Financial Investment and Decision Making

NUCB, Summer 2015

SyllabusSupplements
Please consult the official syllabusdistributed earlier through the university officefor
the overview of the course. This document contains (i) other course policies that didnt fit
for the official syllabus, (ii) detailed and updated outline of the course.
Office Hour
There is no set office hour, but I will be happy to meet students individually or in a group
outside the classroom at a mutually agreeable time and location. Send me an e-mail to
arrange an appointment (dkim@konkuk.ac.kr), or just talk to me after the class.
Textbook
As stated in the official syllabus, purchasing a textbook is not required for the course.
Reference materials are listed in the official syllabus. Additional reference will be
discussed in class. Also, to help students to review the materials, I will provide review
questions in every class meeting, and, occasionally, notes on selected topics will be
distributed. Most importantly, I expect the students to carefully take notes during each
class meeting. See below.
Use of Slides
It is perhaps so obvious that students (graduate students as well as undergraduate
students) manage to forget from time to time: Taking notes during each class is
absolutely necessary for successful learning outcome. The slides include only keywords,
and cannot replace carefully written notes. To encourage students to take notes
diligently, I will minimize the use of the projector/slides during the class. Needless to say,
students are expected to bring a pen and a notebook to the classroom.
Mobile Phone, Tablet, Laptop, etc.
The use of a mobile phone, a laptop, or any other electronic and communication
equipment is not allowed during the class. This is to minimize the distraction to other
students. Violators may be asked to leave the classroom.
Course OutlineUpdated
Week 1 (June 3)
Lecture #1: Mean Variance Algebra and Its Applications
- Review of Basic Concepts
- Overview
- Assumptions
- The Algebra
- Riskfree Asset
- Applications
Excel exercise #1: Individual stock returns
- Calculate daily returns out of daily adjusted prices
- Calculate mean and std of daily returns
- Annualize mean and std of daily returns
Excel exercise #2: Portfolio returns
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- Calculate equal-weighted buy-and-hold portfolio returns

- Calculate mean and std of portfolio returns
- Calculate value-weighted buy-and-hold portfolio returns
To-do for the team project
- determine investment universe, time period
- collect data
- do exercise #1 and #2 with your own data
Week 2 (June 10)
Lecture #2: The Standard Asset Pricing Models
- Capital Asset Pricing Model: Summary
- Capital Asset Pricing Model: Details
- Review of Basic Statistics
- Capital Asset Pricing Model: Evidence
- Three Factor Model of Fama and French
- What Else is Out There?
Excel exercise #3: Zero-investment portfolio returns
- Rank stocks by a characteristics variable
- Construct characteristics-sorted portfolios
- Calculate equal-weighted buy-and-hold returns of characteristics sorted portfolios
- Calculate value-weighted buy-and-hold returns of characteristics sorted portfolios
- Calculate the returns of the zero-investment portfolio
To-do for the team project
- Decide the variable of interest
- Collect further data if necessary
- Do exercise #3 with your own data
Week 3 (June 17)
Lecture #3. Popular Equity Strategies
- Beta vs. characteristics (or risk vs. behavioral bias)
- Alpha model vs. beta model
- More on size effect
- More on value effect
- Momentum strategy
- Other notable ideas from anomaly literature
Excel exercise #4: Performance plot
- Calculate the return index out of portfolio returns
- Plot return indexes of portfolios
Excel exercise #5: Frequency distribution plot
- Plot the frequency distribution of portfolio returns
- Determine min, max, and quantiles of portfolio returns
To-do for the team project
- Do exercise #4 and #5 with your own data
Week 4 (June 24)
Lecture #4. Popular Investment Strategies in Foreign Exchange Market
- Basics of foreign exchange markets
- Carry trade
- Momentum investing in FX
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- Factor models for FX

Excel exercise #6: TS mean test
- Test whether the mean is different from zero for different portfolios
- [Advanced] The monotonicity test
Excel exercise #7: TS regression
- Determine alpha and beta of individual stocks, and of portfolios
- Test whether alpha is zero
- Determine alpha and beta of individual stocks, and of portfolios, using the three factor
model
- Test whether alpha is zero
To-do for the team project
- Do exercise #6 and #7 with your own data
Week 5 (July 1)
Lecture #5. Popular Investment Strategies in Commodity Futures Market
- Basics of commodity futures markets
- Normal backwardation
- Momentum investing with commodity futures
- Factor models for commodity futures
Excel Exercise #8: CS plot
- Plot mean against characteristics of individual stocks
- Plot alpha against characteristics of individual stocks
- Plot 3-factor alpha against characteristics of individual stocks
Excel Exercise #9: CR regression
- Regress mean against characteristics of individual stocks
- Regress alpha against characteristics of individual stocks
- Regress 3-factor alpha against characteristics of individual stocks
To-do for the team project
- Do exercise #8 and #9 with your own data
- Finalize the report
Week 6 (July 8): Final Exam
Week 7 (July 15): Student presentation

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