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UNIVERSITY OF MASSACHUSSETS DARTMOUTH College of Business Department of Accounting and Finance Fall 2011 COURSE: Investment Analysis, FIN 383-Section 01, TR 12:30-1:45 Class location: Science & Engr 118 PREREQUISITES: FIN 312 and junior standing INSTRUCTOR: Duong Nguyen, Ph. D. Office Room 220, College of Business Phone (508) 999 – 8070 Email dnguyen2@umassd. edu Tuesday 3:30-5:00 pm Thursday 3:30-5:00 pm Wednesday 11:00-12:00 and 1-5pm and also by appointment OFFICE HOURS:
COURSE DESCRIPTION This course will mix both description and theory. On the descriptive side we will cover the purpose and operation of securities markets in the United States and around the world. On the theoretical side we will cover how we should evaluate investment opportunities to develop a portfolio that satisfies your risk-return objectives. The quantitative material will draw heavily on college level algebra and statistics. You will find this class quite challenging if your algebra and statistics skills are not up to par.
COURSE OBJECTIVES The objective of this course is to discuss the material of practical use for students whether they plan to pursue a career of an investment professional or want to be a sophisticated individual investor. Here are some of the learning outcomes for the course: 1. To understand the organization and function of primary and secondary securities markets. 2. To analyze the characteristics of the major stock and bond market indices in the United States and internationally. 3. To calculate the expected and historical rates of return for an individual asset or a portfolio of assets. . To calculate the risk of an individual investment or a portfolio. 5. To understand the factors which determine the required rate of return for an investment. 6. To understand the role of asset allocation in investment planning, and to understand why investment goals change over a person’s lifetime and circumstances. 7. To understand the advantages of global diversification. 8. To understand the Markowitz portfolio theory. 9. To understand theoretical pricing models such as the Capital Asset Pricing Model (CAPM) and the Arbitrage Pricing
Theory (APT) 10. To analyze the major determinants of an economy’s long term and short term growth and discuss indicators that can be used to forecast economic variables. 11. To understand the basic features of bonds which affect their risk, return and value. 12. To understand and compute the expected rates of return on bonds, and the value of bonds, and to and examine the characteristics that cause changes in a bond’s price. 13. To conduct industry and company analysis, and to estimate the intrinsic value of a company.
COMPETENCIES AND CONTACT HOURS The student will be introduced to: The profession of investments and opportunities for investment personals The student will understand: Nature of investments and investment alternatives Relationship between risk and return from investments Portfolio selection and capital market theory Market efficiency Valuation of Bonds and Stocks and investment strategies Market and Industry analysis Fundamental and Technical analysis The student will be able to: Analyze stocks and bonds and make recommendation for investments Construct portfolios with desired risk and return characteristics Total 2 6 6 3 6 6 6 6 3 45 TEXTBOOK AND REQUIRED MATERIALS (1)Essentials of Investments, by Zvi Bodie, Alex Kane and Alan J. Marcus, 8th Edition, McGraw Hill Irwin, (Required). A customized version of this book is available in the UMD book store (2)Financial Calculator (Texas Instruments BA II Plus, recommended) (3) Stock Trak registration (4) Wall Street Journal (recommended) Financial calculator is a must in this class.
You will not be able to do the assignments or the exams without one. I strongly recommend all of you get familiar with the calculator by reading the manuals posted on my website. ATTENDANCE • • • • Regular attendance and participation is essential for success. All assigned material should be carefully read and end-of-chapter exercises should be attempted before each class meeting.
