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Finance 4504
INVESTMENTS
Fall 2002
TABLE OF CONTENTS
I.
General Information ............................................................................................................1
II.
Academic Integrity Policies .................................................................................................3
III.
Class Preparation and Deliverables......................................................................................4
IV.
Grading ...............................................................................................................................7
V.
Class Schedule ....................................................................................................................8
Reserve Listing/Library Assignments ...............................................................................10
Event Analysis Case Summary…………………………………………………………11
Retirement Case Summary……..………………………………………………………15
1
TERM:
Fall 2002
COURSE
NUMBER:
FIN 4504
COURSE
TITLE:
Investments
PREREQUISITES: Fin 3403 with a C or better.
CATALOG DESCRIPTION: Principles and practices of investments; factors influencing
security values.
INSTRUCTOR:
Dr. Cheryl Frohlich
OFFICE:
42/3210
OFFICE HOURS:
Tu: 10:30-11:30 Tu Th: 7:15-9:00 and by appointment
PHONE:
620-2630 (office); 223-7249 (home)
Email: [email protected]
Fax: (904) 928-3861
CLASS TIME:
T, Th
T, Th
1:40- 2:55 p.m. (42/ 1101)
6:00-7:15 p.m. (42/1105)
REQUIRED TEXT: Charles P. Jones, Investments Analysis and Management, eighth edition
Financial Calculator BAII Plus
THANKSGIVING HOLIDAY:
November 28-30
DROP DATE:
Thursday, November 7, 2002
LAST DAY OF CLASS:
Friday, December 6, 2002
FINAL EXAM:
FIN 4504 095: Tuesday, December 10, 1:00-2:50 p.m.
FIN 4504 094: Tuesday, December 10, 6:00-7:50 p.m.
WHY TAKE FINANCE?
Finance is the language of business. Understanding finance is essential for all business students
whether the intended major is management, marketing, law, or accounting. A finance background
provides a graduate with fundamental training that can be used in all aspects of organizational
activity, whether commercial, governmental, or institutional.
2
THIS COURSE INTENDS
Finance 4504 examines the field of investments. Descriptive material is thoroughly covered and the
analytics of investments are presented. The variety of securities available when investing directly or
indirectly, the markets in which they are traded, the mechanics of securities trading, and a careful
analysis of the important concepts of risk and return are discussed. Basic approaches to security
analysis and valuation of stocks and bonds are presented. In addition, derivatives are examined and
discussed. Fundamental analysis and technical analysis is briefly covered. Finally, portfolio
management, capital market theory, and the concept of efficient markets are presented.
1.
Objective: The objective of this class is to provide the student the opportunity to stretch to
his/her full thinking potential. The course is very rigorous and the student must integrate
concepts in lecture and test. A working knowledge of how securities are valued, the markets
they trade in, and portfolio management will be expected at the conclusion of the course
2.
Lecture-Discussion: Most of the class periods will be devoted to covering material from the
textbook or assigned readings. Class participation through discussion, questions, examples,
or newspaper articles is required.
I will expect each of you to remain abreast of current developments in financial markets and
securities in general. In order to accomplish this objective, the Wall Street Journal along with
certain weekly publications such as Business Week, Newsweek, or Forbes need to be read on
a regular basis.
WRITTEN COMMUNICATION REQUIREMENT:
(See Class Preparation and Deliverables)
ORAL COMMUNICATION REQUIREMENT:
Oral communication skills will be demonstrated through class participation. In addition, discussion
of homework when presented in class will be required.
COMPUTER APPLICATIONS:
Several spreadsheet software packages are available. Use of one of these packages will be required
to complete some homework assignments.
INTERNATIONAL COVERAGE:
One section on Foreign Exchange Markets, in addition to international applications and issues
throughout the text are presented.
ENVIRONMENTAL ISSUES COVERED:
None
ETHICAL ISSUES COVERED:
Ethics will be discussed as it pertains to the use of finance in managerial decisions and its impact
upon the organization.
