Zhiwu Chen
46 Hillhouse Avenue, Rm. 204 (at the International Center for Finance)
Telephone 432-5948
TA: Zheng Yue, office hour: 4:00--5:00pm every Tuesday (room to be determined)
Administrative Assistant: Pamela Roche
Office Hours: Monday 10:00 - 11:00
Class Hours: Monday & Wednesday 4:00 -5:20pm, A53

MGT 544: Investment Management

The course will focus on the application of financial theory to the issues and problems of investment management. The approach taken is "bottom-up" (instead of "top-down"), in the sense that we will try to understand the valuation and selection of  various investment instruments first and then move on to cover portfolio optimization issues (plus risk management). This course is more analytical than usual. Topics will include bond valuation and strategies, stock valuation and strategies, options valuation & strategies; portfolio optimization and asset allocation, the CAPM & the APT, and their implications for investment management. The course will build upon the analytical skills developed in the finance core course. Students learn to either use optimization software or create their own spreadsheet optimization programs in Excel. For this course, second-year finance concentrators are given preference if there is a space limitation. Prerequisites: the finance core course and a working knowledge of statistics. Spreadsheet proficiency is essential.

Investment Simulation:

Students are encouraged to participate in the http://www.stocktrak.com/index.shtml Market Simulation game. You can write a report at the end of the game, and choose to turn in the report in place of a group case report. For case credit, you may participate in this challenge and turn in the following:

1. A description of your investment strategy based upon the goal of maximizing your probability of winning the challenge.
2. Records of how you excecuted your strategy.
3. Evaluation of your track record using standard portfolio performance measures.

You can register for the challenge at  http://www.stocktrak.com/index.shtml .
 

Readings:

Required: Bodie, Kane and Marcus Investments, Irwin 2002.[BKM]
Recommended: Investments:  A Global Perspective, by Roger Ibbotson and Jack C. Francis [IF], 2001.
Recommended: Philippe Jorion, Big Bets Gone Bad: Derivatives and Bankruptcy in Orange County Academic Press, 1995.
Recommended: Philippe Jorion, Value at Risk.
Of interest: Harry M. Markowitz, Portfolio Selection, Basil Blackwell, 1959,1991.[HM]
Of interest: Burton G. Malkiel, A Random Walk Down Wall Street, W.W. Norton & Company, 1981.[BM]

Course Requirements & Grading

There are four group cases, three homework assignments, and one final exam. The four cases may be analyzed & submitted in groups of 3 or 4. Each case is worth 14% of the course grade, each homework assignment worth 5%, and the final exam 15%. Class participation is worth 14%. Case grades will be based on writing as well as analytical quality. Each case write-up should include an executive summary and clear, well-designed exhibits. The four group cases are due by date of the in-class discussion. For each given case, we will have two groups presenting (each for 10 to 15 minutes) in class.

See Group Assignments for presenting the cases.
 