If you miss any material, it is your responsibility to obtain the information from another student. Do not consistently arrive late or leave early. If you have to leave or enter the room while a discussion or presentation is in progress, be quiet and discreet. A continued absence or several absences will adversely impact your grade. Do not conduct private conversations while class is in session. However, participation in class discussions is expected. TENTATIVE COURSE SCHEDULE
Meeting 09/08/11 09/13/11 09/15/11 09/20/11 09/22/11 09/27/11 09/29/11 10/04/11 10/06/11 10/11/11 10/13/11 10/18/11 10/20/11 10/25/11 10/27/11 11/01/11 11/03/11 11/08/11 Topic Class Introduction Investments: background and issues Financial securities Financial securities Securities markets Securities markets Bond prices and yields Bond prices and yields Bond prices and yields Mutual fund and other investment companies Follow Monday’s schedule (no class) Mutual fund and other investment companies Wrap up and Review Exam 1 Risk and Return Risk and Return Efficient diversification Efficient diversification CAPM and APT 1, 2, 3, 4, 9 5 5 6 6 7 HW 4 due Excel case 1 due 4 HW 3 due Chapter Homework and Excel cases (required) 1 2 2 3 3 9 9 9 4 HW2 due HW1 due 11/10/11 11/15/11 11/17/11 11/22/11 11/24/11 11/29/11 12/01/11 12/06/11 12/08/11 12/13/11 12/15/10 CAPM and APT Efficient markets Wrap up and Review Exam 2 Thanksgiving (no class) Equity valuation Equity valuation Macroeconomics and industry analysis Financial Statement Analysis Technical analysis Wrap up and Review 7 8 HW5 due HW6 due 5, 6, 7, 8 12 12 11 13 19
Excel case 2 due HW7 due HW8 due HW9 due Excel case 3 due Stock Trak Project due Check calendar Exam 3 11, 12, 13 19 EXAMS, HOMEWORKS, PROJECTS AND GRADES There will be three exams. They are both multiple choice and problem/essay-typed questions. The exams are not comprehensive, although some material will carry through. There is no point for end-of chapter exercises. However, it is recommended that all of you should do them for better understanding about the class materials and for preparation of the exams. The solutions for the homework are posted on my website. There will be 9 homework and 3 excel case studies. They are counted toward your final grades.
The homework and excel cases will be posted on my website. The purposes of case studies are to get you familiar with financial functions in Excel and help you understand more about lectures with practice problems. Therefore, it is expected that you use as many Excel functions as you can, try to get Excel to do all the calculations. Check the syllabus for the due dates. You can either do the homework and the cases on your own or work in a group of no more than 2 people. Late homework and cases will not be graded. Attendance will count 5% in your total grade. To have this 5%, you should not miss more than 4 class meetings. I will hand out the sign-in sheet in every class meeting.
If the sign-in sheet, for some reasons, is not distributed to you, you should come ask me after the class. I will base on these sheets to determine the grade for attendance at the end of the semester. Exam 1: Exam 2: Exam 3: Homework and excel cases (9 homework and 3 excel cases) Stock Trak Project Attendance Total : 22% 22% 22% 18% (1. 5% each) 11% 5% 100% The distribution grade for attendance as follows Attendance grade 5% 4% 3% 2% 1% 0 No. of meetings missed 8 Your grade will be based on the following schedule A+ (98-100); A (92-97); A- (90-91); B+ (85-89); B (78-84); B- (75-77); C+ (72-76); C (65-71); C- (60-64); D+ (55-59); D (50-54); F (0-49)
Absolutely no incomplete grades or make-up examinations will be given unless a medical or personal EMERGENCY precludes the completion of the exam. Students who are eligible for makeup need to finish the makeup within 48 hours of the scheduled time. Otherwise, missing an exam on the scheduled date will automatically earn a zero score. DISABILITY SERVICES If a student has a disability and needs assistance, please notify the Instructor and contact the Office of Disability Services for Students to make arrangements for the appropriate modification and/or assistance. RELIGIOUS HOLIDAYS Any student may request to be excused from a scheduled exam to observe a religious holy day of their faith.
The student must notify the instructor and arrange to take the exam in advance of the regularly scheduled exam date. MISCELLANEOUS Cell phones and beepers are to be turned off or set to “silent mode” during class and exams. The last day to drop the course with a grade of “DR” or “WI” is: Check school calendar. POLICIES FOR ALL EXAMINATION – READ CAREFULLY • • • • • • • • • All examinations will start at the scheduled time. Exams are to be completed individually. You are not to discuss any question with any individual. Make sure that your calculator works and you have extra batteries available. A nonworking calculator will be no excuse for a make-up test. You may be asked to produce a photo ID during the examination.
Bring at least two sharpened No. 2 pencils. Students are permitted the use of a calculator and a formula sheet. Tests will typically consist of multiple choices and essay questions You must hand in the examination, answer sheet and formula sheet at the end of the examination. If you do not hand in your examination before the scheduled end time, one point will be deducted for every extra minute. Ten minutes after the end time, I will assume you have not taken the test and get a score of zero. ACADEMIC MISCONDUCT Every student must respect the right of all to have an equitable opportunity to learn and honestly demonstrate the quality of their learning.
