FINANCE 361 – Topic 1 – Introduction

Paul Geertsema

1
1 Introduction

• Welcome to FINANCE 361 – Modern Investment Theory and Man-

agement
• Please read the course outline and course summary
– You can find both in the first module under Modules on Canvas
• Introducing the team:
– Lectures
◦ Dr Paul Geertsema (p.geertsema@auckland.ac.nz)
– Workshops
◦ Brianna Wang (y.wang@auckland.ac.nz)
– Assignments
◦ Yongfei Xie (y.xie@auckland.ac.nz)

2 FINANCE 361 Class Notes – University of Auckland – Copyright (C) Dr Paul Geertsema
 Introduction (cont.)

• Lectures consist of:

– Pre-recorded lectures posted to Canvas
◦ This will cover the material in the lecture notes and the re-
quired readings
– In-person classroom lecture sessions
◦ Each week I will present a topic for interactive discussion.
Topics might include current events relevant to finance, new
financial innovations or a discussion of current research.
◦ Please note:
· We will not be repeating the material covered in the pre-
recorded lectures
· We will not introduce new examinable material in the in-
person sessions
· The in-person sessions will not be recorded, as it will mostly
consist of small group interactive discussions

3 FINANCE 361 Class Notes – University of Auckland – Copyright (C) Dr Paul Geertsema
 Introduction (cont.)

• Workshops consist of:

– Pre-recorded workshops posted to Canvas
◦ This will cover the workshop questions and other relevant
material
– In-person classroom workshop sessions
◦ This is an opportunity to ask questions regarding the work-
shops or get help with problems
◦ The in-person workshop sessions will not introduce any new
examinable material and will not be recorded
• In summary, you can take the paper without coming to class, as
everything you need is available online
• However, if you do come to class you’ll have the opportunity to
engage in interactive discussions with the lecturer and your class-
mates. (Give it a try!)

4 FINANCE 361 Class Notes – University of Auckland – Copyright (C) Dr Paul Geertsema
 Introduction (cont.)

• Please refer to the course summary for a preliminary list of topics

and readings
– You can find both the official course outline and the course
summary in the first module under Modules on Canvas
• Three main parts
– Portfolio theory (about 5 weeks)
– Empirical finance (about 2 weeks)
– Fixed income (about 3 weeks)
• Lecture notes and workshops are on Canvas (under Modules)
– I’ll have the lecture notes up in advance
– The required readings will be noted in the first section of the
lecture notes

5 FINANCE 361 Class Notes – University of Auckland – Copyright (C) Dr Paul Geertsema
 Introduction (cont.)

• If you have questions:

– Try reading the relevant readings again
– Ask a classmate
– Post your question on Piazza (this works best for simple ques-
tions with simple answers)
– Ask a question during the lecture or workshop in-person sessions

6 FINANCE 361 Class Notes – University of Auckland – Copyright (C) Dr Paul Geertsema
 Introduction (cont.)

• If you have suggestions regarding the course structure (or my teach-

ing!)
– Feel free to discuss it with me
– Or mention it to the class rep if you’d rather be anonymous
◦ BTW, any volunteers for class rep?
– Discuss it with the tutor, who can then raise the issue (anonym-
ously) with me

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2 About FINANCE 361

• Broadly in this paper we will cover:

– Modern Portfolio Theory (by now it should be called Classic
Portfolio Theory)
◦ Markowitz mean-variance analysis and extensions such as
Black Litterman
◦ CAPM theory (and estimation via OLS)
– Behavioural finance and market efficiency
– Empirical Finance
◦ Return predictability, trading strategies and factor models;
introduction to financial machine learning
– Fixed Income
◦ Pricing and risk management of bonds; structured products
and securitisation

8 FINANCE 361 Class Notes – University of Auckland – Copyright (C) Dr Paul Geertsema
 About FINANCE 361 (cont.)

• NOT covered in Finance 361

– Equity valuation (covered in Finance 351)
– Derivatives (covered in Finance 362)

9 FINANCE 361 Class Notes – University of Auckland – Copyright (C) Dr Paul Geertsema
 About FINANCE 361 (cont.)

• Once you have completed this paper I expect you to

– Know the theory
– Not just know the theory, but understand it
– Not just understand the theory, but be able to implement it
– Be aware of the assumptions and limitations of different ap-
proaches
– Have an opinion about investment related matters!
◦ Does not have to match my opinion
◦ But either way, you should be able to defend your opinion
– Be able to solve real-world, “industrial strength” investment
problems
– Achieve some fluency in the lingo and jargon of finance

10 FINANCE 361 Class Notes – University of Auckland – Copyright (C) Dr Paul Geertsema
 About FINANCE 361 (cont.)

– Learn how to use the tools of the trade

◦ Excel, Python, R
◦ Basic econometric tools such as OLS regressions
◦ Data sourcing and manipulation
◦ How read and understand journal articles
◦ Learn to apply some useful math
· Linear algebra, probability theory, calculus
· (The background from MATHS 208 should be more than
adequate)
– Develop a sense of what the real world of finance is like

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 About FINANCE 361 (cont.)