3
ACADEMIC INTEGRITY POLICIES
ETHICS AND CODE OF CONDUCT
In today's environment, ethics has become an extremely important topic. These characteristics are
not bestowed upon you at graduation but are developed over time. The College of Business
Administration has published an undergraduate handbook, which includes a Code of Conduct (Pages
2-3). All items listed will be strictly enforced. Any student violating any aspect of the code of
conduct will be penalized and receive a grade of `F' for the course and referred to the proper
authorities for expulsion from the University. Specific items that relate directly to this course are:
Cheating
Intentionally using or attempting to use unauthorized materials, information, notes, study aids
or other devises in any academic exercise. This definition includes unauthorized
communication of information during an academic exercise.
This includes, but is not limited to the following:
(1)
Computer assignments must be done independently.
(2)
Copying or allowing copying by another student or students constitutes cheating.
Multiple Submissions
The submission of substantial portions of the same academic work for credit more than once
without authorization.
(1)
Computer assignments must be done independently.
Abuse of Academic Materials
Intentionally or knowingly destroying, stealing, or making inaccessible library or other
academic resources such as:
(1)
Solution manuals.
(2)
Instructor's overheads.
Complicity in Academic Dishonesty
Intentionally or knowingly helping or attempting to help another to commit an act of
academic dishonesty
(1)
Providing answer(s) to a later class.
(2)
Asking other student(s) or class(es) for answer(s).
DISABILITY ACT:
If you have a disability, as defined by the American with Disability Act (ADA), which requires a
classroom accommodation or auxiliary aid(s), please inform me of your needs during the first week
of class so that I may take appropriate action. Individuals who require reasonable accommodations
must contact the Office of Disabled Services Programs at Founders Hall, Building 2, Room 2120,
904-620-2769 as soon as possible.
4
CLASSROOM PROTOCOL
Success in business requires much more than adequate technical training. Some of the factors that
you should have developed by now include:
(1)
dependability (e.g., attend class regularly)
(2)
punctuality (e.g., class starts on time)
(3)
courtesy (e.g., pay attention, don't pack up early)
(4)
motivation (e.g., be adequately prepared for class)
POLICY ON LATE WITHDRAWALS
The University policy for dropping a course after the published drop date, is as follows:
UNF students are not allowed to drop a course after the official withdrawal date unless there are
unusual circumstances that are clearly beyond the student's control. When such cases exist, the
student should file a petition with attached documentation. The instructor does not approve or
disapprove, but assigns a grade of WP or WF. The instructor may also recommend an action to be
taken or write a note explaining unusual circumstances connected with the course. This policy
means that students do not have the right to drop a course after the official university deadline simply
because they have a passing grade at that time.
CLASS PREPARATION and DELIVERABLES
Homework and attendance are essential parts of the learning process. It is the student's responsibility
to have read the assigned chapter(s) before coming to class. Assignments should be prepared and are
due on the dates indicated on the schedule unless otherwise instructed. You should spend at least ten
to fifteen hours per week outside of class on assignments.
ATTENDANCE/PARTICIPATION
Even though no roll will be called, attendance is important in achieving good grades. Participation
in the lotus notes is required. Students are responsible for thorough preparation of all chapters.
Students may be called upon randomly to answer and help present problems.
QUIZZES/ HOMEWORK
There will be at least five homework assignments, quizzes, or mini-cases. Each is worth 12 points.
No make-up homework will be given. When possible there will be a two-class turnaround time on
homework. Late homework will not be accepted. Late is defined as the day I return the
homework in class.
There will be quizzes throughout the semester. Absolutely no makeup quizzes will be given. If you
must be out of town, you will need to coordinate taking the quiz prior to your departure.
The highest scores on five homework/ quizzes/ mini-cases will be counted.
Portfolio Project:
5
Due Date: Rough Draft November 5th---Final Paper November 12th
Each student will receive an imaginary $100,000 to create a portfolio consisting of a least 3 stocks
(one must be preferred, one common stock must be bought on NYSE and one common stock
must be purchased on the NASDAQ), 2 bonds (one corporate and one government or
municipal), 2 puts, 2 calls, 3 mutual funds (one bond, one stock, and one international), and
1 future contract. Only the future is bought on margin. You will use a 10% of the purchase
price as an initial margin and a 7% maintenance margin for maintenance calls. At the 7% level
you must add to your margin account funds to bring it up to the initial margin. When your margin
account falls below the 7% of the initial purchase price, funds must be deducted from your savings to
bring the margin account back to the 10% of the purchase price. The student must have at least 30
trades. You will have 13 trades when you initially purchase the portfolio’s assets as required. Each
time you buy/sell is a trade. All of the $100,000 must be invested at all times. Therefore, you must
have a savings account: when you sell an asset, the account is increased by the sale price, and
when you buy an asset the savings account is decreased by the purchase price. In addition the
savings account is affected by the margin calls you receive on your future. If your future falls
below the maintenance margin, you must deduct the funds from the savings that are necessary
to bring the margin account back to the initial 10% of the purchase price. However, if your
future margin account has excess funds in it, they may be added to your savings account.
