SMU Classification: Restricted

The Lee Kong Chian School of Business

Academic Year 2023/24
Term 1

FNCE102 FINANCIAL MARKETS AND INVESTMENTS

Instructor Name : Dr Karen Gan
Title : Senior Lecturer of Finance
Tel : 6828 0147
Email : karengan@smu.edu.sg
Office : LKCSB #4110

COURSE DESCRIPTION
This course describes the role of financial markets in facilitating the flow of funds and how investors can evaluate
and price investments. The course will describe institutional features of equity, debt, foreign exchange, and
derivative markets. Students will be grounded in investment principles and their applications, including topics on
risk and return, diversification, single and multi-factor models, asset-pricing anomalies, bond portfolios, and
performance evaluation tools. The course also examines the role of financial institutions such as mutual funds
and hedge funds, and the use of risk management tools for hedging. This course builds on the foundations
provided by FNCE101 Finance and focuses on learning how the fundamental principles in finance can be applied
to financial markets and investments.

LEARNING OBJECTIVES
At the end of this course, students will be able to:
• Explain the role of each financial market and compare the differences between each market
• Apply the concepts of risk and return and diversification to investment portfolios
• Know the single and multi-factor approaches to pricing investments
• Demonstrate understanding of common asset-pricing anomalies
• Understand the role of mutual funds/hedge funds and evaluate their performance
• Describe the use of risk management tools, e.g., for managing foreign exchange and interest rate risk

PRE-REQUISITE/ CO-REQUISITE/ MUTUALLY EXCLUSIVE COURSE(S)

Please refer to the Course Catalogue on OASIS for the most updated list of pre-requisites / co-requisites for
this particular course. Do note that if this course has a co-requisite, it means that the course has to be taken
together with another course. Dropping one course during BOSS bidding would result in both courses being
dropped at the same time.

ASSESSMENT METHODS
Group Project Presentation and Report: 20%
Class Participation: 10%
Class Assignments: 10%
Mid-term Exam: 20%
Final Exam: 40%

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INSTRUCTIONAL METHODS AND EXPECTATIONS

Class Participation
Class interaction and participation are encouraged. Students should join in class discussions with constructive
opinions and comments. Class participation will not just focus on quantity of comments but the quality of
comments. This will help facilitate the exchange of ideas among students. Your participation in class helps your
classmates enhance their learning journey. Asking questions after the lecture is over, on email, or during office
consultations do not count towards class participation.

Group Project and Presentation

The group project (20% of your grade) will require an analysis report, to be announced at the beginning of the
term. Groups must submit a written report on the project and make an oral presentation to the class. Every
student must present a section of the project and also help in replying to queries from the audience. There will
be about 8 groups per class and size should be about 5 or 6 members per group. You are encouraged to find
your own group members. The group-member list should be submitted to the TA by the 2nd lesson.

Class Assignment
There will be 1 class assignment in the semester. Details will be announced at the beginning of the term.

Examinations
There will be a mid-term exam during the term. Also, there will be a cumulative final exam of 3 hours. The
Multiple Choice section for the final exams will cover a maximum of 50% of the total marks. Both exams are
closed-book and will focus on the materials covered in class. A formula sheet will be provided for both exams.
Everyone should follow the school’s examination policy, exercising honesty and integrity during the exams.

CONSULTATIONS AND TEACHING ASSISTANTS

If you need to see me outside class hours, please contact me to make an appointment. My office and contact
information are listed at the top of this course outline. I am also readily available by emails. Contact information
of my TAs will be available at the beginning of the term.

CLASS TIMINGS
This is a weekly course to be taught in one 3-hour session with a 15-min break.

RECOMMENDED TEXT AND READINGS

Required Text
Zvi Bodie, Alex Kane and Alan J. Marcus
Investments
13th edition, McGraw Hill.

USE OF CALCULATORS
In all Finance 102 sessions, only non-programmable/non-graphical calculators (and those that cannot store text)
will be allowed in quizzes, midterm exam, and final exam.

UNIVERSITY POLICIES

Academic Integrity
All acts of academic dishonesty (including, but not limited to, plagiarism, cheating, fabrication, facilitation of acts
of academic dishonesty by others, unauthorized possession of exam questions, or tampering with the academic
work of other students) are serious offences.

All work (whether oral or written) submitted for purposes of assessment must be the student’s own work.
Penalties for violation of the policy range from zero marks for the component assessment to expulsion,
depending on the nature of the offense.

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When in doubt, students should consult the instructors of the course. Details on the SMU Code of Academic
Integrity may be accessed at https://oasis.smu.edu.sg/Pages/DOS-WKLSWC/UCSC.aspx.

Copyright Notice
Please note that all course materials are meant for personal use only, namely, for the purposes of teaching,
studying and research. You are strictly not permitted to make copies of or print additional copies or distribute
such copies of the course materials or any parts thereof, for commercial gain or exchange.

