Syllabus (FIN 332) Fundamentals of Investments

Description

An introductory survey of the fundamental principles of investment management. The learning outcomes for this course are summarized below:

1. Understanding the structure of various capital markets, as well as how and why organizations (ranging from individuals to multinational firms) participate in these markets. Particular importance will be assigned to innovations in market structures (dark pools, ECNs) and their implications for market participants. The student will be able to set up buy and sell orders for various securities, as well as understand the use of leverage inherent in margin accounts and some derivative securities.
2. To extend previous study on equity and fixed income security valuation. Further, we will introduce and value hybrid securities which have characteristics of both debt and equity (particularly convertible bonds). Valuing the warrant in a convertible bond will also serve as a prelude to derivative securities.
   
3. Quantify the interest rate risk in fixed income securities using duration and convexity. Moreover, the student will be able to discuss the allocation of interest rate risk between lender and borrower in fixed rate as compared to adjustable rate securities.
4. Assess reinvestment risk in fixed income securities and the benefits inherent in the option to prepay.
5. This course will also introduce exchange­listed derivative securities (futures and options), along with basic hedging and speculation strategies using these securities. Students will also learn about the markets wherein derivatives are traded, and how laws governing these markets may differ from the laws governing the stock markets. A basic introduction to valuing futures on storable commodities, currencies, and interest rates will be afforded. We will then briefly discuss futures on non­storable commodities (particularly electricity). Lastly, using Excel students will apply the Black­Scholes (1973) option pricing model to valuing options on non­dividend paying stock. The assumptions of Black­Scholes (1973) will be discusses along with a non­rigorous introduction to risk neutral pricing (intended to motivate further study).
6. Students will be able to measure the risk and return of individual securities as well as of a portfolio of multiple risky securities. The effect of forming a portfolio on risk and expected return will be quantified, as well as the resulting implications for forming an efficient portfolio. We will derive the Capital Asset Pricing Model (CAPM) and thereby calculate the expected return for individual securities. A short discussion of the assumptions of the CAPM and the alternative ‘Arbitrage Pricing Theory’ (APT) will conclude.

Course Objectives and Learning Outcomes:

Upon successful completion of the course each student will be able to:

1. Understand and express factual knowledge, principles and theories in the area of investments,

2. Exhibit creative problem-solving skills and refined reasoning capabilities in the area of investment selection and management,

3. Recognize the need for a broad-based, general education as a useful tool to understand the financial markets,

4. Understand the growing importance of globalization on both the investment process and on security markets,

5. Show an awareness of the various issues and developments that constantly reshape financial markets and investment choices.

Learning Goals and Objectives

Project 1: Trading Assignments

Trading assignments are here: https://github.com/Matt-Brigida/fin-332-trading-assignments Students will complete each of these during the semester. If you do not make the trades you will receive a 0 for the assignment even if you attempt to answer some of the questions.

Market Trading Hours: The stock and option markets are open from 9:30 am to 4pm each non-holiday weekday. Therefore, you must make your trades within these times.

Here is a video on the first 3 trading assignments: https://www.youtube.com/watch?v=uG7l0WaATDs

And a video on shorting stock: https://www.youtube.com/watch?v=bTP19kqiKEk

Project 2: Earnings Announcement Event Study

Each student will complete an event study on a U.S. common stock whose ticker begins with the same first letter as the student’s last name. The event is the company’s most recent earnings announcement on or before [insert cutoff date]. If no suitable NYSE- or Nasdaq-listed common stock is available for that letter, the student should use the next letter in the last name. If that also fails, the student should contact the instructor for an approved fallback ticker. ETFs, mutual funds, ADRs, preferred shares, and OTC stocks may not be used.

The purpose of the project is to measure how the stock reacted to its most recent earnings news. Students must identify the earnings announcement date using the company’s investor relations page, earnings press release, or SEC filing. The event date is defined as the first trading day on which the market could react to the earnings news. If the earnings release was issued before the market opened, that trading day is day 0. If the earnings release was issued after the market closed, the next trading day is day 0.

Students will use daily adjusted closing prices for both the stock and the market benchmark, SPY, to compute returns. Daily stock return is:

\[ R_{i,t} = \frac{P_{i,t}}{P_{i,t-1}} - 1 \]

and daily market return is:

\[ R_{m,t} = \frac{P_{m,t}}{P_{m,t-1}} - 1 \]

where \(P_{i,t}\) is the adjusted close for the stock on day \(t\), and \(P_{m,t}\) is the adjusted close for SPY on day \(t\).

Students will calculate abnormal return for each day in the event window using the market-adjusted model:

\[ AR_t = R_{i,t} - R_{m,t} \]

The required event window is [-1, +1], where:

• -1 = the trading day before the event
• 0 = the event day
• +1 = the trading day after the event

Students must calculate:

1. the stock’s return on day -1, day 0, and day +1
   
2. SPY’s return on day -1, day 0, and day +1
   
3. abnormal return on day -1, day 0, and day +1
   
4. the cumulative abnormal return over the three-day window:

\[ CAR[-1,+1] = AR_{-1} + AR_0 + AR_{+1} \]

Each student must submit:

1. a spreadsheet showing all calculations
   
2. the source for the earnings announcement date
   
3. a chart showing either the three abnormal returns or the cumulative abnormal return over the event window
   
4. short responses to the following questions:
   • Was the market reaction to the earnings announcement positive or negative?
   • Was most of the reaction concentrated on day 0, or did it spill over to day -1 or day +1?
   • Does the result appear consistent with semi-strong-form market efficiency?