At the end of the term, a two-page paper on the Trials and Tribulations of playing the market will
be due. The paper might address such topics as: What strategies did you use to choose the securities
in your portfolio? What differences between the various markets did you notice? How did interest
rate and economic changes affect your securities? Writing skills will be graded. There must be an
introduction, body, and conclusion. The paragraphs must flow together. One cannot jump from one
topic to another without a lead-in. Spelling and sentence structure will be graded.
The appendix must include the spreadsheet in which the securities were tracked. The calculation
for the portfolio's holding and annualized return including dividends paid and accrued interest
on the bonds must be calculated and shown. Periodically, the spreadsheet will be collected to
ensure that students are tracking the securities and buying securities when required. Failure to either
track or purchase timely will have a negative impact upon the grade of the assignment.
Two copies of the rough draft of your paper will be due on the first due date. If the rough
drafts are not submitted on the appointed dates (November 5th) the student will lose 10% of
the possible points for the paper. The paper will be given to fellow students to read and
critique. The critiqued papers will be due the following class period (November 7th). If the
critiqued papers are not returned on the appointed date by the critiquing student-10% of the
possible points on the critiquing students paper will be lost.
Total project counts: 40 points.
CASES (TEAM PROJECTS):
1. Event Study Research Paper and Presentation
[50 points]
Students form teams comprised of three people to work on this assignment. The objective is to
measure the stock market response to an event or announcement, and to present the findings in a
research paper that is publishable in a journal or presentable at a conference. Students, therefore,
gain insight into the informational efficiency of the market and learn how to perform rigorous
financial research. The event/announcement must be unique and must be approved by the
instructor. A sequence of deadlines for various stages of the research process is given whereby
groups meet with the instructor to ensure satisfactory progress is being made on the project. For
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every day that lapses beyond the deadlines, 1 point will be deducted from the project grade. A
summary of the iterations is provided below. It is very important to schedule meetings with the
instructor prior to the due dates at each level in order to receive approval to move on to the next
stage of the assignment. Waiting until the day before the due date or the due date itself puts the
students at great risk of not being able to schedule a meeting.
Due Date: various as per attached Event Study Deadline Schedule
2. Retirement Case and Paper (50 points)
Your client is employed by the State of Florida and has enrolled in the State’s Optional
Retirement Plan. The State contributes 10.14% of the client’s gross income into a retirement
fund. The employee is allowed to contribute to a separate 403-B plan. However, the employee
cannot contribute by salary reduction more than the percentage the employer contributes
(currently 10.14% or $10,000 whichever is the lesser). The client currently contributes an
average of $186.16 to their individual plans every two weeks. Your client has been employed by
the state since the fall of 1986. Your client files taxes as single.
Your client’s annual net salary after taxes and 403-B deductions is $57923. Your client
contributes $4,840 per year to the retirement plans. You client wishes to have a $70,000 takehome income upon retirement. The client plans in retiring in 17 years and you can estimate
your client will live 25 years after they retire. Their current retirement plan is through
Security First. The client has the option to either change provider or to change investment
options within the Security First provider.
Due Dates various as on attached Summary of the Retirement Case.
Grading for Cases:
I will grade the group output and your peers will evaluate you within the group. Your grade
may be less than the group grade assigned by myself depending on your peer evaluation.
Each member of the group will evaluate the other members of the group. Your individual grade will
depend upon your group's evaluation of your efforts and contributions. For every 2 points below the
highest individual's average score, 10% will deducted from the grade of the project.
i.e.:
Highest individual average score within the team
9
Your average:
5
(4 points below group average of 9)
Project grade:
90/100
Your grade:
90(.8) = 72
Total of the two cases: 100 points.
