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1 University of Texas, Permian Basin T, Th, 12.30-1.45pm Spring 2016 Economics Scott Carson Economics 4334.001.2162– Financial Economics In October 2008, I sat in Paul Hodges’ office and were amazed with how fast the US economy seemed to be unravel. It was a dreary, overcast day that mirrored what was happening in the World. Lehman was bankrupt. American International Group (AIG) was on the ropes. Fannie and Freddie were rumored to be in trouble. The Treasury and Eurodollar (TED) spread had widened considerably, and it looked as though the US and World economies may be heading for a second Great Depression, where Gross Domestic Product (GDP) declined by one third and unemployment reached 25 percent. I had former students as far away as Tennessee and the Rocky Mountains emailing and calling me to ask what was next. Were we heading for the next economic Big One? Having a Ph.D. in economics with an emphasis in finance and having research in economic history, I quickly responded we were nowhere close to the next Great Depression. This course tries to make sense of these considerable economic changes against what it means to the individual and firm’s allocation over their financial assets. We consider financial assets and institutions. The course emphasizes modern asset valuation theory and the role of financial intermediaries and their regulation in the financial system. COURSE LEARNING OBJECTIVES 1. 2. 3. 4. 5. 6. The student gains a working knowledge of the investment and trading environment. Students learn the importance of diversification, portfolio theory, and its practice. Students use portfolio theory and learn modern capital asset pricing. Students learn the fundamentals of debt markets. Using time value, students learn equity valuation models. Students learn modern option pricing theory. Grading You are graded on your performance relative to the class in four areas. 1. Problem sets, (100 Points, 5 assignments at 20 points each). Subject to change. 2. Mid-Term Exam (100 Points) 3. Comprehensive Final (200 Points) Office Hours T, TH, 2-3pm Prerequisite 2 Economics 2301 and 2302. If you have not had these courses, please see me. Required Textbooks Bodie, Kane, and Marcus. Investments. Any edition later than the 5th. Malkiel, Burton G. A Random Walk Down Wall Street. Any version. I accept your use of any of the last three editions of this book, but you are responsible to make sure to keep up with the readings and to answer the correct problem set questions from the book. Course Notes Some instructors provide their course with pre-written notes. As one interested in memory, comprehension, and retention, I believe the best way to retain material covered in class is for students to write it themselves. Therefore, I do not provide pre-written notes because you retain material better when you write it down. Grading Grades are assigned according to your point accumulation relative to the class high. Grades are assigned according to the following scale: Grade A AB+ B BC+ C CD+ D DE Percent 93% 90% 87% 84% 81% 78% 75% 70% 67% 64% 60% Below 60% POLICY ON SCHOLASTIC DISHONESTY: When legal code is necessary to maintain academic honesty and social interaction, social bounds of reciprocity are eliminated. Ergo, it is expected that the highest forms of 3 honesty and respect for others be adhered too. Outside of that, the University expects a student to maintain a high standard of individual honor in all scholastic work. STUDENT CLASSROOM CONDUCT: Be nice. Failure to be cool with me, the instructor, or other students may adversely affect your grade. If you sometimes feel like you're stepping over the lines of social decorum, you probably are, so step back and reevaluate, because it may detract from our classroom environment. Other than that, let's just hang out and learn as much as we can this semester. Electronic Device Policy Computers are essential in modern research and economics. However, they can also be a tremendous distraction. So, unless there is an issue with a physical or other disability, laptops are not allowed during lectures. Tablet PCs and Ipads are also not allowed. The use of other electronic devices, such as cell phones and text massagers, are strictly prohibited. Please do not even bring them to class. Moreover, please do not distract class by turning your phone to vibrate and then walking out to take a call. Take all calls before or after class. Nothing good is going on when a student is doing things with their hands under their desk. So, outside of the limited use of laptop computers, do not bring electronic devices to class and do not leave the class to use them. Outline Macroeconomics Chapter 17 Macroeconomic and Industry Analysis Introduction of Financial Economics Chapter 1 The Investment Environment Chapter 2 Asset Classes and Financial Instruments Chapter 3 How Securities are Traded Portfolio Theory and Practice Chapter 5 Introduction to Risk, Return, and the Historical Record Chapter 6 Risk Aversion and Capital Allocation To Risky Assets Chapter 7 Optimal Risky Assets Equilibrium in Capital Markets Chapter 9 The Capital Asset Pricing Model Midterm Chapter 10 Arbitrage Pricing Theory and Multifactor Chapter 11 The Efficient Market Hypothesis Models of Risk and Return Chapter 12 Behavioral Finance and Technical Analysis Chapter 13 Empirical Evidence on Security Returns Fixed Income Securities 548-582 1-27 28-58 59-91 117-159 160-195 196-245 280-317 318-342 343-380 381-406 407-438 4 Chapter 14 Bond Prices and Yields Chapter 15 The Term Structure of Interest Rates Security Analysis Chapter 18 Equity Valuation Models Options, Futures, and Other Derivatives Chapter 20 Options Markets: Introduction Chapter 21 Option Valuation Chapter 22 Futures Markets Final 439-479 480-507 583-626 667-710 711-754 755-783 This is a tentative syllabus and outline. I reserve the right to make changes. However, all changes will be announced in class. If you miss a day, you are responsible to be informed of any changes to this syllabus.