconomics: Understanding the wealth of nations, by David Miles and Andrew Scott, 2nd edition. (The text is referred to as MS in the outline that follows.) If you attend all classes and take notes, you can use the textbook mainly as a reference or a supplement for details not covered in class due to time constraints. Several copies of this book are also available at the Learning Resources Center (LRC).
• Additional readings – notes, cases, articles from the financial press – supplied in the course packet are all required. We will discuss several of these articles in detail in class.
• You should also read any other class handouts distributed in class or posted on Blackboard.
• You are strongly encouraged to at least skim the assigned readings before each class. This would increase your understanding of the lectures and allow you to contribute to the class discussions. They can be read on many levels – the same documents can be read in depth after each class discussion.
• The Economist (http://www.economist.com) is a highly recommended reading for the course. It is a weekly publication, and a good source of global macroeconomic data and analysis, with a distinctly global perspective. The Financial Times (http://www.ft.com) and Wall Street Journal (http://www.wsj.com), and Business Standard (http://www.business-standard.com), are also recommended.
• Video: Selections from the documentary Commanding Heights: The Battle for the World Economy and other relevant videos will be shown in class during the second part and discussed to help understand recent economic history, in particular, “how globalization will shape our lives in the twenty-first century.”
Session-Wise Topics/Readings The class meets for ten sessions and ten topics are listed below. Each topic is meant to roughly correspond to a session – some topics might take more than a session, and others less. You have to read the articles ahead of time – we will have time only to discuss them very briefly in class.
Part I : Macroeconomic Framework, Global Capital Markets, Exchange Rates 1. Course Motivation & National Income and Product Accounts
Readings:
• MS: Chapters 1, 2, Section 3.1 • India at a glance, The World Bank Group • Economic and Financial Indicators, The Economist, March 24, 2011 • Measuring what Matters, The Economist, September 19, 2009 • Do We Need Google to Measure Inflation? Slate, December 20, 2010.
Issues:
• Motivation: Why are some countries poor and others rich? Why do countries
have financial crisis? • The Classical-Keynesian debate: Markets or Government or both? • Definition of GDP: Production = Income = Expenditure • Fundamental prices (consumer price index and real interest rates)
2. Production and the Capital Market
Readings:
• MS: Sections 3.3, 4.2, 13.1, 13.2 • Invested Interests, The Economist, January 23, 2010 • The Poor Half Billion, World Bank Blog, March 17, 2011
Issues:
• The big picture of the economy • The production function • Marginal productivity of capital and the demand for capital • Investment and the demand for capital • Consumption smoothing and the supply of capital • Taxation and Supply Side Economics
3. International Capital Flows
Readings:
• MS: Sections 19.4, 19.5, 19.6 (p.517-518), 20.9, 20.10 • China to Unveil Its Strategy to Rebalance Robust Economy, The New York
Times, March 2, 2011. • Shifting Sands, The Economist, February 12, 2011.
Issues:
• Open economy accounting; the current account balance
• Small open economies and the world interest rate • The global capital market • Sovereign debt and risk
4. Money, Inflation, Banking, Money Creation
Readings:
• MS: Chapter 11, Sections 15.8 • The Inflation Solution, The Economist, March 13, 2010 • Greater Expectations? The Economist, February 3, 2011 • How the Fed Prints Money without any Ink, Fortune.com, February 18, 2011 • Systems Failure, The Economist, November 28, 2009
Issues:
• What is money? Monetary aggregates • Velocity and the quantity theory of money • The nominal interest rate and the demand for money • Fractional reserve banking and money creation
5. Exchange Rates & Currency Crises
Readings:
• MS: Sections 19.1-19.3, 21.1, 21.2, 21.7-21.9 • India, Brazil to Press China on Yuan, Wall Street Journal, February 18, 2011 • Default Lines, The Economist, December 05, 2009 • The Big Mac index: Why China Needs More Expensive Burgers, The
Economist, October 14, 2010. • The McFlation Index: What Do Burger Prices Tell Us About the Reliability of
Official Inflation Figures? The Economist, January 27, 2011
Issues:
• Nominal and real exchange rates • Purchasing power parity and interest rate parity • Exchange rate systems • Currency crises
Part II : Growth, Globalization, Government Policy 6. The Labor Market
Readings:
• MS: Sections 7.1, 7.2, 7.9 • China’s labour market: The next China, The Economist, July 31, 2010 • The Himalayas of hiring, The Economist, August 7, 2010 • Concern as Baby-Boomers Prepare for Retirement, Financial Times, February
28, 2010
Issues:
• Marginal productivity of labor and labor demand • Real wage = Marginal Product of labor • Income inequality; unemployment
7. Growth Accounting and Economic Growth Readings:
1994 • The world turned upside down (A special report on innovation in emerging
markets), The Economist, April 17, 2010 • A Nation Develops, Financial Times, January 11, 2010 • The elusive fruits of inclusive growth, The Economist, May 15, 2010 • Secret Sauce, The Economist, November 14, 2009 • Inclusion. Growth. In India, Entrepreneurship Can Connect the Dots, ISB
Insight, Winter 09-10, 12-15.