Therefore, all students must adhere to a standard of academic conduct, demonstrating respect for themselves, their fellow students, and the educational mission of the University. As a student in the College of Business taking this class: • • • • I will not represent someone else’s work as my own I will not cheat, nor will I aid in another’s cheating I will be honest in my academic endeavors I understand that if I am found responsible for academic misconduct, I will be subject to the academic misconduct procedures and sanctions as outlined in the Student Handbook Failure to adhere to the guidelines stated above may result in one of the followings: • • Expulsion: Permanent separation of the students from the University, preventing readmission to the institution.
This sanction shall be recorded on the student transcript Suspension: Temporary separation of the student from the University for a specific period of time By taking this class, I promise to adhere to UMass Darthmouth Student Code of Academic Integrity. For details on the policy and procedure, please check the Student Handbook. Stock-Trak Project In order to gain some valuable insights about investment, you will be required to work in a team of two persons or work on your own in managing a simulation portfolio of $1,000,000 via StockTrak. The Stock-Trak account will allow you to buy, sell, buy on margin, and sell short most common stocks, stock options, and mutual funds. You can also buy and sell certain index options, bonds, futures, and international stocks.
In addition, Stock-Trak allows the possibility to place market orders, limit orders, and stop orders. The maximum number of trades is limited to 200. This simulation is set up for the 12 weeks of class. You need to go to http://stocktrak. com/public/content/tradingrules. aspx and print out the registration materials/trading rules. Following the “Read Rules” link in the left hand column of the home page, directs you to the same link. After printing out the trading rules, go to the following link to register for your account http://www. stocktrak. com/public/members/registrationstudents. aspx? p=FIN-383-484-Fall11 The price is $26. 95 per account.
Use the discount code BKM808 when you register to get $5 off. The final price after discount is $21. 95. Trading can begin Sep 15th and will end Dec 2nd. It is important that you read the Rules before you do anything. At the end of the semester, you are required to submit a written report which should include the followings: 1. Investment Objective: you are required to construct a policy statement which specifies your investment goals/objectives. When constructing the policy statement, the most basic place to start is an analysis of your risk tolerance and desired return on your portfolio. You have 12 weeks to earn a return on this portfolio. There are 2 steps in constructing your investment policy. 1) Asset Allocation: determine how many percent of your money should be invested in stocks, how many percent in bonds, futures, options, real estate, etc. Since this is an introduction to investment class, we consider only 3 major assets: stocks, bonds, and cash (2) Security analysis: After the asset allocation step, you have to decide which type of securities you should invest in each asset categories. For example, should you invest in small or big stocks, high growth or low growth stocks, etc. Although it is really up to you to decide your strategies, there are some certain requirements you need to keep in mind as follows: no more than 25% of your fund can be in one stock.
At least 10% invested in bond (to make sure your investment strategy is not too aggressive) Some questions you might want to consider: What is your risk tolerance (i. e. , are you more risk averse person or less risk averse person, are you willing to take higher risk for higher return), What is the time horizon for investing? What are your strategies to invest your money in order to achieve the desired return within the investment time horizon. 2. By Oct 20th, at least 50% of your portfolio should be invested. 3. At the end of the trading period, at least 90% of your fund has to be invested. Also, there is a minimum of $5000 has to be used every week. You can buy or sell but make sure you need to trade at least $5000 every week. 4.
Over the course of the trading period, make at least 50 transactions that have to include all buy, sell, short sell, and short cover transactions at the market price. We will go into more detail of these transactions when we study chapter 3. You should print out the transaction history from your account with Stock-Trak and include it in the report 5. Over the course of the trading period, make at least 10 limit order that includes limit-buy order, limit-sell order, stop-buy order, and stop-sell order transactions. We will go into more detail of these transactions when we study chapter 3. You should print out the limit transaction history from your account with Stock-Trak and include it in the report 6.
