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School of Accounting and Finance AFM472: Investments Fall 2011 Course Syllabus
Instructor: Email: Office Hours: Course web page: Alan Huang Office: HH 386E aghuang@uwaterloo.ca Phone: 888-4567 ext. 36770 Mondays and Wednesdays 4:00-5:00 or by appointment http://www.arts.uwaterloo.ca/~aghuang/AFM472 (also accessible via UWACE)

COURSE DESCRIPTION: This course examines equity investments (we do not look at bonds and options, which are covered in other finance courses). We look at the environment in which investors, investment advisors, security analysts, and portfolio managers operate. Within this framework we study the techniques used to value assets and manage portfolios. The central theme throughout this course is the risk-return relationship, which governs the way in which securities are priced in the marketplace. Topics that we will explore include asset allocation, market microstructure, portfolio performance measurement, and international diversification. LECTURES: Section 01: MW 10:00-11:20 Section 02: MW 1:00-2:20 Section 03: MW 2:30-3:50 PREREQUISITES: One of AFM 371/ACC 372, ACTSC 372, ACTSC 391/AFM 372 or ECON 372. REQUIRED TEXT: (BKMPR) Bodie, Kane, Marcus, Perrakis, and Ryan, Investments (7th Canadian Edition) McGraw-Hill Ryerson Limited, 2011 RECOMMENDED READINGS: (Haris) Trading and Exchanges: Market microstructure for practitioners, by Larry Harris, 2003, Oxford University Press A more advanced reading: (FFK) Quantitative Equity Investing: Technique and Strategies, by Fabozzi, Focardi, and Kolm, Wiley, 2010 There are a few academic papers which I recommend you to read. They will be posted along the way. In addition, to gain a good sense of investments, and more generally, of business, I recommend you to read HH1108 HH1102 HH1102

2 newspapers such as the Wall Street Journal, National Posts Financial Post, Globe and Mails Report on Business. COURSE EVALUATION: Class participation Mini computer assignments 8% 7% Based on group and individual participation in class 2-3 individual computer assignments based on Bloomberg and involving the use of advanced functions of excel and/or a statistical package of your own choice. Thursday, Oct 27 There is a poster competition arranged for the project. Out of the 30%, 15% is given to the poster competition (including displayed poster, presentation, and Q&Awithin a panel), and 15% is given to the final project report. Examination scheduled by the Registrars office

Mid-term exam Portfolio or stock analysis project

25% 30%

Final exam

30%

CLASS PROJECT (30%): You are required to finish a project with a group of your own choice. Groups must be formed from members of the same class section. You may discuss the group assignment with your colleagues in the course. However, the research, analysis, and writing of each report must be done only by the members of the group. You can choose either the Portfolio Project or the Stock Analysis Project, as outlined below. Details of each project will be posted on the course website. Due to resources limit, you cannot participate in both projects, and group size must be five students (unless there are not enough students for roundup). PORTFOLIO PROJECT: For this project, you will manage a hypothetical portfolio over a period of eight weeks. It may be desirable for you to divide the project into two phases. You can use the first phase to become comfortable obtaining market quotes, applying a variety of trading procedures, recognizing the importance of transaction costs, and learning the dynamics of portfolio management. You can use the second phase to implement a potential trading strategy. The virtual trading platform is Rotman Portfolio Manager (http://rpm.rotman.utoronto.ca/). There is a fee (currently $35 for each account for the semester) for this trading game, and you are responsible for paying the fee. STOCK ANALYSIS PROJECT: The goal of this project is to have you analyze an assigned stock and provide a research report and your recommendation. Your report should include a company overview, an industry overview and competitor analysis, future potential and trends, industry forecast and company forecast, financial analysis and valuation.

