FINA 3080:
Investment Analysis and Portfolio Management
Lecture 1 – Review of the Syllabus & Course Overview,
Trading Securities
Chao Ying
Investments
• What is an investment?
• Current commitment of money (or other resources)
Expect to reap future benefits
• Current vs. future:
Sacrifice now and get something back later
• Expectation:
The future benefits are uncertain
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What Will You Do With $10,000?
• Imagine one day you wake up and find that you are
HK$10,000 richer
• What will you do?
• Invest?
• Consume?
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My Answer
• How will I spend it?
• Suppose my original wealth was $1,000,000
• And suppose my original investment portfolio was 50%
Stock, 30% Bond, 20% Cash
• i.e., $500,000 Stock, $300,000 Bond, $200,000 Cash
• Now, with the additional $10,000, I will have $1,010,000
• My portfolio weights can still stay the same:
• 50% Stock, 30% Bond, 20% Cash
• i.e., $505,000 Stock, $303,000 Bond, $202,000 Cash
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This Course: FINA 3080
• How to invest wisely in an uncertain environment
(Not how to predict the future!)
• Fundamental aspects of investments
• Asset classes and financial markets
• Money allocation
• Determination of the fair price of a security
• Evaluating portfolio managers
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Outline of Today’s Lecture
• Review of the Syllabus
• Course Overview
• Financial Markets and The Economy
• Indexes
• Quiz
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Course Information
• Instructor: Chao YING (chaoying@cuhk.edu.hk)
• Teaching Assistant:
• Zijun (Jorie) Lin (zijun.lin@link.cuhk.edu.hk)
• Basic concepts you should already know:
Expected value, standard deviation, covariance,
regression, discount rate, net present value
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Optional Textbook
• Bodie, Kane, and Marcus (BKM):
Investments,
12th Edition
• See Syllabus for the list of
(optional) assigned readings
• Other materials are also optional
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Lecture Slides
• Slides will be available on the class website at least 24 hours
before each lecture
• Two versions will be provided: one before the lecture, one
after the lecture (with additional slides)
• Official class website: https://blackboard.cuhk.edu.hk/
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Grading
• Homework: 15%
Two group assignments, four to six students per group
We will ask you to form groups after the add/drop period
• Peer Evaluation: 5%
Evaluate your teammates at the end of the semester
• Participation: * (Only upgrade, no downgrade!)
Decided by myself (I may ask your name many times…)
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Grading (cont’d)
• Midterm Exam: 35%
Thursday, October 17, 7 – 9pm
(No class on October 15, and no office hour on October
17 during midterm week)
• Final Exam (cumulative): 45%
Thursday, November 28, 7 – 9pm
(No class on November 26, and no office hour on
November 28 during final week)
Check your schedule. If you have any conflict, please
inform our TA by Tuesday, September 17.
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Outline of Today’s Lecture
✓ Review of the Syllabus
• Course Overview
• Indexes
• Quiz
12
Money Allocation
• Money allocation across different assets/securities
• How to invest money wisely
• The risk-return relationship:
High expected return, high risk
• Not how to get rich quickly – the fastest way is
gambling, which also is the fastest way to lose
Prof. Harry
• Diversification to Markowitz,
reduce risk Nobel
Laureate
1990
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Asset Pricing
• Determine the fair price of a security
• An important concept:
Law of one price
Prof. William Sharpe, Prof. Eugene Fama
Nobel Laureate 1990 Nobel Laureate 2013
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Big Mac Index
• Violation of law of one price?
• Can you make money from this?
• Price difference is close to transaction cost: Buy low and sell high
• Compare to IPAD mini (in terms of percentage)?
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• Price difference is close to transaction cost: Buy low and sell high
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Prices of Cocaine
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Asset Pricing: Arbitrage
• Violation of law of one price = arbitrage opportunity
• What is arbitrage?
• “Free lunch”
• A zero-risk, zero-net investment strategy that still
generates profits
• How to make arbitrage profits?
• Buy low, sell high!
• What will happen?
• Prices will converge and arbitrage profits disappear
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Market Efficiency
• Example
• HSBC is trading at $60
• Suppose you know the “true” price is $100.
What should you do?
Buy HSBC!
• What will happen?
• HSBC share price will increase to $100
• In an efficient market, prices reflect all available
information
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Portfolio Evaluation
• We will see that financial markets are not 100% efficient
• Some investors could earn higher returns because of
their information/skills
• But high returns could be due to luck as well
• The important issue here is to separate luck and skill
• If you are the fund manager, how can you provide
ALWAYS ‘accurate’ prediction to (some) investors to
attract them?
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Luck or Skill?
71 up
143 36 up
72 down 18 up
1155109 … 36 down
1155110 …
1155111 … 18 down
:
:
1155178…
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Outline of Today’s Lecture
✓ Review of the Syllabus
✓ Course Overview
• Indexes
• Quiz
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Securities Indexes (or Indices)
• Why? To track how securities are doing on average
To compare performance of managers
To use as base of derivatives
• Several kinds:
• Stocks (DJI, HSI) vs. Bonds (Barclays Capital, Merrill)
• Narrow (DJI, HSI) vs. Broad (S&P500, HSCI)
• Large cap (DJI, HSI) vs. Small cap (S&P600)
• General (DJI, HSI) vs. Sectorial (HSI-Finance)
• Country (DJI, HSI) vs. Regional (MSCI)
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Value-Weighted Indexes
• Average return of index stocks, weighted by value
• Example 1: Hang Seng Index: 82 Large HK stocks
• Example 2: Standard & Poor’s S&P 500
N Compares today’s market cap to the initial level
(Q it Pit ) Where: is the summation operator.
Formula: I tV = iN=1 x100 Qit is the # of stock i outstanding at time t.
(Qi 0 Pi 0 )
i =1
Pit is the price of stock i at time t.
• Reflects a buy & hold strategy, unaffected by stock splits
Weighted by market cap
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• Recession Fears Aug 5: A weak jobs report from the U.S.
triggered concerns about an impending recession
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• Why the price recovered?
• Investors buy the stock; New data shows better economy; Fed
cut the interest rate
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Outline of Today’s Lecture
✓ Review of the Syllabus
✓ Course Overview
✓ Indexes
• Quiz
27
