Investments
Lecture 01
Joon H. Song
Course Outline
This course explores various issues underlying asset management.
This is the most fundamental attribute of any professionally
managed portfolio. Even if most of the concepts presented in
class are specific to portfolios consisting of shares or stock
market indices, the majority of these concepts apply to a wide
variety of financial asset categories.
In this course, students will become familiar with fundamental
concepts of investment including market efficiency, risk and
return tradeoff, portfolio theory, CAPM, multifactor models,
arbitrage-free pricing model, market equilibrium and the pricing
of financial derivatives.
We will cover the analytical tools and finance theory necessary to
make efficient investment decisions and to understand the
paradigm of asset valuation.
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Finance vs. Money and Banking
It is educationally important to realize that finance
touches on different subject from money & banking
in its scope and objective.
M&B is about how money is created and operated in
money market and what is its effect on the macro
economy, i.e. all about money which is one specific kind
of financial assets.
Finance is about how the various types of financial
assets are underwritten, priced, traded in order to
achieve inter-temporal resource allocation and risk
management.
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Course Schedule (tentative)
Sessions 1: Financial markets overview
Sessions 2, 3, and 4: Construction of Portfolios
Sessions 5 and 6: CAMP and Factor Models
Session 7 and 8: Market Efficiency and equilibrium
Sessions 9: Active Portfolio Management
Session 10: Bond Portfolios
Session 11: Equity Analysis
Session 12-14: Options, futures and other
derivatives
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Evaluation
You will be evaluated using the following criteria:
Midterm Exam: 40%
Final Exam: 40%
Class Attendance: 20%
The midterm and final exams are 2 hours long.
The exams will be closed book.
For the exams, you are allowed to bring an
electronic calculator.
Old exams will not be made available.
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Contact Information
E-mail: jhsong@hufs.ac.kr
Office: 교수연구동, Room 411
Regular lectures: Monday 12:00 – 2:50 a.m.
Please do not be shy about contacting me if you have
questions about the material!
Please refrain from contacting me via cellular phone calls
without urgent reasons.
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Course Information
Text book: Bodie Zvi, Alex Kane, Alan J. Marcus. (BKM)
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10th international edition,
2015, McGraw-Hill.
Additional reading:
I will assign reading on newspaper
articles or relevant material as we
move along.
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Course Information
Supplementary text book: Bodie Zvi, Robert C. Merton,
David L. Cleeton (BMC)
Financial Economics
2th international edition,
2009, Pearson Education.
■ This is not a required reading.
Just for those who are interested
in reading more materials
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Course Information
Supplementary text book: D. G. Luenberger(박구역 외 역)
Investment Science (금융과학)
2014, 교우사
■ Again, this is not a required
reading.
Just for those who are interested
in reading more technical methods
and real-life applications.
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Course Information
Google drive: Slides from lectures, handouts, excel
sheets, etc., will be posted here.
Prerequisites: Financial economics is a quantitative
subject, hence it is important that you have already
taken introductory statistics and calculus courses. If you
do not have a working knowledge in statistics and math,
you may not be well prepared to take this course. Use of
a spreadsheet package like Excel will be crucial for
understanding and replicating class materials.
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Today’s Lecture
Objective: To give an overview of financial
assets and its role in the economy.
Recent development and trends in financial market.
Major players in financial markets.
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Real Assets Versus Financial Assets
Essential nature of investment
Reduced current consumption
Planned later consumption
Inter-temporal allocation of resources and
distribution of wealth
Real Assets
Assets (you may think inputs) used to produce
goods and services
Financial Assets
Claims on real assets
Allocative function rather than production.
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A Taxonomy of Financial Assets
Fixed income or debt
Money market instruments
Bank certificates of deposit
Capital market instruments
Bonds
Common stock or equity
Derivative securities
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Financial Markets and the Economy
Information Role
The Google effect
Consumption Timing
Allocation of Risk
Separation of Ownership and Management
Agency Issues
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Financial Markets and the Economy (Cont’d)
Corporate Governance and Corporate Ethics
Accounting Scandals
Examples – Enron, Rite Aid, HealthSouth
Auditors—watchdogs of the firms
Analyst Scandals
Arthur Andersen (→ now known as
Accenture)
Sarbanes-Oxley Act of 2002
Tighten the rules of corporate governance
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The Investment Process
Asset allocation function of researchers or
analysts
Choice among broad asset classes
Security selection function of fund managers
Choice of which securities to hold within asset
class
Security analysis function of fund managers
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Markets are Competitive
Risk-Return Trade-Off
Efficient Markets
Active Management
Finding mispriced securities
Timing the market
Passive Management
No attempt to find undervalued securities
No attempt to time the market
Holding a highly diversified portfolio
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The Players
Business Firms– net borrowers
Households – net savers
Governments – can be both borrowers and savers
Financial Intermediaries
Investment Companies
Banks
Insurance companies
Credit unions
Investment Bankers
Perform specialized services for businesses
Markets in the primary market
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Recent Trends—Globalization
American Depository Receipts (ADRs)
Foreign securities offered in dollars
Mutual funds that invest internationally
Instruments and vehicles continue to develop
(web-based trading, HTS, mobile trading etc.)
Exchange Traded Funds (ETFs)
Enlisted or publicly traded funds in the equity
markets
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Recent Trends—Securitization
Mortgage pass-through securities
Other pass-through arrangements
Car, student, home equity, credit card loans
Offers opportunities for investors and originators
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Recent Trends—Financial Engineering
Use of mathematical models and computer-based
trading technology to synthesize new financial
products
ELS, ELD, ELN, CDO, CBO etc.
Bundling and unbundling of cash flows
Unpackaging and repackaging.
Law of one prices linear pricing
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Recent Trends—Computer Networks
Online information dissemination
Information is made cheaply and widely available to
the public
Automated trade crossing
Direct trading among investors
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Read Ch.2-Ch.4
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