Pick any 10 transactions and explain why you choose to make those transactions (the explanation can come from fundamental analysis, technical analysis, or recommendation from some experts, etc. ) 7. In the above 10 transactions, one explanation will come from financial statement analysis. For example, if you choose to buy stock IBM, you need to pull the financial statements in the last 3 years (income statement, balance sheet, cash flow statement) of IBM and at least one competitor (e. g. , HPQ) and then calculate all the required financial ratios to compare the performance of IBM and HPQ over time. (see an example in the appendix below) 8. Create a pie chart reflecting the structure of your portfolio at the end of the trading period Dec 2nd.
Calculate the percentage of stocks, bonds, and cash on Dec 2nd Calculate the percentage of stocks, bonds, cash in the portfolio on Dec 2nd as follows • %stock = (total value of stocks)/(total value of portfolio) • %bond = (total value of bonds)/(total value of portfolio) • % cash = 1-%stock – %bond • Create a pie chart to reflect the structure of the initial portfolio. For example, if your portfolio allocates 60% stocks, 30% bond, 10% cash, the pie chart is as follows Asset Allocation as of Dec 2nd, 2011 10% stock 30% bond cash 60% 9. Calculate your portfolio return every week and compare with the return on the market index S&P 500. Put the information in Excel. You need to graph your portfolio return and the S&P 500 index return. The y-axis is the return, the x-axis is the week. Here is an example date Sep 15 Sep 22 Sep 29 Oct 06 Oct 13 Oct 20 Oct 27 Nov 03 Nov 10 Nov 17 Nov 24 Dec 02 Week 0 1 2 3 4 5 6 7 8 9 10 11 Porfolio Value 1,000,000 Portfolio Return S&P 500 S&P 500 return –
The return is calculated as follows Return in week 1 = (ending value – beginning value)/beginning value = (Sep 22 – Sep 15)/ (Sep 15) Return in week 2 = (ending value – beginning value)/beginning value = (Sep 29– Sep 22)/ (Sep 22) (to get the historical data on S&P 500, go to Yahoo Finance webpage, and download the historical data corresponding to your trading period and compute the weekly return of S&P500, The value you should get for S&P500 is the adj. close, the last column on the website) 3. 00% 2. 00% 1. 00% 0. 00% ? 1. 00% ? 2. 00% ? 3. 00% ? 4. 00% ? 5. 00% 0 2 4 6 8 10 12 My R eturn S &P R eturn 10. Write an essay evaluating the performance of your portfolio over the trading period. How does your portfolio compare with the market? Is it better or worse?
Provide some explanation why your portfolio performs better or worse than the market (for example, did you follow your investment policy consistently (you can compare the initial structure and ending structure), what types of securities, industries you tend to invest, what transactions you earn a lot of return, what transactions you lose a lot of money, what else you should have done to improve your performance, what lessons you have learned during this portfolio simulation so you can apply to your personal investing in the future, etc. ). You should include an analysis of macroeconomics, industries, financial markets, stock-specific news, events that may have affected the risk and return performance of your portfolio There is no penalty for getting low returns, however, top 3 accounts whose returns are highest in the class and have at least 50 transactions will have 3% bonus added to the total grade.
Appendix: Financial statement analysis example 1. First, you need to identify at least one competitor. The information can be taken from Yahoo Finance or Google Finance (see the attachment below). 2. After you identify the competitor, make a summary table that includes some key statistics for IBM, the competitor (e. g. HPQ), and the industry using the data in current year. For example Statistics Market cap Total asset Total long-term debt Total short-term debt Number of employees Quarterly revenue growth Revenue Gross margin Operating margin EPS P/E PEG Beta 3. Make some comments, comparison between IBM, HPQ, and the industry based on these statistics 4.
To justify your choice of IBM over HPQ, you need to do financial ratios analysis for both companies over the last 3 years. All the financial statement can be downloaded from Yahoo Finance. The financial ratios fall into 5 categories: • • • • • Leverage ratios: how much debt the company is using and how much interest expense it has to pay with respect to earning Asset utilization ratios: how efficient the company is using its asset to generate sale Liquidity ratios: how liquid the company is. Profitability ratios: how profitable the company is Market price ratios: how the market view the company IBM HPQ Industry You need to make the table to calculate these ratios for the last 3 years based on the For example, For IBM I. Leverage ratios 1. Interest burden 2.