EXAMINATIONS:
There will be a mid-term and final. Tests may either be in class or take-home. The final may be
comprehensive. As a general policy NO Make-Up's are given. There is every possibility that if you
should miss a test, you will receive a zero on that test. All exams are to remain in control of the
professor. FAILURE TO RETURN AN EXAM RESULTS IN AN AUTOMATIC ZERO FOR
THAT TEST.
GRADING:
7
Grading schedule is subject to change given class progress. Notification will be provided prior
to change.
Individual
Homework/Quizzes (5)
Portfolio Project*
Cases
Midterm
Final
Total
15%
60
10%
25%
25%
25%
40
100
100
100
400
*Two copies of the rough draft of your paper will be due on the first due date. If the rough
drafts are not submitted on the appointed dates (November 5th) the student will lose 10% of
the possible points for the paper. The paper(s) will be given to fellow students to read and
critique. The critiqued papers will be due the following class period (November 7th). If the
critiqued papers are not returned on the appointed dates by the critiquing student-10% of the
possible points on the critiquing students paper will be lost.
A
B
C
D
F
Percentage
90-100%
80-89%
70-79%
60-69%
0-59%
A student must have earned at least 90% of the total possible course points (maximum 400) to
obtain an 'A' for the course. Similar requirements for letter grades, B, C, and D are indicated on the
schedule above. Although, quite often the final grades are curved, this is not a certainty. Therefore,
the most conservative approach will be to use the above percentages for grading during the semester.
The + and – grades may be used at the discretion of the instructor.
8
Content Schedule
Quiz--TVM
Introduction
Understanding Investments
Chapter 1
Market Efficiency
Chapter 12 (316-327)
Market Efficiency Implications
Chapter 12 (327-340)
Interest Rates, Forecasting and the Market:
Yield-Curve Quiz-Homework
Interest Rates
Chapter 9 (228-234)
Economy/Market Analysis (On Your Own)
Chapter 13
Industry Analysis (On Your Own)
Chapter 14
Company Analysis (On Your Own)
Chapter 15
Investment Vehicles:
Investment Alternatives
Chapter 2
Indirect Investing
Chapter 3
Evaluation of Investment Performance
Chapter 22 (pages 579-587)
Return & Risk:
Risk Case
Return and- Risk
Chapter 6
Expected Return and Risk
Chapter 7
Analysis of Risk and Return
Chapter 5—ON RESERVE
[Moyer, McGuigan, Kretlow Contemporary Financial Management, Eighth Edition]
Bonds:
Bond Case
Bond Homework
Duration Homework
Bonds Yields and Prices
Chapter 8
Bond Analysis and Strategies
Chapter 9
9
Midterm
Stocks:
Stock Case
Stock Homework
Stocks
Chapter 10
Analysis and Strategy
Chapter 11
Derivatives:
Options Homework
Futures Homework
Options
Chapter 17
Futures
Chapter 18
Markets:
Securities Markets
Chapter 4
How Securities are Trading
Chapter 5
Security Analysis:
Economy/Market Analysis
Chapter 13
Industry Analysis
Chapter 14
Company Analysis
Chapter 15
Technical Analysis
Chapter 16
Portfolio Management:
Portfolio Selection
Chapter 19
Capital Market Theory
Chapter 20
Portfolio Management
Chapter 21
Evaluation of Investment Performance
Chapter22
FINAL
Note:
The indication of material covered by week may change depending upon class’s progress.
The placement of tests may be moved depending upon the class’s progress.
10
LIBRARY ASSIGNMENTS/ RESERVE LISTING
University of North Florida Library
Reserve Collection
TITLE
Contemporary Financial
Management, Eighth Edition
Readings for Financial Institutions
4th Edition
CBOT Financial Instruments Guide
Strategies for Buying and Writing
Options on T-Bond Futures
Understanding Basis:
The Economics of Where and When
AUTHOR
Moyer, McGuigan, Kretlow [3047]
Fraser & Rose (F&R) [ 7269]
CBOT [ 1911]
CBOT [ 1907]
CBOT [1910]
11
SUMMARY OF EVENT STUDY METHODOLOGY
Event Study - a way to test the efficiency of the market by measuring the value of new information
and the speed by which the market reacts to it.
