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Course Materials
Required Text
 Bodie, Zvi, Alex Kane, and Alan Marcus, Investments, McGraw ?Hill, 9th Edition, ISBN:  0073530700, 2010 (BKM).
Recommended Texts

1. Malkiel, Burton, A Random Walk Down Wall Street, Norton, 9th Edition, 2007 ;
2. Siegel, Jeremy, Stocks for the Long Run, McGraw ?Hill, 4th Edition, 2008.

 
The recommended texts will not be explicitly employed in the course, but provide additional insight into some of the topics covered.

Course Outline and Readings
This is an approximate schedule of topics that will be covered. You should read the corresponding material in the text prior to the lecture. ¡°BKM¡± refers to the book by Bodie, Kane and Marcus.
 
Week One ¨C Risk and Return; Asset Pricing and Present Value
? Course Outline and Introduction
? Overview of Financial Markets
? Risk and Return
 
¨C BKM, chapters 1, 2, 3
 
Week Two ¨C The Capital Asset Pricing Model
? The Capital Asset Pricing Model (CAPM)
? Applications of CAPM
 
¨C BKM, chapter 9 (sections 1 2, 3)
 
Week Three ¨C Arbitrage Pricing Theory
? Multifactor Models and Arbitrage Pricing Theory
? The Fama & French 3-Factor Model
 
¨C BKM, chapters 10
 
Week Four ¨C Macroeconomic and Industry Analysis
? Fundamental Analysis
? Top down approach:
    Analyze economy
    Analyze industry
    Analyze firm
 
¨C BKM, chapters 12
 
Week Five ¨C Group project progress presentation
 
 
 
Week Six ¨C Portfolio performance evaluation
? Various performance measures
? Style analysis
? Performance Attribution Procedures
 
¨C BKM, chapter 18
 
 
 
Week Seven ¨C Fixed Income
? Bond Prices and Yields
? The Term Structure of Interest Rates
? The Term Structure of Interest Rates (cont¡¯)
? Duration Matching and Immunization. Convexity
 
¨C BKM, chapters 5.1, 15, 16(sections 1, 2),
 
¨C BKM, chapters 13
 
Week Eight ¨CEquity Valuation Model

• Balance Sheet Models
• Dividend Discount Models
• Price/Earnings Ratios
• Free Cash Flow Models

 
 
Week Nine ¨C Final presentation, group project
 

Project:
One of the main goals of this class is to promote learning by doing and team work. They are all vital skills for your future success.  To achieve this goal, I will assign team of 4-6 to prepare a class project on a pre-specified topic. The class project last for the whole course, with a mid-term progress presentation, a final group presentation and a final report due. The mid-term presentation is to guide you through your preliminary analysis and provide insights to further improvement. The final report includes the in-class final presentation and a written report which summarized the project.

• Nature of the project

The class project simulates a typical work project conducted by a mutual/hedge fund which is detecting potential market inefficiencies (trading opportunities).
The project covers roughly three stages:

1. Collection relevant information of which the most important one is data collecting.
2. Strategy developing and back-testing
3. Feasibility analysis of implementation

 You are expected to do independent research on the topic from various sources such as library publications, internet, and collect data if necessary. You are expected to start on the project as soon as possible (i.e., after the first class), do not wait for the material to be covered before you work on the project. I expect you to learn whatever you need to work on the project, and that will in turn improves you understanding of the materials if they are later covered in my class.     

• Team management

To expose you to a full range of ideas, we have multiple topics. I will assign a different topic to each team. Team will be assigned to mix students with different gender, school and your undergraduate major. Working with team is essential. Once the team is assigned, there should be no change in the team member. And each team should figure out a way to manage your team to the best effect. I will not interfere with team work-load assignment or how you interact with other members. But free-riding is not allowed. This means that you have to reach an agreement before-hand on how to work on the project. If any member does not do his/her job, you should report that to me; and this member will not get the score for the group project which guarantees a failure from my class. 

• Requirement for final report

All presentations should be in English, and the final report should be in both English and Chinese (to make sure, it is useful for you when you go on the job market). The final report should include a written report, your raw data and cleaned data, and your SAS programing code for your analysis. They should be turn-in electronically in a folder with group number as name (i.e., folder name group1, file name: data_raw_group1, data_clean_group1, testing_group1.sas). Make sure I can run your SAS code directly without much manipulation. You data and programming code should be clean and easy to trace. Starting your program with explanation of what you try to do and your algorithm. Write concise documenting lines to show what you were trying to do in front of each programing block.
The final written reports should have the following format:

1. Executive summary
   1. Why choose this idea?
   2. Major issues, challenges
   3. Your results, and conclusion
2. Data and methodology
1. Data collection (source, and procedure)
2. Data cleaning (make sure data is making sense and no error)
3. Simple descriptive statistics to show the major statistical property of your data
4. Methodology describe how you handle your data, i.e. statistical models, portfolio construction methods etc.
1. Show your analysis and results
2. Robustness test etc.
3. Various other related analysis
4. Data analysis and results
5. Conclusion

All information cited should have a footnote to show the source (publication, book, or web address) which will allow me to verify and trace the authenticity.  The reports should be concise and well written; the maximum length is 15 pages (on A4 letter, 1.5 space, font size 12), although you are allowed to put any charts and tables in the appendix which will not be counted for pages.

