html\fin647

FIN 647: INVESTMENTS
Spring 2003

Professor Pin-Huang Chou
choup@cc.ncu.edu.tw
886-3-4227151 ext 6270
http://www.mgt.ncu.edu.tw/~chou

Introduction

This is a course in graduate-level investments. I will follow closely the textbook during the semester. Special topics of interest, especially those related to recent advances in the academics and practices, will be introduced and discussed. I more or less treat this course as one on "investment science." Hence, in addition to the materials covered in the text, I will cover methodologies including tests of asset pricing models, optimization of portfolio construction with and without constraints, index tracking, event studies, etc., most of which may not be covered in detail in the textbook, and are somehow technical. While most of you may have taken undergraduate investments, I expect everyone well prepared before sits in the class. I assure you that you will learn of something different (and yet, more correctly, hopefully).

Reading assignments will be handed out a couple of weeks before we start a topic. Other useful "less-academic" journals but yet closely related to academic research are: Financial Analysts Journal and Journal of Portfolio Management. You are suggested to take a look at these journals to see what topics and issues that people in academics and practices are concerned.

Textbooks

Avi Bodie, Alex Kane and Alan J. Marcus, 2002, Investments, Fifth Edition, McGraw-Hill. (to be referred to as BKM in the following)
Robert A. Haugen, 1999, The new finance: The case against efficient markets, second edition, Prentice Hall.
Robert A. Haugen, 1999, The inefficient stock market, Prentice Hall.
Jeremy J. Siegel, 1998, Stocks for the long run, second edition, McGraw-Hill.
Hersh Sherfrin, 2000, Beyond greed and fear: Understanding behavioral finance and the psychology of investing, Harvard Business School Press.
Robert Shiller, 2000, Irrational Exuberance.
An Introduction to Financial Econometrics (by Chung et al, 2002).

There are a couple of Chinese version investments textbooks available. But I don't particularly recommend you to buy one. However, some of them do contain materials related to financial institutions that are unique in Taiwan's stock markets.

Grading

Midterm exam (April 15)	30 %
Final exam (June 17)	40 %
Assignments and projects	15 %
Class presentation	15%

Class Hours: Tuesday, 1:30 -- 4:30 PM.

Class Schedule

	Topic	Duration
1	Introduction: Stock and portfolio returns calculations and index construction	1 week
2	Portfolio Theory: risk and return; efficient frontier	1 week
3	Capital Asset Pricing Model: Theory, uses and tests	3 weeks
4	Arbitrage Pricing Theory and multifactor pricing models	1 week
5	Factor v.s. characteristic models	2 weeks
6	Efficient market hypothesis and event studies	2 weeks
7	Security analysis and asset allocation	1 week
8	Index portfolio management: Tracking, arbitrage, etc.	1 week
9	Mutual fund management and performance evaluation	2 weeks
10	Trading strategies: Contrarian, momentum and other technical trading rules	1 week
11	Behavioral Finance	1 week
12	Alternative approach: Artificial intelligence applications	1 week

Presentation

Selected papers will be presented by you starting from April 22. Each week, two or three papers will be presented.

Projects

1. Trading strategy (due 3/4).

Consider the case where there are only two assets: one riskless asset (Rf) and one risky asset (Mkt). Based on the data below, develop a strategy that gives the best performance possible. (Date: strategy.dat; Mkt-Rf is the market excess return, and Rf is the riskfree rate.) (Sample SAS program: strategy.sas)

2. Portfolio optimization (due 4/18)

Select a set of assets or securities of your own (domestic or foreign) that you think can provide the best efficiency (with and without short-sale restrictions). Collect monthly returns data for 10 years. First, use the data for the first 5 years to estimate the optimal portfolios with and without short sale restriction. Report the optimal weights, and the corresponding performance measures. Second, based on the optimal weights obtained from the first 5-year subsample, compare its performance with respect to an appropriate market index. Remember you need to consider two cases --- with and without short-sale constraint.
You may choose a riskless asset by yourself or simply assume the riskless rate is zero. (Optional) You may want to use the technique suggested by Jorion (Portfolio optimization in practice) to examine how performance differs statistically.

3. CAPM tests (due 5/13)

4. Event studies (due 6/3)