Market Anomalies—Event Analysis Case
Chapter 12 (329-336)
An Event is observed, an expectation about performance is established, actual performance is
measured, and any differences are tested for significance.
Significant Difference = event generated new information to the market
Reasonable Explanation for Significant Difference = market efficiently responded to the
event
No Reasonable Explanation for Significant Difference = market inefficiency or anomaly
1.
2.
3.
4.
To Perform an Event Study
Identify Event/Announcement (date)
Estimate Expected Returns
Calculate Actual Returns
Excess Return = Actual Return – Expected Return
Why can’t we simply look at the stock price reaction to the event to judge the value of the event?
1. Dollars do not provide a consistent standard ($100 to $105 vs. $5 to $10)
2. Price is also influenced by market-wide factors, so event may not be responsible for entire
impact
3. Price can be influenced by other firm-specific event that confounds reaction
Event Study Scope
1. Common Event with Same Event Date (e.g. hurricane strike)
2. Common Event with Different Event Dates (e.g. Dividend increase announcements)
1.
Event Study Methodology
Identify Announcement Date (Day 0) and Event Period
(usually 60 days around Announcement)
2.
Identify Estimation (Pre-Event) Period
(usually 150 days from Day -30 through Day -180)
3.
Formulate Expected Returns
a. Risk-Adjusted Method (Market Model)
Ri,t =  + Rm,t + 
parameter estimation during pre-event period
a. Using historical quotes at yahoo.com, bigcharts.com or some other website that
enables the downloading of daily stock price data, calculate the daily % returns
for your firm for 150 days from Day -30 through Day -180)
12
b. Using the same website(s) carrying downloadable daily data, calculate the daily %
return for the DJIA, the Standard & Poor’s 500 Index and the NASDAQ Composite
Index for the same period in’a’.
Date
c. Enter the data in a spreadsheet in the following format:
Stock Firm
DJIA
S&P500
NASDAQ
Close Return
Close Return Close Return
Close Return
d. Calculate beta for your firm based on each of the three market indices. If using
Excel, you can simply go to data analysis under tools and choose add-in and
check mark tool-pac. This enables you to run regressions with all of the
statistical information that a regression provides. The dependent variable (y) is
the return column for your firm; the independent variable(x) is the return column
for each of your market representatives. The regression will give you give your
alpha and beta.
e. Prepare a graph showing the relative behavior of your firm against the three
markets during your sample period. You must generate this graph and it must
match your data. Choose the appropriate index for your event. You choose the
market index that has the highest adjusted R2.
.
E(R) =  + Rm
for each day during event period
Use the actual daily return on the market (usually 60 days around Announcement
---30 days before and 30 days after the event) and the α and calculated in ‘d’ and
chosen in ‘e’ You will calculate the E(R) for each of the 60 days (30 days before
and 30 days after the event) by using the α and chosen in ‘e’ and the market returns
for the corresponding index for appropriate period 30 days before and 30 days after
the event. You now have an E(R) for each of 61 day period.

Excess Return = Actual Return – ( + Rm)
Calculate the actual daily return on the stock (usually 60 days around announcement
---30 days before and 30 days after the event) using the following procedure.
P t - P t -1 + D t
Rt =
P t -1
You now have actual returns for the 60 day period. Having found the actual return
for each day subtract the E(R) for that day.
You will have 61 Excess Returns.
4.
5.
Calculate Average Excess Returns (AER)
AER = Excess Return / n
n=number of days in the sample
Test the Significance of AERs
a. calculate standard deviation ()of AERs during estimation period
b. t-statistic = AER/
c. Check if the t-statistic is significant
13
Event Study Research Paper Schedule
Partners: _____________________________________________________________________________
Event Study Topic:
_____________________________________________________________________
1. Partner Selection
Due Date: Tuesday, September 5
__________________________
Approved:
2. Event/Announcement Selection
The event should be one that isolates a day in the life of a company , rather than something
that encompasses many consecutive days. The event should also have a measurable impact
that can be theoretically justified. The empirical test that this assignment comprises will
expose if the event did, indeed, generate new and significant information to the market and
whether the market reacted efficiently.
Due Date: Tuesday, September 17
__________________________
Approved:
3. Literature Review
Summarize the related research that has already been published. This assignment should
break new ground in the area of inquiry, so topics already covered previously are not eligible
for this assignment. Focus primarily on research in academic journals.