Investment Management Spring 2002 Course Outline


Date (click a lecture # to see the slides) Topic or Case Reading
Lecture 1 MGT 544--Investment Management: what is it about?  Review of Basic Concepts BKM Chapters 1-4, Jorion, Value at Risk Chapters 1-5 & Chapter 12. On the Web, see Value at Risk.
Jan. 16, 23 & 28 & 30 
Lecture 2, Lecture 3, Lecture 4,Bond-Extra		 Bond Valuation & Asset/Liability & Bond Strategies BKM Chapters 14-16. Also, see: Asset Liability analysis
Jan. 29 TA session: 4:00 to 5:00pm
Jan. 30. First homework due
Feb 25. Guest speaker: Dr. Barry Schachter, Head of Enterprise Risk Management, Caxton International Corp (the largest hedge fund company) http://www.gloriamundi.org/
Feb. 6 Case I: Philippe Jorion's Orange County Case: Using Value-At-Risk to Control Financial Risk Book by Jorion: Big Bets Gone Bad: Derivatives and Bankruptcy in Orange County. Jorion (1999): Risk Management Lessons from Long-Term Capital Management.  Also, see Value at Risk: A Two Day Course. For related references, check Barry Schachter's website: http://www.gloriamundi.org/
Feb. 6 & 11 
Lecture 5, Lecture 6 is based on the Lee, Myers and Swaminathan paper.		 Equity Valuation Models BKM Chapters 18 & 19, Chen & Dong (1999), Lee, Myers & Swaminathan (1998)
Feb 12 TA session: 4:00 to 5:00pm
Feb. 13 
Lecture 7		 Stock Selection Styles: traditional ratios vs. models Fama & French (1997), "Value versus Growth: International Evidence" (and references therein). Other recommended readings: 
Feb. 18 Second homework due  
Feb 18, 20, & 27 & March 25 & 27 
Notes for Lecturs 8, 9 & 10 will be distributed in class		 Options & Futures Markets: Valuation & Applications  BKM Chapters 20 -- 23, and Leland (1980): Portfolio Insurance
March 25 Case II due:  Enron Corporation Find articles in Fortune magazine, Barron's, Wall Street Journal, and on www.theStreet.Com.
March 27 Third homework due
April 1 Speaker: Satch Mehta, Managing Director, Emerging Markets Funds, JP Morgan Investments
April  3 
Lecture-11 and Extra Slides 		 Portfolio Optimization, Efficient frontiers in practice.
Optional homework is here.		 BKM Chapters 6-8, Goetzmann & Edwards (1994): "Short Horizon Inputs and Long Horizon Portfolio Choice,"
April 2 TA session: 4:00 to 5:00pm
April 8 &  10 
Lecture-12		 International equity returns. Re-emerging markets. Home investor biases. BKM 25,  IF. Harvey (2000): "The Drivers of Expected Returns in International Markets," 
The following set of recoomended articles describes the Goldman Sachs Asset Allocation Model in practice: 
Goldman Sachs, 1999, Importance of Asset Allocation in Managing Private Equity Commitments.
Robert Litterman and Kurt Winkelmann, Goldman Sachs, January 1996, Managing Market Exposure. 
Robert Litterman and Kurt Winkelmann, Goldman Sachs, January 1998, Estimating Covariance Matrices. (More technical) 
Andrew Bevan and Kurt Winkelmann, Goldman Sachs, June 1998, Using the Black-Litterman Global Asset Allocation Model: Three Years of Practical Experience. 
Guangliang He and Robert Litterman, Goldman Sachs, December 1999, The Intuition Behind the Black-Litterman Model Portfolios. 
April 15 Case III: Going Global A tailor-made international portfolio BKM Chapter 26, "A Century of Global Stock Markets" by Goetzmann and Jorion and "Re-Emerging Markets" by Goetzmann and Jorion
April 12 Visit Mr. Sandip Bhagat, President & CIO, Travelers Investment Management Co. (TIMCO), a subsidiary of Citigroup. Address, 100 First Stamford Place, on the 7th floor, Stamford, CT, time block: 12:00 to 3:00pm.
April 15 & 17 
Lecture-13 and market-neutral strategy		 Risk management using factor models and methods. CAPM & Arbitrage Pricing Theory. 
Hedging (BKM Chapter 27)		 BKM Chapters 9-11 & 13, Fama and French (1992). Berry, McElroy & Burmeister (1988). See the Goldman Sachs articles above. 
April 23 TA session: 4:00 to 5:00pm
.
April 22 & 24 
Lecture-16		 Mutual Fund & Hedge Fund Performance: evaluation methods & history BKM Chapter 24, Brown, Goetzmann and Ibbotson (2001): "Off-Shore Hedge Funds: Survival and Performance: 1989 - 1995"
April 29 Case IV: El Lobo. Quantifying systematic risk exposure
April 29 & May 1 
Lecture-17		 Investment Manager Behavior: lessons from the past 
The Efficient Market Hypothesis		 BKM 12, Fama (1991), Odean (1998), 
"Are Investors Reluctant to Realize Their Losses?", Odean (1998), "Volume, Volatility, Price, and Profit When All Traders Are Above Average," "Do Investors Trade Too Much?"    Shefrin (1999), Beyond Greed and Fear: Understanding Behavioral Finance and the Psychology of Investing (new book).
May 6 Course Review
May 13? Final Exam