Interest coverage 3. Leverage ratio II. Asset utilization ratios 1. Total asset turnover 2. Fixed asset turnover 3. Inventory turnover 4. Days receivable. III. Liquidity ratios 1. Current ratio 2. Quick ratio 2008 2009 2010 IV. Profitability ratios 1. Return on assets 2. Return on equity 3. Return on sales V. Market price ratios 1. Market to book 2. Price-earnings ratio (P/E) You need to create the same table for HPQ 5. Based on the above computations, do some analyses, make some comments to justify your choice of IBM over HPQ. 9/6/2011 Financial Statements for International … nguyenducduong@gmail. com Web Images Videos Maps News Shopping Gmail more
NYSE:IBM Company Summary News Option chain Related companies Historical prices Financials Markets News Portfolios Stock screener Google Domestic Trends In Millions of USD (except for per share items) chg | % Get quotes International Business Machines Corp. financials Watch this stock Income Statement Balance Sheet Cash Flow Hide charts View: Quarterly Data | Annual Data Recent Quotes IBM 164. 20 -2. 78 12 months ending 12 months ending 12 months ending 12 months ending 2010-12-31 2009-12-31 2008-12-31 2007-12-31 99,871. 00 -1. 00 99,870. 00 53,857. 00 46,014. 00 20,943. 00 6,026. 00 253. 00 641. 00 81,720. 00 18,150. 00 1,944. 00 19,723. 00 14,833. 0 14,833. 00 14,833. 00 14,833. 00 14,833. 00 0. 00 1,287. 36 11. 52 2. 50 95,759. 00 95,759. 00 51,972. 00 43,787. 00 20,193. 00 5,820. 00 285. 00 474. 00 4. 00 78,748. 00 17,011. 00 5. 00 1,529. 00 18,138. 00 13,425. 00 13,425. 00 13,425. 00 13,425. 00 13,425. 00 0. 00 1,341. 35 10. 01 2. 15 103,630. 00 103,630. 00 57,969. 00 45,661. 00 23,386. 00 6,337. 00 87,692. 00 15,938. 00 26. 00 1,332. 00 16,715. 00 12,334. 00 12,334. 00 12,334. 00 12,334. 00 12,334. 00 -1. 00 1,387. 80 8. 89 1. 90 98,785. 00 1. 00 98,786. 00 57,057. 00 41,728. 00 22,060. 00 6,153. 00 85,270. 00 13,516. 00 18. 00 1,172. 00 14,489. 00 10,418. 00 10,418. 00 10,418. 00 10,418. 0 10,418. 00 0. 00 1,456. 88 7. 15 1. 50 – Revenue Other Revenue, Total Total Revenue Cost of Revenue, Total Create portfolio from quotes Recent Activity IBM: Financials . DJI, . INX, . IXIC Market news . DJI: Historical prices Gross Profit Selling/General/Admin. Expenses, Total Research & Development Depreciation/Amortization Interest Expense(Income) – Net Operating Unusual Expense (Income) Other Operating Expenses, Total Total Operating Expense Operating Income Interest Income(Expense), Net Non-Operating Gain (Loss) on Sale of Assets Other, Net Income Before Tax Income After Tax Minority Interest Equity In Affiliates Net Income Before Extra.
Items Accounting Change Discontinued Operations Extraordinary Item Net Income Preferred Dividends Income Available to Common Excl. Extra Items Income Available to Common Incl. Extra Items Basic Weighted Average Shares Basic EPS Excluding Extraordinary Items Basic EPS Including Extraordinary Items Dilution Adjustment Diluted Weighted Average Shares Diluted EPS Excluding Extraordinary Items Diluted EPS Including Extraordinary Items Dividends per Share – Common Stock Primary Issue Gross Dividends – Common Stock www. google. com/finance? q=NYSE:IB… 1/2 9/6/2011 Financial Statements for International … Net Income after Stock Based Comp. Expense Basic EPS after Stock Based Comp. Expense Diluted EPS after Stock Based Comp.