EVALUATION OF THE PROJECT The evaluation of the project consists of a poster competition (15%) and a final project report (15%). The poster competition for the project is judged by faculty members and/or industrial experts. Details will be announced in the course website. To ensure equity across the two projects, the final mark of the project will be adjusted so that both projects will have the same mean mark. All group members must contribute their fair share to each assignment. Each group report is assigned a mark. Group members can choose one of the following to receive their individual mark: (1) each group member shares the same group mark; or (2) each group member receives a mark that is weighted by peer evaluation (the form is attached at the end of the syllabus). If you choose the former, you dont need to hand in your peer evaluation. If you choose the latter, the following applies: (i) Two or more group members need to let me know of this choice before or on the report due date; I will then enforce it for all group members; (ii) Once I receive such a request I will send a notifying email to the students involved using the email addresses on Quest; (iii) The peer evaluation form is then due within 96 hours of the project report due time; and (iv) Failure to turn in the peer evaluation form on time will result in the student automatically receiving 50% of the project mark. Late submission of the report will be assessed a penalty of 10% of the grade received per day after the due date. CLASS PARTICIPATION (8%): Class participation is essential to the success of this course. You should form a group in the first week, and seating will be assigned from the second week on. Each class I will randomly pick groups to participate and engage in Q&As. This component of the mark is in principle 70% based on the group performance in class and 30% based on individual performance in class. I reserve the discretion on how class participation mark is assigned; for example, students actively participating can still earn high marks despite a possible poor performance of their groups; and if a student rarely appears in class, s/he should not expect a good participation mark.

4 TENTATIVE CLASS SCHEDULE: Date Sept. 12 14 19 21 26 28 Oct. 3 5 12 17 24 26 Topics Readings

Introduction Financial markets and instruments; trading BKMPR Ch. 2, 3 Market microstructure Harris Ch. 6 Return distribution BKMPR Ch. 4 The Modern Portfolio Theory (1) BKMPR Ch. 5 The Modern Portfolio Theory (2) BKMPR Ch. 6 CAPM/APT BKMPR Ch. 7, 8 Testing CAPM/APT BKMPR Ch. 8, 11 Testing the Efficiency Market Hypotheses BKMPR Ch. 9 Behavioural Finance BKMPR Ch. 10 Technical analysis and charting BKMPR Ch. 10 Q&A for midterm, no-class Oct. 27, Thursday, Midterm exam Asset Pricing Anomalies Trading strategies and Evaluation Financial statement analysis Security analysis (1) Security analysis (2) Mutual funds and the institutional environment Active portfolio management (1) Poster competition for the project in lieu of the Nov. 23 class. Tentative time is from 16 pm Active portfolio management (2) Active portfolio management (3) Course wrap-up BKMPR Ch. 11; Fama and French (2008); FFK Ch. 11 BKMPR Ch. 16 BKMPR Ch. 15 BKMPR Ch. 15 BKMPR Ch. 22 BKMPR Ch. 20

30 Nov. 2 7 9 14 16 21 Nov. 25 (Friday, tentative) 28 30 Dec. 5

BKMPR Ch. 21 BKMPR Ch. 21; Sharpe (1998)

Note: The poster competition time is tentative. It will be finalized before Oct. 15.