• Presentation requirements

The goal is for you to develop technical skills to handle investment research projects. When you prepare your presentation, you should think of your target audience as being technically advanced which means you want to be more detailed on the technical issues.  The general requirement of presentation is to have less than 20 slides and to finish the presentation in 30 minutes. Every member is expected to present a portion.  To make sure no free-riding, I will randomly direct my question (technical) to group members. Failure of any member to address my technical questions will count as a group failure. The general idea of a good presentation still applies which is clear and concise; do NOT put long sentences which you intend to talk in your slides, only points, graphs, tables and charts. For table and charts with lot information, power point animations that could highlight the major points are highly encouraged.
Despite the class project is more technical orientated, a good presentation skill is required and a formal dressing code for presentation is enforced.

Class projects:

1. Use the optimal portfolio weights, how to construct a mean-variance portfolio.
   1. Literature on optimal portfolio
   2. Use the constituents of Shanghai CSI 300 Index (000300.SH) to construct an optimal portfolio
   3. How to do it, what are the assumptions you have to make?
   4. How sensitive is your result to these assumptions?
   5. Compare the other alternative approach, such as native 1/N weight or using current return as expected return
   6. Any specific considerations for Chinese market?

 

2. Test the size effect on Chinese market
   1. Introduction and literature review on the size effect
   2. Given the literature do you expect the size effect to work in China as well?
   3. How to test this effect?
   4. Can the effect survive after considering transaction cost?

 

3. Test the book-to-market effect on Chinese market
   1. Introduction and literature review on the effect
   2. Given the literature do you expect this effect to work in China as well?
   3. How to test this effect?
   4. Can the effect survive after considering transaction cost?

 

4. Test the momentum effect on Chinese market
   1. Introduction and literature review on the effect
   2. Given the literature do you expect this effect to work in China as well?
   3. How to test this effect?
   4. Can this effect survive after considering transaction cost?

 

5. Test calendar effect: turn-of ¨Cthe month and weekend effect in Chinese stock market
   1. Introduction and literature review on these effects
   2. Given the literature do you expect these effects to work in China as well?
   3. How to test the effect?
   4. Can these effects survive after considering transaction cost?

 

6. Test calendar effect: the January and quarter-end effects in Chinese stock market
   1. Introduction and literature review on these effects
   2. Given the literature do you expect these effects to work in China as well?
   3. How to test the effect?
   4. Is there any month that has consistently higher return, if not January? If there is, why?
   5. Can these effects survive after considering transaction cost?
7. Test the parity conditions (future-spots and puts-call) in Chinese financial market
   1. Introduction and literature review on the parity conditions
   2. Given the literature do you expect these effects to work in China as well?
   3. How to test the effect?
   4. Can these effects survive after considering transaction cost?
8. Test a mean-reverting strategy using high frequency trading data.
   1. Introduction and literature review on the effects
   2. Given the literature do you expect earnings drift in Chinese stock market?
   3. How to test these effects?
   4. Can the effect survive after considering transaction cost?

 

9. Test the earning announcement drift effect in China¡¯s stock market
   1. Introduction and literature review on the effects
   2. Given the literature do you expect earnings drift in Chinese stock market?
   3. How to test these effects?
   4. Can the effect survive after considering transaction cost?

 

10. Test some technical indicators such as RSI, over-sold and over-bought indicators. using China¡¯s stock market
    1. Introduction and literature review (what are the measures)?
    2. Can any of the measure be apply to Chinese market?
    3. Test if these measures predict returns
    4. Can it survive transaction cost?

 

11. Investor¡¯s sentiments, an explanatory study
    1. Introduction and literature review (what are the measures)?
    2. Can any of the measure be apply to Chinese market?
    3. Test if these measures predict returns
    4. Can it survive transaction cost?

 

12. China¡¯s mutual fund and ETF
    1. Types
    2. Returns
    3. Fees and returns
    4. Does rating has an prediction power of future performance
    5. What is the best mutual fund to invest based on investors preference?

 
To tech the trading strategy, you need to collect historical data and construct portfolios which represent your trading strategy; then track the returns of your portfolios over time. To measure the performance of your strategy, you need to do risk adjustment (adjust for beta, use sharp ratio etc.). It is a good idea to show sub-period analysis to test to see if your results are robust (i.e., the results based on full sample period is applicable to sub-sample periods).  Finally, you need to consider more realistic settings such as considering the impact of transaction cost and potential price impact.
The starting point of your project is to understand the effect that you are going to test.  These are all well-known market ¡°anomalies¡± based on studies on US data. So search the research journal on the topic will be your starting point.  You can follow the procedure of the papers to construct you portfolio.
The progress of the project last the whole module.  By week 5, I expect you to 1. Finish the introduction and literature review. 2. Already collected the data or report your data collection progress. 3. Has figured out the methodology to test your strategy. And these are the results you report in your mid-term project progress presentation.