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BF215 - INVESTMENT ANALYSIS AND PORTFOLIO MANAGEMENT

Course Description and Scope

This course begins by describing the investment environment, the various developments in investment
theory, and the principles and practices of valuation. The analyses of fixed-income securities, equity
securities, derivative securities, together with other securities such as unit trusts, will then be discussed.
The theories, principles, and techniques of portfolio management will also be presented. The topics
include the portfolio investment process, asset allocation, portfolio construction, and portfolio
performance evaluation. Throughout the course, a global perspective will be emphasized.

Proposed Lecture Schedule

Week No. Topics Readings


1 The Investment Environment RB Ch 1-3

1. The Investment Setting


• Understanding investments
• Measuring risk and return
• Determining required rates of return
• Tradeoff between risk and return

2. Asset Allocation
• Individual investor life cycle
• Portfolio management process
• The investment policy statement
• Objectives & constraints of institutional investors
• Importance of asset allocation

3. Selecting Investments in a Global Market


• Case for global investments
• Global investment choices
• Historical risks and return
• Covariance and correlation

2 The Investment Environment (Cont’d) RB Ch 4-6

4. Organization & Functioning of Securities Markets


• Securities markets
• Primary capital markets
• Secondary financial markets
• Exchanges & exchange markets
• Changes in securities markets
Week No. Topics Readings
2 (Cont’d) 5. Security-Market Indicator Series
• Uses of indicator series
• Factors in constructing and indicator series
• Bond-market indicator series
• Composite stock-bond indexes
• Comparison of indexes over time

6. Sources of Information on Global Investments


• Aggregate economic analysis
• Aggregate security-market analysis
• Industry analysis
• Individual stock & bond analysis
• Investment magazines
• Information on bonds
• Theoretical & empirical analysis

3 Developments in Investment Theory RB Ch 7-8

7. Efficient Capital Market


• Forms of market efficiency
• Evidence on market efficiency
• Implications of efficient capital markets

8. Introduction to Portfolio Management


• Background assumptions
• Markowitz portfolio theory
• Two-asset portfolio
• Three-asset portfolio

4 Developments in Investment Theory (Cont’d) RB Ch 9-10

9. Introduction to Asset Pricing Models


• Assumptions of capital market theory
• The risk-free asset & market portfolio
• Capital asset pricing model

10. Extensions and Testings of Asset Pricing Theories


• Relaxing the assumptions of CAPM
• Empirical tests of the CAPM
• Relationship between systematic risk & return
• The market portfolio
• Arbitrage pricing model
• Empirical tests of the APT
Week No. Topics Readings
5&6 Analysis and Management of Bonds RB Ch 15-17

11. Bond Fundamentals


• Basic Features
• Global bond market structure
• Alternative bond issues
• Obtaining information on bonds

12. Analysis and Valuation of Bonds


• Fundamentals of bond valuation
• Computing bond yields
• Calculating future bond prices
• Bond valuation using spot rates
• What determines interest rates?
• Term structure of interest rates
• Yield spreads
• What determines bond price volatility?
• Duration and convexity

13. Bond Portfolio Management Strategies


• Alternative bond portfolio strategies
• Implications of CML and EMH on bond management

7 Valuation Principles and Practices RB Ch 13-14

14. Introduction to Security Valuation


• Overview of valuation process
• Theory of valuation
• Valuation of common stocks
• Estimating the inputs for valuation

15. Analysis of Alternative Economies and Security Markets


• Economic activity & security markets
• Cyclical indicator categories
• Economic variables & stock prices
• Analysis of world security markets

Recess
Week No. Topics Readings
9 Analysis of Common Stocks RB Ch 18-20

16. Stock Market Analysis


• Applying the valuation model to the market
• Estimating future EPS
• Estimating future earnings multiplier
• Calculating the expected rate of return
• Analysis of world markets

17. Industry Analysis


• Why perform industry analysis?
• Estimating industry rates of return
• Estimating industry EPS
• Estimating industry earnings multiplier
• Global industry analysis

18. Company Analysis and Stock Selection


• Analysis of companies vs. stock selection
• Estimating a company’s value
• EVA & MVA
• Global company analysis
• Analysis of growth companies

10 Analysis of Common Stocks (Cont’d) RB Ch 12, &


21-22
19. Financial Statements Analysis
• Types of financial statements
• Ratio analysis
• Analysis of growth potential
• Limitations of financial ratios

20. Technical Analysis


• Underlying assumptions
• Challenges to technical analysis
• Advantages of technical analysis
• Technical trading rules

21. Equity Portfolio Management Strategies


• Passive management
• Active management
• Asset allocation strategies
Week No. Topics Readings
11 & 12 Derivative Security Analysis RB Ch 11, 22
& 23-25
22. Forward and Futures Contracts
• Overview of forward & futures trading
• Simex & other futures exchanges
• Hedging with forwards & futures
• Basic valuation concepts
• Application & strategies
• Futures in equity portfolio management

23. Option Contracts


• Overview of option markets & contracts
• Payoff diagrams
• Option trading strategies
• Option valuation
• Relationship between forward & option contracts
• Using derivatives in managing investment portfolios
• Options in equity portfolio management

24. Swaps, Convertibles, and Other Derivatives


• Warrants
• Convertibles
• OTC interest rate agreements
• Swap contracts
• Other embedded derivatives

13 Investment Companies and Portfolio Performance RB Ch 26-27

25. Investment Companies


• Management of investment companies
• Closed-end vs. open-end funds
• Types of funds based on portfolio makeup
• Performance of investment companies

26. Evaluation of Portfolio Performance


• Requirements of a portfolio manager
• Portfolio performance measures
• Factors affecting use of performance measures
• Bond portfolio performance

27. Review
Required Materials

RB Frank Reilly & Keith Brown, Investment Analysis and Portfolio Management, Harcourt Brace
th
& Co., 5 edition (HG4521.R362)

BT The Business Times, Singapore.

References Materials

Frank J. Fabozzi, Investment Management, Prentice Hall

William F. Sharpe, Gordon J. Alexander and Jeffrey V. Bailey, Investments, Prentice Hall

Zvi Bodie, Alex Kane and Alan J. Marcus, Investments, Irwin

Method of Instruction

Lectures: 2 hours per week


Tutorials: 2 hours per week
Lectures start in Week 1 and end in Week 13
Tutorials start in Week 2 and end in Week 14

Course Assessment

Presentations, Participation and Tutor’s Evaluation 10%


Group Presentation and Report 10%
In-Class Assignments (two quizzes of 30 minutes each) 10%
Final Examination 70%

Lecturers Office Room No. DID E-mail

Dr. Lau Sie Ting S3-01C-93 790-4649 astlau@ntu.edu.sg


(Course Coordinator)
(Weeks 7-13)

Assoc Prof Shafiqur Rahman S3-01C-100 790-4658 ashafiq@ntu.edu.sg


(Weeks 1-6)