For the full copyright notice, please visit: https://smu.sg/Copyright-notice or OASIS -> CAMPUS LIFE &
EXCHANGE -> CONDUCT & DISCIPLINE -> UNIVERSITY COUNCIL OF STUDENT DISCIPLINE

Accessibility
SMU strives to make learning experiences accessible for all. If you anticipate or experience physical or academic
barriers due to disability, please let me know immediately. You are also welcome to contact the university's
disability services team if you have questions or concerns about academic provisions: DSS@smu.edu.sg. Please
be aware that the accessible tables in our seminar room should remain available for students who require them.

Digital Readiness for Teaching and Learning (DRTL)

As part of emergency preparedness, instructors may conduct lessons online via the Zoom platform during the
term, to prepare students for online learning. During an actual emergency, students will be notified to access
the Zoom platform for their online lessons. The class schedule will mirror the current face-to-face class timetable
unless otherwise stated.

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WEEKLY LESSON PLANS

Week Topic Readings

Financial Markets
• Explain the nature and role of financial markets
• Types of financial markets
o Fixed income markets Ch 1, 2
- Money markets, Government and Corporate bonds
o Equity markets (e.g. SGX)
1
o Forex markets
o Derivative markets

Financial Institutions
• Explain the nature and role of financial institutions
• Understand Financial Intermediation

Capital Allocation & Optimal Risky Portfolios

• Describe risk and risk aversion; capital allocation and portfolios of risk-free and risky
assets; risk tolerance; asset allocation with equities and bonds.
2 • Explain the steps to the construction of an optimal risky portfolio; learn about Ch 6, 7
diversification and portfolio risk; describe the Markowitz Portfolio Optimization
Model; understand the roles of risk pooling and risk sharing; understand the Capital
Market Line.

Capital Asset Pricing Model

• Learn about equity valuation - understand the single-factor security market and the
single-index model; explain the expected return-beta relationship and calculate the Ch 8, 9
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risk and covariance in the single-index model; learn portfolio construction using the
single-index model.
• Interpret CAPM and its parameters, and the Security Market Line.

Arbitrage Pricing Theory & Multi-factor Models

• Understand Arbitrage Pricing Theory (APT) and the assumptions underlying
APT. Ch 10, 13
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• Explain multi-factor models of risk and return used to measure and manage
exposure to multiple economy-wide factors; apply the knowledge on multi-
factor models to interpret the mechanisms of the Fama-French Three-Factor
Model and other modern multi-factor models.

Market Efficiency & Asset-pricing Anomalies

• Understand the concept of market efficiency and different forms of market
efficiency.
• Understand the concept of anomalies and how they contradict the efficient
5 market hypothesis; describe the common types of anomalies.
Behavioural Finance
• Explain the irrationalities that characterize how individuals make decisions, such
Ch 11, 12
6 as, errors in information processing and behavioral biases that affect how
investors frame choices.
• Apply Behavioral finance concepts to analyzing patterns of stock prices -
7 technical analyses.

Smart Beta Investing

• Understand the smart beta investment approach as compared to the traditional
methods of investing.

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Midterm Exam (details to be announced at start of Term)

8 Recess Week

Financial institutions that manage assets

Mutual Funds
• Describe various types of investment policies of mutual funds; learn about the
costs of investing in mutual funds; explore exchange-traded funds (ETFs).
9 Ch 4, 26
Hedge Funds
• Explain various hedge fund strategies; measure hedge fund performance; learn
about factors that make hedge fund performance difficult to evaluate; explain
the fee structure in hedge funds.

Managing Bond Portfolios

• Learn about valuation of debt instruments - understand regular bond yields; money
Ch 14,
10 market instruments; explain the linkage between default risk and bond pricing;
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understand the bond indenture; discuss credit risks and collateralised debt obligations
• Describe management of bond portfolios: interest rate sensitivity and bond duration.

Portfolio Performance Evaluation

• Understand the measurement of portfolio returns and approaches to risk
11 Ch 24
adjustment; calculate and interpret Sharpe ratio, Treynor ratio, etc.; understand
market timing and its potential value; explain performance attribution procedures.

Risk management
• Nature and types of risks; e.g. Identify and describe key price risks, currency risks and
interest rate risks
• Approaches to risk management
o Risk assessment
o Risk appetite / risk policy
o Importance and limitations of information in risk management
o Risk monitoring
12 Ch 22, 23
Futures
• Characteristics of futures instruments.
• Use of these derivatives to manage portfolio risks.
• Understand exchange rate differences and hedging methods for foreign currency risk.
• Understand interest rate fluctuations and hedging methods for interest rate risk.
• Explain additional risks of trading abroad, and hedging methods.
• Understand the costs of hedging above risks.

13 Project Presentations
14 Study Break
15 Final Examination (3 hours)