A successful project will correctly identify the event date, correctly compute stock returns, market returns, abnormal returns, and \(CAR[-1,+1]\), and provide a brief interpretation of the market’s reaction to the earnings announcement.

Project 3: Black-Scholes Project

First, choose a stock whose ticker starts with the same letter that your last name starts with. For example, since my last name is Brigida I may choose Boeing (ticker BA). Once you have chosen your stock create a spreadsheet which will:

1. Value an option on the stock using the Black-Scholes (1973) option pricing model.
2. Calculate the stock’s historical annualized volatility, and get an estimate of the implied volatility. To do so the you must show it is able to download a recent time series of the underlying stock price, convert these prices into a time series of returns, calculate the standard deviation of the returns, and then annualize the standard deviation (this is the stock annualized volatility which is a parameter in the option pricing model).
3. Calculate the value of the option by Monte Carlo.. Background on the valuation.
4. Calculate the proportion of your stock’s return variance which is from the market and which is due to firm specific uncertainty.

You should be ready to explain any part of the spreadsheet. For 4. consider the following regression:

\(r_s = \alpha + \beta_s r_m + e_s\)

where \(r_s\) are returns on your stock and \(r_m\) are market returns. Then:

\(Var(r_s) = (\beta_s)^2 Var(r_m) + Var(e_s)\)

because:

\(Cov(r_m, e_s) = 0\)

Note, \(Var(X)\) denotes the variance of \(X\), and is also often written as \(\sigma^2_X\).

\((\beta_s)^2 Var(r_m)\) is the market’s contribution to your stock’s variance, and:

\(Var(e_s)\) is the firm specific contribution.

Project 4: Portfolio Construction and CAPM Analysis

Each student will construct and evaluate a portfolio of common stocks. The purpose of the project is to measure how diversification affects risk and return, and to relate the portfolio’s expected return to its systematic risk.

Each student will choose four U.S. common stocks. At least three different sectors must be represented in the portfolio. ETFs, mutual funds, ADRs, preferred shares, and OTC stocks may not be used.

Students will use daily adjusted closing prices over the sample period [insert start date] through [insert end date]. Students will also use SPY as the market benchmark and the 3-month Treasury bill rate as the risk-free rate.

Students must first calculate daily returns for each stock and for SPY:

\[ R_{i,t} = \frac{P_{i,t}}{P_{i,t-1}} - 1 \]

where \(P_{i,t}\) is the adjusted closing price of asset \(i\) on day \(t\).

Students will then form an equally weighted portfolio, so that each of the four stocks has a portfolio weight of:

\[ w_i = 0.25 \]

The daily return on the portfolio is:

\[ R_{p,t} = \sum_{i=1}^{4} w_i R_{i,t} \]

Students must calculate the following for the portfolio:

1. average daily return
   
2. annualized average return
   
3. daily standard deviation
   
4. annualized standard deviation

Annualized return should be calculated as:

\[ \bar{R}_{p,ann} = 252 \times \bar{R}_{p,daily} \]

Annualized standard deviation should be calculated as:

\[ \sigma_{p,ann} = \sqrt{252}\,\sigma_{p,daily} \]

Students must then estimate the portfolio’s beta by running the following regression:

\[ R_{p,t} - R_{f,t} = \alpha_p + \beta_p (R_{m,t} - R_{f,t}) + e_t \]

where \(R_{p,t}\) is the portfolio return, \(R_{m,t}\) is the return on SPY, and \(R_{f,t}\) is the daily risk-free rate implied by the 3-month Treasury bill rate.

Using the estimated beta, students must calculate the portfolio’s CAPM expected return:

\[ E(R_p) = R_f + \beta_p \left(E(R_m) - R_f\right) \]

Students must compare the portfolio’s realized annualized return to its CAPM expected return and briefly discuss whether the portfolio outperformed or underperformed what CAPM would predict.

Students must also calculate the Sharpe ratio of the portfolio:

\[ Sharpe = \frac{\bar{R}_p - R_f}{\sigma_p} \]

Each student must submit:

1. a spreadsheet showing all calculations
   
2. a table with the four stocks and their sectors
   
3. the portfolio’s annualized return, annualized standard deviation, beta, CAPM expected return, and Sharpe ratio
   
4. one chart comparing the cumulative return of the portfolio to SPY over the sample period
   
5. short responses to the following questions:
   • Did diversification reduce risk relative to the individual stocks?
   • Was the portfolio’s realized return above or below its CAPM expected return?
   • Would you consider this a strong portfolio for a passive investor? Why or why not?

A successful project will correctly calculate portfolio returns, annualized risk and return, beta, CAPM expected return, and the Sharpe ratio, and will provide a brief interpretation of the portfolio’s performance.