5 OTHER NOTES: 1. LAPTOP POLICY AND SLIDES: Use of laptop is not encouraged in class; as a result, I do not necessarily design the slides in a way thats computer-annotation friendly. Slides/notes will be posted at least two days before the class; it is your responsibility to frequently check the course website and print out the slides/notes. 2. EXAMS: All examinations will be closed book examinations. A formula sheet will be provided. You will be allowed to bring a financial calculator to the midterm and to the final. The final examination will be cumulative but emphasizes the post-midterm materials. The sole basis for being excused from the midterm and final examinations is a medical certificate stating that you were unable to write the exam. The course evaluation for a missed midterm will be made up on the final exam, provided there is a valid medical certificate. Requests for re-grading a mid-term exam must be made within one week after the exam has been returned and must be in writing. To have your exam considered for re-grading, the exam must be written in ink. Note that the instructor reserves the right to re-grade the entire exam and raise or lower the grades originally reassigned. Occasionally, for various reasons, a students performance on an examination does not reflect their knowledge. This will be taken into account using the following procedure. For the midterm and final exams, a standardized, normally distributed Z-score will be calculated for each student for each exam (i.e., z = (mark class mean)/class std.). If the difference between the two Z-scores is 1 or more, then more weight, up to 30% of the course mark, will be given to the better examination. Finally, the final mark of the course will be bell-curved. 3. I will periodically hand out problem sets that include questions from the text, as well as others. These will not be graded but your success in the exams will depend on your ability to do questions similar to these. The solutions for the assigned problems will be made available online. 4. An open discussion forum will be set up under UWACE under the tab Discussion Forum for course related questions and discussion. This forum will be monitored by the course instructor and TAs, who will respond to queries. 5. ACCOMMODATIONS FOR MISSED ASSESSMENTS: Students are expected to complete all course assessments and write their examinations as regularly scheduled; however, there may be circumstances where accommodating a missed assessment is approved. Accommodation is not automatic upon the presentation of documentation. Instructors will use the documentation along with all information available to them, when determining whether accommodation is warranted. Please note, there will not be deferred mid-terms or final exams for this course. However, if a student requires a final course mark for immediate graduation purposes, a term paper or a make-up exam can be arranged, with the understanding that the instructors expectation is not lower (usually

6 higher) than the regularly scheduled final exam and that the materials will fall within a more general setting of the course. Based on an approved absence, the weighting of the final exam will be adjusted to make up for an excused absence from a mid-term or any other component of the course. If you are excused from the final exam, due to an approved absence, you will be required to write the exam, the next time the course is offered. At the end of the current term you will receive an INC course grade. If the course is not offered in the immediately subsequent term, at the end of that subsequent term the course grade will automatically change to a FTC and you will be assigned a grade of 32%. This is a systems issue and it is your responsibility to contact Carol Treitz at the end of that term and request that the FTC be replaced with an INC. You will need to do this for each subsequent term, until the course is offered and you are able to write the final exam. When you have written the final exam, a grade revision will be submitted, based on the results of the final exam written and your other course work. Failure to write the deferred exam the next time the course is offered will result in a course grade based on the elements of the course you completed. Documentation requirements supporting requests for accommodation UWs policy regarding documentation that supports requests for accommodation due to illness can be found at http://www.registrar.uwaterloo.ca/students/accom_illness.html . To support requests for accommodation due to illness, students should seek medical treatment and provide supporting documentation to the SAF Undergraduate Coordinator, Carol Treitz at HH 3156 (if the Undergraduate Coordinator is not available the documentation should be provided to the receptionist in the Program Office), within 48 hours of the missed assessment. A completed University of Waterloo Verification of Illness Form should be provided to support requests for accommodation due to illness. This form is normally the only acceptable medical documentation and is available on line at www.healthservices.uwaterloo.ca/Health_Services/verification.html. For other approved accommodations, such as death of a family member, appropriate documentation should be provided within a reasonable time period. All students who are requesting accommodation for a missed exam (term or final) must also complete and submit the SAF Request for Exam Accommodation form, in addition to the supporting documentation noted above. This form can be obtained from Carol Treitz, the Schools Undergraduate Coordinator. All forms must include student name, ID number, course number of missed examination, and instructors name. The SAF Undergraduate Coordinator will complete the bottom section of the SAF Request for Exam Accommodation form, and provide a copy to the instructor. The Coordinator will maintain a record of missed exams by student (name, ID #), so that unusual situations can be identified and addressed. 6. UNIVERSITY POLICIES:
Academic Integrity: In order to maintain a culture of academic integrity, members of the University of Waterloo community are expected to promote honesty, trust, fairness, respect, and responsibility. Check www.uwaterloo.ca/academicintegrity/ for more information.