Due Date: Tuesday, October 1
__________________________
Approved:
4. Identification of Event Dates, Sample Firm, Event Window, Pre-Event Period
The dates are especially important because they influence the expected behavior of returns in
an environment absent the event.
Due Date: Tuesday, October 8
__________________________
Approved:
5 Download Closing Prices and Calculate Returns
The organization of the data in the spreadsheet should be done with care, as a great deal of
quantitative work will be performed on it. Identify the announcement date as Day 0.
Due Date: Tuesday, October 15
__________________________
Approved:
14
6.
Regression Results, Excess Returns, t-statistics
These numbers determine how the market interpreted the information generated by the
event. The difference between actual return and expected return is the excess return.
Due Date: Tuesday, November 5
Approved:
__________________________
7.
Final Paper organized as follows:
i.
Introduction
ii.
Literature Review
iii.
Data and Methodology
iv.
Results
v.
Conclusions
Due Date: Tuesday, November 26
__________________________
Approved:
15
Retirement Case
Florida Optional Retirement Plans
Analysis of Current Situation:
1) 1.Determine if your client’s current contributions have exceeded the taxdeferred
annual contribution limits.
2. Compute the inflation-adjusted return of the current Security First
portfolio given the data provided in the excel spreadsheet. Calculate the
inflation-adjusted return of each account and then calculate the retirement
portfolio’s inflation adjusted return using the three inflation-adjusted returns
you calculated from the three individual accounts. Using the weights of the
accounts, calculate the inflation adjusted risk return of the retirement
portfolio.
Due Date September 24th
2)
Approved:
1.Compute the anticipated retirement funds available upon retirement in
17 years (your client’s 67th birthday) under the current investment plan. Be
sure to adjust your portfolio’s return for inflation by using the
inflation adjusted rate.
2.Determine how long the retirement funds would last if monthly
withdrawals were made in the before-tax amount that you calculated to
supplement the social security payments to produce the after-tax annual
amount of $70,000.
Due Date October 10th
Approved:
Analysis of Proposals:
3) 1.Determine the proper provider for your client. Even if the current portfolio
will meet the client’s cash flow needs, there may be another provider
and/or funds that would increase the investor’s inflation adjusted return.
2. Determine the investments offered by the chosen provider that you would use.
3.Justify why you recommend one provider over another.
Due Date October 22nd
Approved:
4) 1. Determine an appropriate allocation mix for the plan until retirement
(percentage in bonds, stocks, etc) and choose the funds appropriately. The
allocation mix may change upon retirement.
2.Determine the inflation-adjusted rate of the new portfolio that is
created.
3.Compute the anticipated retirement funds available upon retirement
after your adjustments to the plan.
4.Determine how long the retirement funds would last if monthly
withdrawals were made in the before-tax amount that you calculated to
supplement the social security payments to produce the after-tax annual
amount of $70,000.
Due Date November 12th
Approved:
16
5) 1.Determine an appropriate allocation mix for the plan until retirement
(percentage in bonds, stocks, etc). The allocation mix may change upon retirement.
2.Determine the inflation-adjusted rate of the new portfolio that is created.
3.Determine how long the retirement funds would last if monthly
withdrawals were made in the before-tax amount that you calculated to
supplement the social security payments to produce the after-tax annual
amount of $70,000.
Due Date November 19th
Approved
6) Write -Up
What suggestions would you make to the client to achieve his retirement goals?
Even if the current portfolio will meet the client’s cash flow needs, there may
be another provider and/or funds that would increase the investor’s riskadjusted return. If the current portfolio is not going to meet the client’s cash
flow needs, the client could increase contributions but calculate the affect it would
have upon the monthly take-home. Remember the client still needs to meet his
current expenses, which are close to $4000 per month.
Completing your analysis, you will write a memo to the client outlining: (1) what the
current portfolio’s return, risk and expected cash flows will be upon the client’s
retirement, (2) what your analysis of other providers and various portfolios would
yield as to return, risk, and cash flows upon retirement, and (3) your final suggestion
as to what the client should do. You will include in the appendix any spreadsheets or
tables necessary for the client to understand your analysis.
Due Date December 3rd
Approved