Issues:
• The big picture of the economy • The production function • Growth accounting and efficiency of the economy • Growth dynamics • Policies to promote growth • Global inequality and convergence
8. International Trade & Globalization
Readings: • MS: Chapters 8 (8.7 optional), 9 • Opening the Floodgates, The Economist, May 09, 2009 • Goodbye, Free Trade? The Wall Street Journal, October 15-17, 2010
Issues:
• Trade patterns • Comparative advantage and the gains from trade • Who wins and who loses from trade • Trade policy & trade politics
9. Monetary Policy, Economic Fluctuations
Readings:
• MS: Sections 16.3, 16.4, 16.7 • India lifts key rate to battle inflation, Financial Times, September 17, 2010 • Some enchanted easing, Financial Times, October 28, 2010 • A Computer Would do Better Than the Fed, The New York Times, April 07,
2001 • Oil price holds global economy hostage, Financial Times, March 11, 2011
Issues:
• The debate on non-neutrality and monetary policy • Long-term interest rates • Characterizing fluctuations • The big picture using the classical theory of fluctuations
10. Fiscal policy, Government Debt
Readings:
• MS: Sections 10.1, 10.3-10.5 • Subsidy Reform can Help India Spend Better, Financial Times, March 04,
2010 • China holds $1,160bn of US debt, Financial Times, March 01, 2011 • Threadbare, The Economist, November 18, 2010 • Saving the Euro, The Economist, November 18, 2010
Issues:
• Tax revenues, government expenditure, and the budget deficit • Traditional and Ricardian views of government debt • Classical and Keynesian views of fiscal stimulus
Handouts for the class The Powerpoint presentation used during the lecture will be handed out at the beginning of the session. Evaluation Components Your grade for the course will be based on your performance on the midterm and final exams. The course grade is determined as follows:
Course Grade = 0.4*Midterm grade + 0.4*Final grade + 0.2*Team project, where all grades are on a scale of 100. Midterm & Final Exams
• The midterm exam will cover material from Part I of the course, and the final exam from Part II.
• Exams are closed book exams. No calculators, PDAs, or laptops will be allowed. You may bring to the exam one standard-sized sheet of paper, with notes on both sides.
• The exams are not group projects. They are to be your work and yours alone. Students are required to adhere to the standards of conduct in the Honor Code, and you will be required to sign an honor code pledge on your submitted examination. Collaborations on the examinations of any sort would constitute a violation of the honor code.
• There is no make-up midterm exam. You can miss the midterm only for an emergency, such as illness. This option is available only if you provide prior information to the professor. In this case, the entire weight of the exams will shift to the final exam; that is, the final will count toward 80% of the course grade.
• Verbal appeals for grades will not be entertained. A written statement, clearly explaining the reasons for the re-grade request has to be submitted. The entire exam will be re-graded, and the score may increase, decrease, or stay the same.
• The best way to prepare for the exams is to: o Follow the lectures and class discussions closely o Cover all the required readings stated in this syllabus o Read additional material handed out in the class o Work on any of the practice questions provided o Work with your team on the assignments and participate in the related class
discussions
If you have difficulty with any of the material, you should email your questions to the professor or the teaching assistant. Team Project Under the team project, groups of 5-6 will be randomly assigned a country. Each group will have to produce a report on the country. The report should bring the reader up to date on each of the aspects that we cover in class. Thus, the report should be able to acquaint the reader with the recent macroeconomic trends in the country, the state of labor and capital markets, monetary conditions, trade flows, major trading partners, the output composition as well as the trade composition, etc. In effect, the report should be an effective guidebook for any prospective investor contemplating investing in that country. The team project will count for 20% of the overall grade for the course. Each group will need to submit a progress report every Monday 8 A.M (June 13, 20, 27, July 04). Each interim report that is not turned in or does not satisfy the assignment requirements (which will be specified later) will result in a deduction of 4 percentage points from the course grade. You will receive feedback on the assignments. The final report is due by midnight, July 8. Attendance Policy
We are required to include the following mandatory ISB Attendance Policy in our course outline. Please contact the Academic Office if you have any questions. “Attendance & Punctuality Learning is an interactive process. ISB students are admitted partly based on the experiences they bring to the learning community and what they can add to class discussions. Therefore attendance is an important aspect of studying here. You have to be present in all the classes. Absence is only appropriate in cases of extreme personal illness, injury, or close family bereavement. Voluntary activities such as job interviews, business school competitions, travel plans, joyous family occasions, etc. are never valid reasons for missing any class. The faculty with the assistance of the Academic Associate will keep track of your attendance and decide on the nature and extent of penalty for any absence from the class. Penalty may include reduction in grade.
