University of Texas at Dallas

School of Management

Finance 6310, Section 501 Professor Yexiao Xu

Investment Management Fall 2005

Course Syllabus

Course Objectives:

In the recent years, we have experienced wide ride in the stock markets not only at home but
abroad as well. Such volatile markets provide both challenges and opportunities for investors.
You may wonder what professional investors are doing in managing their investments. This
course is intended to provide a general overview of capital markets, financial instruments, and
investment process. We will emphasize the role of modern financial theory in portfolio
management. Therefore, we will cover a wide range of topics such as, trading, valuation,
diversification and asset allocation, modern asset pricing models, performance measurement,
active portfolio management, financial derivatives, and fixed income securities. By the end of
the course, I hope you will be able to independently analyze security markets, understand the
available evidence and use it to make investment decisions. The course will also improve the
ability to read the business press with a critical approach.

Because of the risky nature of firms’ investment, most financial decisions are made under
uncertainty about firms’ future cash flows. Therefore, statistical knowledge is required, especially
knowledge on probability distributions, mean, variance, covariance, and regression analysis. You
must take STAT 5311 first. It is also very important to review your calculus textbook, especially on
the topics of derivative and optimization. In addition, financial Management (Fin6301) is also a
prerequisite.

Course Requirements:
There will be one lecture (Monday 7:00-9:45PM) per week. You should make every effort to attend
each lecture. In addition, I will hold my office hours on Monday and Tuesday from 5:00PM to
6:30PM, or by appointment. My office room number is SM3.812, which is on the third floor of the
new School of Management building. I can be reached by phone at (972)883-6703 or email at
yexiaoxu@utdallas.edu. If you are interested in my research, my current working papers are
available for downloading at http://www.utdallas.edu/~yexiaoxu. You can also download my lecture
notes and problem sets from my website. Your performance will be judged according to the
following scale:

Problem Sets 30%

Midterm Examination 30%
Final Examination 40%

You may also seeking help from my TA—Mrs. Lin Zou. Her office hours are on Thursday from
4:15PM to 7:15PM. If you need additional help, please call her at (972)883-4884, or email her at
lxz019800@utdallas.edu to set up an appointment. Her office is located in SM3.608.
Homework:
We will have about five problem sets and one spreadsheet exercise distributed during the semester.
All homework assignments should be submitted to me prior to class. You need to show your
work in order to get the full credit. No late homework will be accepted. Solutions to the problem
sets will be posted on my website after the due date. Please do not fax your homework to me. In
the event that you are unable to attend a particular class, you may either email your homework to
my TA with full solutions or have someone else to turn it in.

Group discussion of homework problems is encouraged but each student must produce an
individual solution to each problem. By contrast, group construction of solutions to spreadsheet
exercises is prohibited. Each student is required to build a unique spreadsheet from the ground
up for each assigned spreadsheet exercise.

Exams:
There will be one in-class midterm and a final exam. In order to be fair to everyone, exams must be
taken on the specified dates. For those who can not take the midterm on the date of exam due to
business travel, you should take it before leaving the town. No additional credit or make up final
will be granted. The midterm and final exams will consist primarily of conceptual and problem
solving questions. All exams will be closed book and closed notes. No cell phone, PDA,
financial or graphing calculator, and other electronic devices, except a SIMPLE (non-
programmable) scientific calculator, are allowed.

In addition to fill out the survey sheet at the end of this syllabus, you are required to have a WebCT
account. Your grades will be posted on webct at http://webct.utdallas.edu

Readings:
The required textbook is Bodie, Kane and Marcus, Investments, 6th edition. I also strongly
recommend Random Walk Down Wall Street by Burton G. Malkiel. This is an entertaining book to
understand the basics of financial markets. It is also an excellent guide for your personal financial
planning. Finance is an emerging filed of economics. One will never truly understand it without
constantly expose to the real world. Therefore, it is crucial to read Wall Street Journal or financial
section of major newspapers such as the New York Times, and watch financial programs.

Assignments and Course Outline:

Oct. 22: Introduction and statistics review
Lecture 1 Financial assets and system
Investment process
Statistics and Math review
Bodie, Kane and Marcus, Chapters 1, 2.1-2.3, 2.5, p1007-1011, and p1031-1035

Oct. 29: Security Market

Lecture 2 Major types of securities
Trading mechanism
Margin purchase
Short sales
Bodie, Kane and Marcus, Chapters 2.1-2.3, 2.5, and 3
Sep. 05: Labor Day—no class

Sep. 12: Valuing Securities Note: Problem Set 1 Due in Class

Lecture 3 Investment companies
Return and Index calculation
Dividend Discount Models
Price and Earning Ratio

Bodie, Kane and Marcus, Chapters 4, 5.4 24.1, 2.4,18.1-18.4, and 18.6

Gary Gastineau. “Exchange-Traded Funds: An Introduction.” Journal of

Portfolio Management, Spring 2001, 88-96.

Jeremy J. Siegel. “The Nifty Fifty Revisited: Do Growth Stocks Ultimately

Justify Their Price?” Journal of Portfolio Management, Summer 1995, 8-20.

Arthur B. Laffer and Marc Miles. “Five Factors Distorting P/E Comparisons
Over Time.” Laffer Associates Supply-Side Investment Research, March, 2003

Sep. 19: Portfolio Theory

Lecture 4 Measuring risk and return
Characterizing portfolio returns
Diversification
Efficient frontier

Bodie, Kane and Marcus, Chapters 5, 6.2, 7.2, and 8.2

Roger Ibbotson and P. Chen. “Long-Run Stock Returns: Participating in the

Real Economy.” The Financial Analysts Journal, January/February 2003, 88-
98.