Expense Depreciation, Supplemental Total Special Items Normalized Income Before Taxes Effect of Special Items on Income Taxes Income Taxes Ex. Impact of Special Items Normalized Income After Taxes Normalized Income Avail to Common Basic Normalized EPS Diluted Normalized EPS 11. 90 10. 27 8. 87 7. 14 Google Finance Beta available in: Hong Kong – Canada – U. S. – China – U. K. Information is provided “as is” and solely for informational purposes, not for trading purposes or advice, and may be delayed. To see all exchange delays, please see disclaimer. ©2011 Google – Google Home – Blog – Help – Privacy Policy – Terms of Service www. google. com/finance? q=NYSE:IB… 2/2 9/6/2011
Company Summary News Option chain Related companies Historical prices Financials Markets News Portfolios Stock screener Google Domestic Trends Income Statement Financial Statements for International … International Business Machines Corp. financials Watch this stock Balance Sheet Cash Flow Hide charts View: Quarterly Data | Annual Data In Millions of USD (except for per share items) Recent Quotes chg | % As of 2010-12-31 10,661. 00 990. 00 11,651. 00 28,225. 00 28,225. 00 2,450. 00 4,226. 00 1,564. 00 48,116. 00 40,289. 00 -26,193. 00 25,136. 00 3,488. 00 5,778. 00 6,288. 00 113,450. 00 7,804. 00 10,184. 00 2,761. 00 4,017. 00 15,796. 00 40,562. 00 21,846. 00 21,846. 00 28,624. 00 378. 0 126. 00 27,492. 00 90,404. 00 45,418. 00 92,532. 00 -96,161. 00 -18,743. 00 23,046. 00 113,450. 00 1,227. 99 As of 2009-12-31 12,183. 00 1,791. 00 13,974. 00 26,793. 00 26,793. 00 2,493. 00 3,946. 00 1,730. 00 48,936. 00 39,595. 00 -25,431. 00 20,190. 00 2,513. 00 5,379. 00 7,196. 00 109,022. 00 7,436. 00 9,728. 00 1,946. 00 2,222. 00 14,671. 00 36,003. 00 21,932. 00 21,932. 00 26,100. 00 470. 00 118. 00 27,864. 00 86,387. 00 41,810. 00 80,900. 00 -81,243. 00 -18,830. 00 22,637. 00 109,024. 00 1,305. 34 As of 2008-12-31 12,741. 00 166. 00 12,907. 00 27,555. 00 27,555. 00 2,700. 00 4,299. 00 1,542. 00 49,003. 00 38,444. 00 -24,140. 00 18,226. 0 2,879. 00 5,058. 00 8,871. 00 109,524. 00 7,014. 00 11,203. 00 2,295. 00 8,942. 00 12,982. 00 42,436. 00 22,689. 00 22,689. 00 33,926. 00 270. 00 119. 00 30,545. 00 96,059. 00 39,129. 00 70,353. 00 -74,171. 00 -21,845. 00 13,466. 00 109,525. 00 1,339. 10 As of 2007-12-31 14,991. 00 1,155. 00 16,146. 00 28,789. 00 28,789. 00 2,664. 00 3,891. 00 1,687. 00 53,177. 00 38,585. 00 -23,503. 00 14,285. 00 2,107. 00 5,248. 00 18,930. 00 120,432. 00 8,054. 00 10,546. 00 8,545. 00 3,690. 00 13,475. 00 44,310. 00 23,039. 00 23,039. 00 35,274. 00 1,064. 00 23,548. 00 91,961. 00 35,188. 00 60,640. 00 -63,945. 00 -3,414. 00 28,469. 00 120,430. 00 1,385. 23
Cash & Equivalents Short Term Investments Cash and Short Term Investments Accounts Receivable – Trade, Net Receivables – Other Total Receivables, Net Total Inventory Prepaid Expenses Other Current Assets, Total Total Current Assets Property/Plant/Equipment, Total – Gross Accumulated Depreciation, Total Goodwill, Net Intangibles, Net Long Term Investments Other Long Term Assets, Total Total Assets Accounts Payable Accrued Expenses Notes Payable/Short Term Debt Current Port. of LT Debt/Capital Leases Other Current liabilities, Total Total Current Liabilities Long Term Debt Capital Lease Obligations Total Long Term Debt Total Debt Deferred Income Tax Minority Interest Other Liabilities, Total Total Liabilities Redeemable Preferred Stock, Total Preferred Stock – Non Redeemable, Net Common Stock, Total Additional Paid-In Capital Retained Earnings (Accumulated Deficit) Treasury Stock – Common Other Equity, Total Total Equity Total Liabilities & Shareholders’ Equity Shares Outs – Common Stock Primary Issue Total Common Shares Outstanding IBM