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Grievance A student who believes that a decision affecting some aspect of his/her university life has been unfair or unreasonable may have grounds for initiating a grievance. Read Policy70, Student Petitions and Grievances, Section 4, www.adm.uwaterloo.ca/infosec/Policies/policy70.htm. When in doubt please be certain to contact the departments administrative assistant who will provide further assistance. Discipline A student is expected to know what constitutes academic integrity [check www.uwaterloo.ca/academicintegrity/] to avoid committing an academic offence, and to take responsibility for his/her actions. A student who is unsure whether an action constitutes an offence, or who needs help in learning how to avoid offences (e.g., plagiarism, cheating) or about rules for group work/collaboration should seek guidance from the course instructor, academic advisor, or the undergraduate Associate Dean. For information on categories of offences and types of penalties, students should refer to Policy 71, Student Discipline, www.adm.uwaterloo.ca/infosec/Policies/policy71.htm. For typical penalties check Guidelines for the Assessment of Penalties, www.adm.uwaterloo.ca/infosec/guidelines/penaltyguidelines.htm. Appeals A decision made or penalty imposed under Policy 70, Student Petitions and Grievances, (other than a petition) or Policy 71, Student Discipline, may be appealed if there is a ground. A student who believes he/she has a ground for an appeal should refer to Policy 72, Student Appeals, www.adm.uwaterloo.ca/infosec/Policies/policy72.htm. Avoiding Academic Offences The Faculty of Arts has prepared a website dealing with ways to avoid academic offences. http://arts.uwaterloo.ca/arts/ugrad/academic_responsibility.html Note for Students with Disabilities: The Office for Persons with Disabilities (OPD), located in Needles Hall, Room 1132, collaborates with all academic departments to arrange appropriate accommodations for students with disabilities without compromising the academic integrity of the curriculum. If you require academic accommodations to lessen the impact of your disability, please register with the OPD at the beginning of each academic term. They will assist you with making appropriate accommodations for completing the course.

AFM 472 Peer Evaluation Form

You can choose to confidentially evaluate the contribution of the other members of your group. In this case, your case mark will be the multiplication of your peer mark and the case mark. However, the maximum mark you can earn is the full mark for the project. Guidelines: 1) Do not evaluate yourself. 2) These evaluations are confidential and will not be shown to other members of your group. 3) The benchmark is that when all group members have shared the work equally, a 100 % level is indicated for each group member. The range of this score cannot fall below 50% and exceed 150%, and the total mark assigned should sum to number of people being evaluated times 100%. 4) If you assign a score below 70% to a group member, you should briefly explain why. Your name: ________________________ Group #: _________________________ Project: [ ] Portfolio [ ] Stock analysis Signature: ___________________ Student number: ___________________

Group Member Names (PRINT) __________________________________ __________________________________ __________________________________ __________________________________

Relative Weights (as a % between 50% - 150%) _____________________________________ _____________________________________ _____________________________________ _____________________________________ ______________________

TOTAL (must be 100% * number of persons being evaluated)

(Put your comments, if any, on the blank space of this page or the back of this form).

9 Peer Evaluation Examples Example 1: Everyone in the group receives the same peer mark. In this case, all group members receive the same mark, and no peer evaluation is necessary. Example 2: Some differences in peer mark across group members exist, so that some group members earn higher marks and some lower marks: Group mark: 80% Group member A B C D E Total Peer mark 80% 120% 100% 100% 100% 500% Final project mark = min (Group mark * Peer mark, 100%) 64% 96% 80% 80% 80% 400%

Example 3: Differences in peer mark across group members exist so that some group members may earn the maximum mark: Group mark: 80% Group member A B C D E Total Peer mark 60% 140% 100% 100% 100% 500% Final project mark = min (Group mark * Peer mark, 100%) 48% 100% 80% 80% 80% 388%