FINA3104:

InvestmentAnalysisandPortfolioManagement
Lecture1 ReviewoftheSyllabus&CourseOverview,
TheInvestmentEnvironmentandFinancialMarketsintheUS&HK

DarwinChoi
September2,2015

Investments
Whatisaninvestment?
Currentcommitmentofmoney(orotherresources)
Expecttoreapfuturebenefits
Currentvs.future:
Sacrificenowandgetsomethingbacklater
Expectation:
Thefuturebenefitsareuncertain
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WhatWillYouDoWith$5,000?
Imagineonedayyouwakeupandfindthatyouare
HK$5,000richer
Whatwillyoudo?
Invest?
Consume?

ThisCourse:FINA3104
Howtoinvestwiselyinanuncertainenvironment
(Nothowtopredictthefuture!)

Fundamentalaspectsofinvestments
Assetclassesandfinancialmarkets
Moneyallocation
Determinationofthefairpriceofasecurity
Evaluatingportfoliomanagers
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OutlineofTodaysLecture
ReviewoftheSyllabus
CourseOverview
RealAssetsandFinancialAssets
FinancialMarketsandTheEconomy
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CourseInformation
Instructor:DarwinChoi(dchoi@ust.hk)
TeachingAssistant:BensonLeung(bbsleung@ust.hk)
Basicconceptsyoushouldalreadyknow:
Expectedvalue,standarddeviation,covariance,
regression,discountrate,netpresentvalue
Mandatorytutorials:T3,T4,T5
Discussandreviewconcepts,solveproblems,goover
gradedhomeworkassignments
Seesyllabusfortheschedule
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RequiredMaterial
Bodie,Kane,Marcus,andJain(BKMJ):
Investments,
AsiaGlobalEdition
SeeSyllabusforthelistof
assignedreadings
Othermaterialsareoptional

LectureSlides
Slideswillbeavailableontheclasswebsite24hours
beforeeachlecture
Officialclasswebsite:https://canvas.ust.hk/
Pleaseprintouttheslidesandbringthemtoclass
Bringslidesforbothpreviouslecture&currentlecture

Grading
Participation:*(Onlyupgrade,nodowngrade!)
Homework: 15%
Threegroupassignments,fourtosixstudents(same
registeredtutorialsection)pergroup
Wewillaskyoutoformgroupsaftertheadd/dropperiod
PeerEvaluation: 5%
Evaluateyourteammatesattheendofthesemester
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Grading(contd)
TutorialActivities: 5%
MidtermExam: 30%
October23,79pm
FinalExam: 45%

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OutlineofTodaysLecture
ReviewoftheSyllabus
CourseOverview
RealAssetsandFinancialAssets
FinancialMarketsandTheEconomy
11

CourseOutline
MainTopics
1.
2.
3.
4.
5.

TheBasics:Assetclassesandfinancialmarkets
MoneyAllocation:Allocateacrossassets/securities
AssetPricing:Determinethefairprice
MarketEfficiency&PortfolioEvaluation
Othersecurities:Bondsandderivatives

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1.TheBasics
FinancialAssets
Equity
Fixedincomesecurities
Derivatives(futuresandoptions)
FinancialMarkets
Whydoweneedfinancialmarkets?
Howdowetradesecurities?

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2.MoneyAllocation
Moneyallocationacrossdifferentassets/securities
Howtoinvestmoneywisely
Theriskreturnrelationship:
Highexpectedreturn,highrisk
Nothowtogetrichquickly thefastestwayis
gambling,whichalsoisthefastestwaytolose
Diversification to
reducerisk

Prof.Harry
Markowitz,
Nobel
Laureate
1990
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3.AssetPricing
Determinethefairpriceofasecurity
Animportantconcept:
Lawofoneprice

Prof.WilliamSharpe,
NobelLaureate1990

Prof.EugeneFama
NobelLaureate2013
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3.AssetPricing:Arbitrage
Violationoflawofoneprice=arbitrageopportunity
Whatisarbitrage?
Freelunch
Azerorisk,zeronetinvestmentstrategythatstill
generatesprofits
Howtomakearbitrageprofits?
Buylow,sellhigh!
Whatwillhappen?
Priceswillconvergeandarbitrageprofitsdisappear
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4.MarketEfficiency
Example
HSBCistradingat$60.5(ClosingpriceonAug31)
Supposeyouknowthetruepriceis$100.
Whatshouldyoudo?
BuyHSBC!
Whatwillhappen?
HSBCsharepricewillincreaseto$100
Inanefficientmarket,pricesreflectallavailable
information
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4.PortfolioEvaluation
Wewillseethatfinancialmarketsarenot100%efficient
Someinvestorscouldearnhigherreturnsbecauseof
theirinformation/skills
Buthighreturnscouldbeduetoluckaswell
Theimportantissuehereistoseparateluckandskill

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5.OtherSecurities
Fixedincomesecurities
Governmentbonds
Corporatebonds
Aportfoliooffixedincomesecurities
Derivatives
Futures
Options
Prof.Merton&Prof.Scholes,
NobelLaureates1997

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OutlineofTodaysLecture
ReviewoftheSyllabus
CourseOverview
RealAssetsandFinancialAssets
FinancialMarketsandTheEconomy
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RealAssets&FinancialAssets
RealAssets
Assetsusedtoproducegoodsandservices
Examples:theland,buildings,machines,andhuman
capital(knowledge)
FinancialAssets
Claimsonrealassets
Donotcontributedirectlytotheproductivecapacity

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OutlineofTodaysLecture
ReviewoftheSyllabus
CourseOverview
RealAssetsandFinancialAssets
FinancialMarketsandTheEconomy
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FinancialMarkets&TheEconomy
The Whole Economy
Financial Markets
funds

1. Direct Financing
(investment banks)
Ideas, no Money
Business Sector

claims

Money, no Ideas

Intermediaries

Household Sector

funds

funds

2. Indirect Financing
(e.g., banks,
claims
claims
insurers, mutual funds)
Demand for Money

Supply of Money

Government (sets fiscal policy and rules)

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FinancialMarkets
PrimaryMarket
Newissuesofassets/securities
Describedinthepreviousslide
SecondaryMarket
Alreadyexistingassets/securitiesareboughtandsold
Forexample:stockexchanges

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FunctionsofFinancialMarkets
Whydoweneedfinancialmarkets?
1. Allocationofcapital
Grownow,paylater(stocks,bonds)
2. Consumptiontiming
Savenow,spendlater(invest)
Buynow,payatadifferenttime(sellpast
investmentsorborrow)

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FunctionsofFinancialMarkets (contd)
3. Allocationofrisk
Investorsselecttheriskreturncharacteristicsthat
bestsuittheirpreferences
Securitiessoldforthebestpossibleprice
4. Separationofownershipandmanagement
Buy/sellstocksandbonds(vs.hire/firemanagers)
Firmmanagersshouldpursuestrategiesthat
enhanceshareholdervalue
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