Syllabus (FIN 332) Fundamentals of Investments

Video Walkthrough of Syllabus

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

Exams

There will be three exams (two during the semester and a final exam). Normally no make-up exams will be given. Failure to take an exam will result in a grade of zero for the missed exam. Make-up exams will only be allowed for extraordinary and verifiable reasons.

Trading/Other 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.

I may assign other several homeworks throughout the semester that involve either trading in your brokerage accounts, or downloading data in R and performing some calculation/analyses. If I give pop quizzes, these grades will be included here.

Here is a video on the first 3 trading assignments:

And a video on shorting stock:

Brokerage Accounts

We will use paper trading accounts provided by Interactive Brokers. These trading accounts are the exact same as the actual brokerage accounts—except the money isn’t real. You will have access to (and real data from) stock, bond, commodity, and foreign exchange markets. While the data alone is worth a fair amount of money, Interactive Brokers is offering the accounts to us for free. Keep this in mind while following the directions to set up your account customer service will be nonexistent. If you lose your password, or forget your username, etc, you will not have an account for the semester. In this case you will have to trade in another student’s account, or mine. Please pay attention while setting up your account, and write everything down.

See here example of the data we can pull using our IB accounts. You may want to think if interesting projects/analyses you can do with access to such data.

Also check out the IB Quant Blog. It is a very good resource.

Required 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.

Optional Web App Project

Optional Projects are only for students doing well in the course. They should not be used to attempt to increase your grade.

Students will create a Shiny interactive web application. To do so you’ll first need to sign up for a free shinyapps account.

You are free to create the account under a pseudonym, so no one can publicly identify you as the owner of the account. However, the web application is a useful tool to show off your work, and is something that can go on your resume (with a link to the application). So you may prefer to use your real name. My user name is mattbrigida.

Your application should have something to do with financial markets, and should be at least somewhat original. See this gallery of applications. Possible applications may be:

• Plot a time series of stock prices, returns, or volatility.
• Financial Advisers: Create an app which will return target asset allocation given a person’s age and investing goals/risk tolerance.
• Create and plot a stock index.
• A Black-Scholes calculator.
• A margin calculator.
• Create a histogram or probability density plot for bond or stock returns.

To get started you will want to use the RStudio development environment for R. This is available in the Still hall computer lab, or you can install it for free on your own computer from here. If you install it on your own computer you’ll need to install R first. You can get R here

Optional Pairs Trade

Implement the pairs trade methodology outlined in Gatev et. al (2006).

@Article{Gatev_2006, author = {Gatev, Evan and Goetzmann, William N. and Rouwenhorst, K. Geert}, title = {Pairs Trading: Performance of a Relative-Value Arbitrage Rule}, year = 2006, volume = 19, number = 3, pages = {797–827}, issn = {1465-7368}, doi = {10.1093/rfs/hhj020}, url = {http://dx.doi.org/10.1093/rfs/hhj020}, journal = {Review of Financial Studies}, publisher = {Oxford University Press (OUP)} }

Optional Optimal Portfolio

Construct a Markowitz Mean-Variance Optimal portfolio.

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.

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.
10. You may not use tobacco products in class.

Tentative Outline

All due dates are in the ouline below. There are no due dates listed in D2L.

• Week 1: Chapter 1
• Week 2: Chapter 2 & 3
• Week 3: Chapter 3 & 4
• Week 4: Review and Market Microstructure (The Only Game in Town and Payment for Order Flow)
• Week 5: Exam 1 Due, September 27 | Trading Assignments 1, 2 and 3 are also due September 27
• Week 6: Chapter 20: Options and Option Markets, 20.1–20.3
• Week 7: Chapter 20: Options and Option Markets, 20.4–20.7
• Week 8: Chapter 21: Options and Option Markets, 21.1–21.3
• Week 9: Chapter 21: Options and Option Markets, 21.4–21.6
• Week 10: Exam 2 Due, November 8 | Trading Assignments 4 and 5 are also due November 8
• Week 11: Chapter 22: Futures, 22.1–22.2
• Week 12: Chapter 22: Futures, 22.3–22.4
• Week 13: Chapter 22: Futures, 22.5 and possibly a topic from Chapter 23
• Week 14: Trading, exam review, Black-Scholes project Due December 3. | Trading Assignments 6 and 7 are also due December 3
• Final Exam Due: Date TBA

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

Answers to Online Questions

On momentum trading strategies such as the post-earnings announcement drift anomaly.

The CAPM does not assume all investors have the same degree of risk aversion