Roger Ibbotson and Paul Kaplan. “Does Asset Allocation Policy Explain 40, 90,
or 100 Percent of Performance?” Financial Analysts Journal,
January/February 2000, 26-33.

Sep. 26: Portfolio Theory (continue) Note: Problem Set 2 Due in Class
Lecture 5 Diversification again
Classification of risks
Efficient frontier with risk-free assets
Shape ratio and optimality condition
Estimation of input variables

Bodie, Kane and Marcus, Chapters 7.1, 7.3, and 8.3-8.6

Mark Kritzman. “What Practitioners Need to Know…about Time Diversification.”

The Financial Analyst's Journal, January/February 1994, 14-18.
Oct. 03: The Capital Asset Pricing Model
Lecture 6 Markets in Equilibrium
The Capital Asset Pricing Model (CAPM)
Estimating the CAPM
Testing the CAPM

Bodie, Kane and Marcus, Chapters 9.1-9.2, and 13.1

Peter L. Bernstein. “If Beta Is Dead, Where Is the Corpse.” Forbes (July 20,
1992), 343. (to be distributed)

N. Jegadeesh and S. Titman. “Returns to Buying Winners and Selling

Losers.” Journal of Finance 48, March 1993, 65-92.

Burton G. Malkiel and Yexiao Xu. “Risk and Return Revisited.” Journal of
Portfolio Management, Spring 1997, 9-14.

Oct. 10: The Arbitrage Pricing Theory and Multifactor Models

Lecture 7 Index model Note: Problem Set 3 Due in Class
Multifactor Models
The Arbitrage Pricing Theory (APT)
CAPM v.s. APT

Bodie, Kane and Marcus, Chapters 11, and 13.2-13.3

Larry J. Merville, Suzanne Hayes-Yelken, and Yexiao Xu. “Identifying the

Factor Structure of Equity Returns.” Journal of Portfolio Management,
Summer 2001, 51-61.

Oct. 17: Midterm exam during the lecture time

Oct. 24: Market Efficiency Note: Spreadsheet project Due in Class

Lecture 8 Random walk hypothesis
Three forms of market efficiency
Emplications of EMH
Evidence on market efficiency

Bodie, Kane and Marcus, Chapter 12

B. Barber, R. Lehavy, M. McNichols, and B. Trueman. “Reassessing the

Returns to Analysts' Stock Recommendations.” Financial Analysts
Journal, March/April 2003, 88-96.
Robert Tumarkin and Robert F. Whitelaw. “News or Noise? Internet
Postings and Stock Prices” Financial Analysts Journal, May 2001, 41-51
Kenneth L. Fisher and Meir Statman. “Investor Sentiment and Stock
Returns.” Financial Analysts Journal, March/April 2000, 16-23.
Oct. 31: Portfolio Management
Lecture 9 Market timing
The Treynor-Black Model
Active portfolio management
Performance Measurement

Bodie, Kane and Marcus, Chapters 27 and 24

Richard C. Grinold. “Real Alphas Don't Get Eaten.” The Journal of Portfolio
Management, Summer 1994, 9-16.

Stephen L. Nesbitt. “Buy High, Sell Low: Timing Errors in Mutual Fund
Allocations.” Journal of Portfolio Management, Fall 1995, 57-60.

William F. Sharpe. “Asset Allocation: Management Style and Performance

Measurement.” Journal of Portfolio Management, Winter 1992, 7-19.

Nov. 07: Options Note: Problem Set 4 Due in Class

Lecture 10 Introduction to options
Put and call parity
Binomial option pricing
Black-Scholes option valuation

Bodie, Kane and Marcus, Chapters 20.1-20.5 and 21.1-21.5

Nov. 14: Fixed income security

Lecture 11 Bond yields and pricing
Default premiums
Term structure of interest rates

Bodie, Kane and Marcus, Chapters 14 and 15

Ed Altman and J. Bencivenga. “A Yield Premium Model for the High-Yield

Debt Market.” The Financial Analyst’ Journal, September-October 1995,
49-56.

Nov. 21: Managing Interest Rate Risk Note: Problem Set 5 Due in Class
Lecture 12 Interest rate sensitivity
Duration
Interest rate swaps

Bodie, Kane and Marcus, Chapter 16

Nov. 28: Final examination

 University of Texas at Dallas
School of Management
Fin 6310 Prof. Yexiao Xu
Section 501 Fall 2005

About Yourself

In order for me to better organize the course, and to adapt the materials to your background,
would you please tell me more about yourself?
Your Name ___________________________
Your Phone Number ____________________
Your Email Address ____________________
(Please send me an email with your full name, so that I can compile a mailing list)
Your Job _______________________________________________________________________

Your Background
Finance Class _____________________________________________________________
Economics Class __________________________________________________________
Accounting Courses ________________________________________________________
Statistics and Math Courses __________________________________________________
Other related Courses _______________________________________________________
Survey:
Do you read sports section of a newspaper?
Never _______ Occasionally _______ Often _________
Do you read financial newspapers, such as the Wall Street Journal, the Financial Times, the
financial section of the New York Times, etc.?
Never _______ Occasionally _______ Often _________
Do you read financial magazines, such as Money Magazine, Business Week, Forbs, etc.?
Never _______ Occasionally _______ Often _________
Do you watch financial programs, such as Nightly Business News, CNBC, Wall Street Week
with Louis Rukeyser, etc.?
Never _______ Occasionally _______ Often _________

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