Exam

There will be one multiple-choice exam covering important Investments topics. The exam will be posted early in the course, and you will have until the due date to submit the exam. If you do not submit the exam by the due date you will receive a 0. Because you have over a month to take the exam, I won’t allow late submissions for any reason.

Course Communication

All important/official announcements will either be posted on D2L or emailed to each student’s SUNY Poly email account. All student questions (other than those that contain personal information) should be asked in class or posted to a discussion board. Do not email me questions such as “When is the exam?”. These types of questions should be asked in class (or on a discussion board).

Missed Classes

If you are not in class you are responsible for figuring out what you missed. I will not email you a summary of what we covered in the class.

Re-Grading Assignments

I normally do not regrade assignments, however if I do so your grade may increase or decrease when regraded.

Grading

• 90 - 100 A
• 80 - 89.9 B
• 70 - 79.9 C
• 60 - 69.9 D
• < 60 F

+/- grades may be assigned at the instructors discretion.

An Important Note on Grading

There is no special consideration if you need a certain grade in this course to graduate. If you require a certain grade in this class to graduate it is your responsibility to earn that grade. Specifically if you receive a D in this course I will not allow you to do extra assignments after the course is complete in exchange for a higher grade.

An Important Note on Late Work

In this course you have plenty of time to take exams and submit assignments. Therefore, late work is not accepted and will receive a 0 grade. Say, for example, you email me on the due date of an assignment or exam and say “I can’t complete the assignment because the power went off at my house/dorm”. You will receive a 0. The takeaway from this is don’t wait until the last day to submit work.

Again, I’ll note the stock market closes at 4pm. So let’s say you wait until 5 pm on the due date of the trading assignments to start working—you will receive a 0 grade because you can’t complete the trades.

A Note on Submitting Assignments

Before you submit an assignment I suggest you take a step back, open the document, and ask yourself can anyone easily understand the answers and how they were generated. This is an important skill a financial analyst must have—the ability to organize a document to efficiently convey information. That is also why I do not provide template for assignment submissions. Constructing a readable document is part of the assignment.

An Important Note on Meetings in 35W Courses

If you signed up for a 35W course this is asynchronous. This is the definition of a 35W course from the SUNY Poly website:

Online course are fully online and are asynchronous and have no meeting time (remotely or in-person). The activities must be completed by the due dates specified by your instructor. Online courses may also have proctored exams. Students will be required to locate their own proctors for the exams.

Depending on the instructor/department, the course may also use webinars to provide office hours, study sessions, presentations, group projects and recorded sessions. Contact the instructor or department for more information. The section number of online synchronous courses end with a “W”

Notice there are no meeting times. If you want to meet by video I will try and set office hours to meet with students, but there is absolutely no guarantee we will be able to meet. If you request a new video on a topic I can usually create one in a timely manner.

If you need to meet with me to take this course however, you should drop the 35W offering and sign up for a in-person or 35S or H offering of FIN 332. One is guaranteed to be offered every other year.

Due Dates

• Project 1:
• Project 2:
• Project 3:
• Project 4:
• Final Exam:

BRTI Tick Data

Below are millisecond data for the Bitcoin Real-Time Index on Jan 3, 2018. The data are pulled via the IB API. With data of this type, you can dicover interesting features of market data—for example, notice the “last trade” is often outside of the bid/offer. This is particularly important to understand when trading illiquid contracts, such as some options. You can left-click your mouse, and drag, to zoom in on subintervals.

Course Syllabus Disclosure Statement Spring 2022

Accommodations for Students with Disabilities:

In compliance with the Americans with Disabilities Act of 1990 and Section 504 of the Rehabilitation Act, SUNY Polytechnic Institute is committed to ensuring comprehensive educational access and accommodations for all registered students seeking access to meet course requirements and fully participate in programs and activities. Students with documented disabilities or medical conditions are encouraged to request these services by registering with the Office of Disability Services. Please request accommodations early in the semester, or as soon as you become registered with Disability Services, so that we have adequate time to arrange your approved academic accommodation/s. Once Disability Services creates your accommodation plan, it is your responsibility to provide me a copy of the accommodation plan.

If you experience any access concerns that may require the need for adaptive or alternate format/presentation of materials, reach out to me or Disability Services right away.

For information related to these services or to schedule an appointment, please contact the Office of Disability Services using the information provided below. The Office of Disability Services can accommodate virtual meeting requests. The website has helpful information, and the link can be found here: https://sunypoly.edu/student-life/diversity-equity-inclusion/disabilities-services/contact-us.html

General Notes (most relate only to in class sections)

1. The instructor is not involved in any way with your adding and dropping the course. It is the student’s responsibility to abide by all proper procedures and dates.
2. Attending class, and reading the text is required.
3. All exams will be closed book.
4. If you are late for an exam, no extra time will be allotted to you.
5. There will be no make up exams or extra points assignments.
6. You will be responsible for any material covered in class that is not in your text.
7. You should bring your text to class.
8. You are expected to be on time for class. This is especially important for exam dates.
9. Disruptive behavior in the classroom will not be tolerated.