Late arrival is disruptive to the learning environment; so you have to be in class before the scheduled time. Most courses meet twice a week during the day. Normally there are no classes scheduled on Friday or in the evenings, but there are exceptions. Class and Exam schedules are posted on the PGP intranet site. Any change in the class schedule is notified in advance. Many professors choose to base part of the course grade on class participation, which may include an attendance component. If you find it necessary to miss a class or make a late submission, you must seek permission from the instructor in advance. In case of illness, the professor may also require a letter of confirmation from a qualified doctor.”
Assignment Schedule Name of the Component
Date of Submission/Deadline
Take-home or in-class Group Assignment (Y/N)
Instructions to students on word limit/format of submission etc
Midterm Exam TBD In class N See above Final Exam TBD In class N See above
Team Project Interim reports: June 13, 20, 27, July 04 Final report: July 08
Take home
Y
See above
Group Information The Group composition fixed by the ISB for the core terms will be used for the core project. Blackboard We use the course management system Blackboard as a course aid. You should refer to Blackboard for announcements, course information and supplementary course material.
Indian School of Business Post Graduate Programme
Term 2, Class of 2012 Global Economics
Professor Sudip Gupta
Team Project The aim of the team project is to provide you with experience in preparing a “country report.” Given that your future firm will most likely be global you will have to prepare or oversee many such reports during your career. Each group will be randomly assigned one of five countries by the Academic Associates. The list of countries is:
1. Thailand 2. Portugal 3. Brazil 4. Nigeria 5. Spain 6. Egypt
No requests to change the country your team has been assigned will be entertained. The report should bring the reader up to date on each of the aspects that we cover in class. Thus, the report should be able to acquaint the reader with the recent macroeconomic trends in the country, the state of labor and capital markets, monetary conditions, fiscal conditions, capital and trade flows, major trading partners, the output composition as well as the trade composition, exchange rate movements, etc. Needless to say, each country might have its unique circumstances, which would also need to be discussed. In effect, the report should be an effective guidebook for any prospective investor contemplating investing in that country. While a discussion of the recent economic crises in the US and the EU may be desirable, do not structure the entire report around them. Long-term trends and prospects are of interest too. The report needs to be more than just descriptive. Under each section mentioned above, a critical analysis of policies (e.g. strengths, challenges, and recommendations) also needs to be given. Such analysis could benefit from the concepts, graphs, and equations discussed in class. In other words, it is not enough to merely give a “CNN-view” of the country you are assigned. It is fine to discuss with other groups sources for data and pertinent research material. However, each group needs to conduct its own analysis without consultation with other groups. While online country reports from other analysts may be used for consultation purposes, please do not replicate their analysis as well. The analysis needs to be unique to the group producing the report. All online sources that are used for either data or analysis purposes have to be referenced. Interim Progress Reports as Weekly Assignments To make the final report submission easier and the work spread out through out the term we want you to submit interim reports as weakly assignments due every Monday 8 A.M. These assignments should be analysis of the assigned country based on the topics discussed in the class in the previous week. However necessary deviations from the covered topics are allowed. At the end of the term you can
work on these assignments to make a final country report. Each assignment should have limited overlap with the previous ones. Each of these interim reports (assignments) should not exceed 4 pages (including figures, tables, and references). The aim is to have the highlights and the outline/structure of the document in place so that you can receive feedback. The 5th page onwards will not be read. Use bulleted lists and tables to permit easy reading. Use at least a font size of 12 (single spacing is fine) and Times New Roman font. Quality rather than quantity matters – do not feel compelled to fill up 4 pages. Final report: Due by midnight, July 9, in e-mail format to the academic associates. Any late submission will lose 50% of this grade. This report should not exceed 15 pages (including figures, tables, and references), and should hopefully incorporate the comments you received! The 16th page onwards will not be read. Use bullet lists and tables to permit easy reading. Use at least a font size of 12 (single spacing is fine) and Times New Roman font. Quality rather than quantity matters – do not feel compelled to fill up 15 pages. Report Submission: For a report to be accepted, a soft copy has to be submitted through Turnitin by the deadline. The Best Reports: The best report for each country will be filed at the LRC to serve as both a reference information tool as well as a guide map for future students. A few source you may find useful (this is not an exhaustive list): The information listed below will be available for free on websites or from LRC. Paying for data to write this report would be overkill and is strongly discouraged. The source should be mentioned for all data, figures, etc. You should feel free to be critical of the data itself! There will be several other country-specific sources.
• World Development Indicators • Penn World Tables • IMF’s International Financial Statistics • CIA’s World Factbook • World Bank’s Doing Business Database • Transparency International’s Corruption Index • Freedom House’s Freedom in the World • Heritage Foundation’s Index of Economic Freedom
Financial Econometrics
Course Designed for Post-Doctoral Students and Academic Associates
