45-811 Investment Analysis

Mini 3 Spring 1999

Instructor: Burton Hollifield

Contact Information:

GSIA Room 314b (old building)

Tel: (412)-268-6505

Fax: (412)-268-6837

e-mail: burton@andrew.cmu.edu

web page: chinook.gsia.cmu.edu

Office Hours:

Monday/Wednesday 2:30-4:40, or by appointment

Course Objectives:

The objective of this course is to introduce you to the basic tools used by investment professionals. You will be able to apply to tools you learn in this class to analyze different fixed-income and equity portfolio investment strategies and apply various risk-management tools. Specifically, you will be able to:

  1. Calculate the term structure of interest rates and apply duration, convexity and factor models in managing interest rate risk in fixed income portfolios.
  2. Construct efficient portfolios using mean-variance analysis and `factor' models.
  3. Use equilibrium models such as the CAPM and APT to evaluate different portfolios and trading strategies.
  4. Understand and apply basic techniques to evaluate the performance of managed portfolios.
  5. You will also learn some basic empirical facts about security returns in this class.

Evaluation:

  1. Homeworks (20%): There will be 4-5 homeworks during the mini. You should form groups of 4 students to work on the homeworks together. Please hand in one homework per group.
  2. Project (20%)
  3. Final Exam (60%): The final exam will be cummulative. It will be closed-book, closed notes. However, you can bring two 8.5 by 11 sheets with any formulas you want written on them to the exam.

Required Readings:

The required textbook for this course is Investments, by Zvi Bodie, Alex Kane and Alan J. Marcus, Third Edition, Irwin Publishing. The is also a course package with reproduced articles and I will handout my copies of my lecture overheads each class.

Other Suggested Readings:

Some other good investments texts include: Investment Science, by David Luenberger, 1998, Oxford University Press, Modern Investment Theory by Robert Haugen, 1997, or Investment Analysis and Portfolio Management by Frank Reilly and Keith Brown. Useful practitioner journals include: Financial Analysts Journal, Journal of Portfolio Management and RISK Magazine. Of course, it is a good idea to read the Wall Street Journal, The Economist or The Financial Times to keep up with the latest developments in financial markets.

Tentative Lecture Schedule:

Topic

Readings

Lecture

The Investment Process

-Investments, Chapters 1--4 (background), Chapter 26

-Kritzman, Mark, `What practitioners need to know about the Nobel Prize'

`Money Machine', Business Week, 1991

1

The Term Structure of Interest Rates

- Cougars, Harvard Business School Case

- Investments, Chapters 14,15

- Kritzman, Mark, `What practitioners need to know about the term structure of interest rates'

2-3

Bond Portfolio Management

- Investments, Chapter 15

- Kritzman, Mark, `What practitioners need to know about duration and convexity'

- Litterman, R. and J. Scheinkman, `Common factors affecting bond returns'

- Kritzman, Mark, `What practitioners need to know about factor methods'

4-5

Portfolio Mechanics

- Perold A. and W. Sharpe, `Dynamic strategies for asset allocation'

- Brinson, G., B. Singer and G. Beebower, `Determinants of portfolio performance II: An update'

6

Optimal Portfolios

-Investments, Chapters 6--8

- Kritzman, Mark, `What practitioners need to know about optimization'

7-8

Equilibrium Models

-Investments, Chapters 9-11

9-11

Performance Evaluation

- Investments, Chapters 12, 28

- Sharpe, W., `The Sharpe ratio', `Asset allocation: Management style and performance measurement', `The arithmetic of active management'

- Kahn, R. and A. Rudd, `Does historical performance predict future performance?'

- Haugen, R. and N. Baker, `Commonality in the determinants of expected stock returns' 

12-14

Please skim chapters 1-4 of the investments text before the first class.