Case Western Reserve University

BAFI 356 Investments Fall 2011

Instructor: Prof. Claudia Moise Office: PBL 365 Phone: (216)-368-4778 E-mail: claudia.moise@case.edu Class Schedule: Mondays and Wednesdays, 3 p.m. 4:15 p.m. in PBL 501 TA: TBA Instructors Office Hours: Wednesdays, 1 p.m. 2 p.m., or by appointment. Objectives This course is a rigorous, quantitative introduction to financial market structure and financial asset valuation. The main topics of the course are arbitrage, portfolio selection, equilibrium asset pricing (CAPM), fixed income securities and derivative pricing. You are expected to understand valuation formulas and be able to apply them to new problems. The appropriate tools necessary for solving these problems will be developed at each stage and practiced in the homework assignments. The models we will cover have immediate applications and implications for real-world financial decisions. Every effort will be made to relate the course material to current financial news. Prerequisites To take this course, students must be comfortable with statistics, linear algebra, calculus, and microeconomics. An array of analytical and statistical skills will be used throughout the course (i.e., basic concepts such as descriptive statistics, as well as inference techniques and regression analysis). During the semester, you will also become familiar with using Excel spreadsheets for financial applications.

BAFI 356 Investments Fall 2011 Class Material The required materials for the course are: - Zvi Bodie, Alex Kane, and Alan J. Marcus, Essentials of Investments, 8th Edition, McGraw-Hill Irwin

Professor Moise

Lecture notes and handouts will be available on Blackboard, before the relevant class session. The supplementary materials will also be available on Blackboard, as will links to other relevant information. Students who miss class are responsible for reading the material covered in class. Course Requirements Assignments You will have five graded assignments during the semester. You may work on the assignments in groups of up to three students. You only need to submit one copy of the assignment per group. All students in a group will receive the same grade on the assignment. No two groups are allowed to work together. You should also work on the end-of-chapter problems from the textbooks to make sure that you master the course material. Exams There will be a pre-exam, a midterm and a final exam. The dates for the exams are listed at the end of this document. All exams are closed book. You are allowed to bring a doublesided 8.5 x 11 sheet of paper, on which you may write anything that you consider relevant for the exam. The questions on the exams will cover the readings from the textbook, the lecture notes, the additional assigned readings, and the homework assignments. The pre-exam and the midterm exam will cover the material up to that day. The final exam will be comprehensive. There will be no make-up exams. You should plan to be in town on the dates of the exams. If you miss the midterm, your final exam will count for 60% of your course grade. Other Requirements Class attendance is an important part of the learning experience. I do not take formal attendance; however, keep in mind that class participation is very important. If you are not in class, you cannot participate in the discussion. And participation is an essential part of learning in this course. Students are expected to participate in all facets of classroom learning. In particular, you are expected to contribute, in a constructive manner, to classroom discussions. The assigned course reading should be done before the corresponding class session, and you are also expected to keep up with current business news by reading a publication such as the Wall Street Journal. If you will miss class, please inform me beforehand via email.

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Re-Grading Policy If you think that you have received an unfair grade on an assignment or an exam, you may submit it for a re-grade no later than one week after it has been returned to you. You should attach a brief note explaining your reasons for requesting a re-grade. Note that the entire assignment or exam will be re-graded, which might result in an overall lower grade. If you are late picking up your assignment because you are not in class, you will not receive extra time to turn in a grade rebuttal. Grading If you do better in your final exam than you did in your midterm, the midterm will be discarded. Assignments Pre-exam Exams 30% 10% max {30%Midterm+30%Final; 60%Final}

The course grade is determined according to your performance relative to the others in the class. You can get 5% extra credit for excellent class participation. Guidelines for Effective Group Work Research shows that outcomes do not depend on group members liking each other personally, but they do depend on effective group processes. Here are some guidelines: - Focus on achieving the best results rather than worrying about interpersonal relationships. - Become aware of and respect differences among each other: a) Demographic (gender, race, ethnicity, national culture); b) Professional (values, skills, personalities). - Meet as soon as possible to a) Agree on your groups ground rules; b) Decide on the process of collaboration: when you will brainstorm ideas/approaches, prepare the solutions; c) Schedule subsequent meeting times; d) Agree on how you will exchange work and by which dates; e) Determine how your group mates will review the combined project and approve it. Policies and Expectations How useful this course is to you will depend not only on what I teach you, but also on your dedication, hard work and class participation. To this end, I will expect you to observe the following norms:

BAFI 356 Investments Fall 2011

Professor Moise

- Come to class on time and stay the entire duration. I will make every effort to start and end class on time. Your late arrival and early departure without my explicit prior approval is not acceptable. It is unprofessional and disruptive to the entire class. - Please turn off mobile phones during the duration of the class. Turn off cell phones, Blackberry, digital music players, and any other communications or sound devices. The use of any unapproved electronic devices during class without prior authorization from the instructor is a violation of the schools honor code and will be treated as such. If you are interviewing, recruiters will understand that they cannot reach you when you are in class. If some emergency requires you to leave your cell phone on, please let me know before class. - Ask questions whenever something is not clear. It takes time to learn new concepts, and asking questions helps. If I do not know the answer to your question straight away, I will get back to you as soon as possible. - Participate actively during lectures. This way you will get the most out of this course. If you are shy, now is your chance to get over it! Make sure you are up to speed with the material covered in class, as I may cold call on you. - I will never view honest mistakes negatively. I will use them as valuable learning opportunities. Often, there is not even a right answer. I simply want to know where you are in the learning process and prefer you to make a mistake to you not answering at all. But remember, if it is obvious that you were unprepared for the discussion, it will negatively affect your grade. - If you have something to say, share it with everybody. No whispered comments to someone sitting next to you. - Learn to challenge the ideas of your classmates, but in a polite manner. Always treat your fellow students with respect, listen to their answers and react to the issues raised by them. You will be surprised at how much you can learn from each other. - Be courteous. I cannot emphasize enough how important this is! While in class, please be courteous to me and to your fellow classmates. Also, during lectures and discussions only one person should speak at a time. - Office hours. I am available during the office hours listed at the beginning of the syllabus. If you cannot make it at these times, you can make an appointment to see me at another time. - Announcements. I will make announcements via e-mail (and sometimes, in class) regarding syllabus revisions, updates of the lecture slides, and any other important information about which you need to be aware. It is your responsibility to check your email at least once a day during the week (Monday through Friday) and you will be expected to be aware of any e-mail announcements within 24 hours of the time the 4

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message was sent. If for some reason you are not able to check your e-mail, find out from a classmate whether anything was sent that you need to know. It is also your responsibility to be aware of all announcements and handouts given in class. If you miss a class, get copies of materials from classmates. Do not ask me or the TA to review what happened in class. - Please prepare a legible name card and use it every lecture. This will help me and your peers to learn your names more quickly. - Adhere to the Schools Code of Conduct. In particular, I will not tolerate cheating, plagiarism, and other forms of academic dishonesty. This includes, but is not limited to, consulting with another person during an exam, turning in written work that was prepared by someone other than you, and making minor modifications to the work of someone else and turning it in as your own. Ignorance will not be permitted as an excuse. If you are not sure whether something you plan to submit would be considered either cheating or plagiarism, it is your responsibility to ask for clarification. The School expects that students will conduct themselves with respect and professionalism toward faculty, students, and others present in class and will follow the rules laid down by the instructor for classroom behavior. Students who fail to do so may be asked to leave the classroom. - Disability. Students whose class performance may be affected due to a disability should notify me immediately so that arrangements can be made to accommodate their needs. - I would like to understand you and your motivation for taking this course. Please fill out the personal information form that can be found on the last 2 pages of the syllabus and bring it to the August 31 class.

Good luck and have fun!

BAFI 356 Investments Fall 2011 Tentative Schedule of Classes BKM refers to Essentials of Investments 8th Edition Topic Details

Professor Moise

Chapters in Class the textbooks BKM 1, 2, 3 1, 2

Dates

Financial Markets, Instruments, and Trading

- Introduction and course overview - The financial system - Overview of financial markets - Instruments, trading

Aug 29, 31

Personal Information forms are due Historical Records of Returns - Historical US asset appreciation - Means, variances, covariances, portfolio basics BKM 5

Aug 31

3-5

Sept 7, 12, 14

Assignment 1 is due Portfolio Theory I - Portfolio returns - Utility theory - Combining 1 risky assets with a riskless asset BKM 5

6 6-7

Due Sept 19 Sept 19, 21

Pre-Exam Portfolio Theory II - Asset allocation with multiple risky assets - Investment opportunity set - Modern portfolio theory - Portfolio optimization tool BKM 5, 6

8 9-11

Sept 26 Sept 28, Oct 3, 5

Assignment 2 is due CAPM - Equilibrium asset pricing - Applying the CAPM BKM 7

12 12-13

Due Oct 10 Oct 10, 12

Review Session Mid-term exam Market Efficiency - The efficient market hypothesis - Behavioral finance - Arbitrage and the law of one price 6 BKM 8, 9

14 15 16-18

Oct 17 Oct 19 Oct 26, 31, Nov 2

Arbitrage

19

Nov 7

BAFI 356 Investments Fall 2011 Assignment 3 is due 20

Professor Moise Due Nov 9

Fixed Income Securities

- Bond prices and yields - Forward rates and the yield curve - Interest rate risk and default risk - Interest rate risk management and active management

BKM 10, 11

20-22

Nov 9, 14, 16

Assignment 4 is due Options - Options markets and option payoffs - Option strategies and the determinants of option value BKM 15, 16

23 23-26

Nov 21 Nov 21, 28, 30 Dec 5

Assignment 5 is due Review Session Final Exam

26 27

Dec 5 Dec 7 Dec 12

BAFI 356 Investments Fall 2011 PERSONAL INFORMATION FORM Your Full Name: _______________________________________ Nick Name: ___________________________________________ Major(s) you are interested in: ____________________________ Expected graduation date: ________________________________

Professor Moise

1) Please read the following statement and indicate your agreement by providing your signature below. (Before signing you should be sure to read the syllabus thoroughly). I have read the syllabus thoroughly. I understand and agree to the requirements associated with this course. ___________________________________________ Signature _________________ Date

1. A few lines on your background (courses taken that may help you in this course).

2. Please list any class (specific date) you might miss for religious observance.

3. Tell me something else about yourself that is important to you and/or makes you unique (your interests, hobbies, background, talents, collections, etc.)

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Professor Moise

4. Do you have any work experience?

5. Anything else you feel I should know about you (learning disability, etc.).

5. What do you expect to get from this course? How does the course fit your career goals?

6. The three key things we have to achieve during the semester for you to always remember this as a very good course.