Lahore University of Management Sciences

FINN 454 Portfolio Management

Spring 2013
Instructor Room No. Office Hours Email Telephone Secretary/TA TA Office Hours Course URL (if any) Dr. Salman Khan 4-08 Salman.khan@hotmail.com 35608220 Mr. Tahir Abbas

Course Basics Credit Hours Lecture(s) Recitation/Lab (per week) Tutorial (per week) Course Distribution Core Elective Open for Student Category Close for Student Category

4 Nbr of Lec(s) Per Week Nbr of Lec(s) Per Week Nbr of Lec(s) Per Week

Duration Duration Duration

1Hour50Min

Yes

COURSE DESCRIPTION The course is designed to study theory and empirical evidence relevant for portfolio management. An emphasis is placed on understanding, how an investment professional would allocate funds in an hypothetical portfolio. The course is rich in theory and modeling techniques. Major topics include estimation of capital market parameters, trade-off between risk and return, optimal portfolio selection, equilibrium asset pricing models, and portfolio management. Emphasis will be put on development of techniques that should be part of the tool kit of those interested in becoming professional investors and/or researchers in finance. COURSE PREREQUISITE(S) Principles of Finance Intermediate Finance

COURSE OBJECTIVES The objective of the course is to study theory and empirical evidence relevant for portfolio management. An emphasis is placed on understanding, How an investment professional would allocate funds in an hypothetical portfolio. Major topics include estimation of capital market parameters, trade-off between risk and return, optimal portfolio selection, equilibrium asset pricing models, and portfolio management. Emphasis will be put on development of techniques that should be part of the tool kit of those interested in becoming professional investors and/or researchers in finance. The course is rigorous in nature and challenging and will require hard work.

Learning Outcomes

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Upon successful completion of the course, the student will have a solid foundation in modern portfolio theory and good understanding of portfolio management in practice. Grading Breakup and Policy Quiz and Assignment(s): 15% Attendance: 10% Midterm Examination: Group Project: 25% Simulation: 20% Final Examination: 30%

Examination Detail Yes/No: No Combine Separate: Duration: Preferred Date: Exam Specifications:

Midterm Exam

Final Exam

Yes/No: Yes Combine Separate: Combine Duration: 2 Hours Exam Specifications: MCQs and/or Long questions

COURSE OVERVIEW Week/ Session/ Topics Module Week 1 Introduction to the course -The Investment Settings and the Asset Allocation Decision

Recommended Readings Chap I & 2

Objectives/ Application

The course outline and evaluation tools will be briefly discussed. We are going to start the course with some of the basic concepts on investments such as return calculations, markets etc. -What is asset allocation, portfolio management process, investment planning, policy statements, the objectives and constraints in a policy statement? -How and why do investment goals change over a persons lifetime and circumstances? -Why do asset allocation strategies differ across national boundaries?

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Week 2 Organization and Functioning of Securities Markets Chap 4 & 5

What is the purpose and function of a market? This includes understanding, the characteristics that determine the quality of a market, the differences between capital markets, the nature and linkages of-the national, regional exchanges and OTC markets, the alternative marketmaking arrangements. The understanding goes a little deeper when we will discuss the major types of orders available to investors and market maker, the major functions of the specialist. -What are the significant changes in markets around the world during the past 15 years? -What are the major changes in world capital markets expected over the next decade? The uses of some of the major security market indicator series (indexes), there characteristics, historical versus current data.

Week 3

Efficient Capital Markets Theory

Chap 6

In this week(s) we discuss the questions such as -What does it mean to say that capital markets are efficient? -Why should capital markets be efficient? -What factors contribute to an efficient market? -What is behavioral finance and how does it relate to the EMH? -What are some of the major findings of behavioral finance and what are the implications of these findings for the EMH? -What is the evidence related to the EMH for markets in foreign countries? In this week(s) start discussion from risk aversion, and what evidence indicates that investors are generally risk averse all the way leading to Markowitz portfolio theory. -What is the risk-returnefficient frontier of risky assets? -Is it reasonable for alternative investors to select different portfolios from the portfolios on the efficient frontier? -What determines which portfolio on the efficient frontier is selected by an individual investor? Overall these week(s)s discusses all the basic and advanced concepts related to CAPM, Capital market line, Security Market Line, assets Characteristic Line and empirical results from tests that examine the stability of beta.

Week 4

An Introduction to Portfolio Management

Chap 7

Week 5 &6

An introduction to asset pricing models

Chap 8

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Week 7 Multifactor models of risk and return Chap 9

In these week(s) the focus will be on understanding the deficiencies of the capital asset pricing model (CAPM) as an explanation of the relationship between risk and expected asset returns and the arbitrage pricing theory (APT) and what are its similarities and differences relative to the CAPM. We will also study the multifactor models and how are they related to the APT. In this week(s) we will discover the expected and the empirical relationships between economic activity and security markets. We will also study the questions such as: -What is the macroeconomic approach to estimating future market returns? -What are the major macroeconomic techniques used to project the securities market? - How do the basic valuation variables differ among countries? -What factors should be considered when analyzing the outlook for a foreign economy and its stock and bond market? -What is the asset allocation procedure for a global portfolio? In this week(s) our focus will be on industry analysis specifically understanding -the difference between the returns for alternative industries during specific time periods. -the consistency in the returns for individual industries over time. -the performance for firms within an industry consistent? What is the implication of these results for industry and company analysis? - Is there a difference in risk among industries? -What happens to risk for individual industries over time? What does this imply for industry analysis? -What are the stages in the industrial life cycle and how does the stage in an industrys life cycle affect the sales estimate for an industry? - What are the five basic competitive forces that determine the intensity of competition in an industry and, thus, its rate of return on capital?
And a lot more

Week 8

Macroeconomic and Market Analysis: The Global Asset Allocation Decision

Chap 12

Week 9

Industry Analysis

Chap 14

Week 10

Company Analysis and Stock Valuation

Chap 15

In this week(s) we will discuss the company analysis in comparison to the stock valuation that you have already studied at intermediate finance and principles of finance level.

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Week 11 Technical Analysis Chap 16

Week 12

Equity Portfolio Management Strategies

Chap 17

Week 13

The Analysis and Valuation of Bonds

Chap 19

In this week(s) we will briefly touch the difference between the technical analysis and the fundamental analysis, the underlying assumptions of technical analysis, the major advantages of technical analysis compared to fundamental analysis, major challenges and rules and some tools of technical analysis. Here we will develop the understanding of two generic equity portfolio management styles, hree techniques for constructing a passive index portfolio, learn the difference between the goal of a passive equity portfolio manager and an active manager, and various portfolio management techniques. The focus will be on bond valuation techniques, duration, convexity and yield curve analysis

Week 13 Week 14

Bond Portfolio Management Strategies Professional Asset Management

Chap 20

Chap 25 Week 14 Evaluation of Portfolio Performance Chap 26 Portfolio Risk Management TBD

In this week(s) we focus on major bond portfolio strategies. Here we will discuss most important aspects of professional asset management such as structure, compensation, performance and ethics. In this week(s) we will discuss number of portfolio performance measures, differences among those measures from investor as well as manager point of view. We will briefly look at different contemporary portfolio risk management strategies.

Textbook(s)/Supplementary Readings

Investment Analysis and Portfolio Management, 7e, Frank K. Reilly, Bernard J. Hank, South-Western College.