• The prescribed text for this course is

– “Investments” by Bodie, Kane & Marcus (McGraw-Hill/Irwin)
◦ BKM hereafter
◦ Current edition is 12. Any edition from the 10th onwards
should be fine.
◦ The quiz and exams in this paper are “open book” – but that
is only helpful if you have a book you can open in the exam.
So get one.
– In general, we will be operating at a level above BKM, so it
won’t be sufficient by itself
– I will make available additional readings and notes on Canvas
(you can also take them into the quiz/exam)
– ALL READINGS ARE EXAMINABLE UNLESS SPE-
CIFICALLY NOTED OTHERWISE

12 FINANCE 361 Class Notes – University of Auckland – Copyright (C) Dr Paul Geertsema
3 How to do FINANCE 361 (the Lecturer’s cut)

• A guide to approach the course (if you want to have a fair shot at
the quiz and exam questions – IMHO)
• For each topic:
1. REVIEW (Skim-read) the lecture notes (to get a sense of what
is involved)
2. READ the required readings
3. READ the lecture notes
(a) Don’t skip this step - see next point
(b) Ideally before the lecture (the lecture will make more sense
that way)

13 FINANCE 361 Class Notes – University of Auckland – Copyright (C) Dr Paul Geertsema
 How to do FINANCE 361 (the Lecturer’s cut) (cont.)

4. LISTEN to the lectures

(a) The lectures are not a substitute for reading through the topic
notes yourself
(b) I won’t have time to go through all slides in detail. In any
case, there is no point in me reading the slides to you. (We
can agree on that, right?)
(c) If I skip material in the class it means I think it is simple
enough that a discussion is not needed. It does NOT mean
it is unimportant or not covered.
(d) So the lectures will be used to
i. provide background and context to the material
ii. elaborate on some of the more subtle or intricate concepts
iii. point out tricks and pitfalls
iv. provide links to the real world using anecdotes, stories or
examples

14 FINANCE 361 Class Notes – University of Auckland – Copyright (C) Dr Paul Geertsema
 How to do FINANCE 361 (the Lecturer’s cut) (cont.)

5. ATTEMPT a few questions (to check you really understand the

material)
6. ATTEND the workshop (for help if you are stuck on some ques-
tions)
7. You can leave a topic behind when
(a) everything makes sense to you and
(b) you can solve problems by yourself and
(c) you can explain why it should be solved that way to somebody
else

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4 Assessment

• All assessments are open book and allow the use of unrestricted
calculators
• A mid-term quiz [30% of final grade] administered online via
Canvas. It will be open book and cover all topics up to the start
of the mid-term break (see course summary).
• A group assignment [30%] (submission via Canvas)
– A “Group” consists of between 1 to 5 students that agree to
work together (we are not involved in how groups are formed;
we leave that up to students.) To be clear, you can be a group
of 1 if you prefer to work alone. All members of a group will
receive the same grade.
– The assignment will likely require calculating results using a
provided code framework and then writing up a report for grad-
ing

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 Assessment (cont.)

– Yongfei Xie (y.xie@auckland.ac.nz) will handle the assignment

grading and any assignment related questions
• A final exam [40%]
– Open book (I care about understanding, not rote memorisation)
– Note, you will rarely see recycled quiz or exam questions. I tend
to write my questions from scratch each semester. Thus under-
standing the material is the only way to do well. Simply being
able to answer previous exam questions (without understanding
what you are doing) won’t get you far (in this paper).
– I’ll have more to say on the exam closer to the time

17 FINANCE 361 Class Notes – University of Auckland – Copyright (C) Dr Paul Geertsema
5 Other matters

• If anything is unclear, please reach out and we’ll try our best to
answer your questions
• We want your learning experience to be both effective and enjoy-
able; if you have any ideas on how we can do things better, please
feel free to let us know

18 FINANCE 361 Class Notes – University of Auckland – Copyright (C) Dr Paul Geertsema