Lahore University of Management Sciences. FINN 454-Portfolio Management Spring Semester 2015

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1 Instructor Dr. Salman Khan Room No. SDSB-408 Office Hours TBA Telephone Secretary/TA Mr. Hassan Haider (5410) TA Office Hours TBA Course URL (if any) Suraj.lums.edu.pk Lahore University of Management Sciences FINN 454-Portfolio Management Spring Semester 2015 COURSE BASICS Credit Hours 3 Lecture(s) Nbr of Lec(s) Per Week 2 Duration 1H15M Recitation/Lab (per week) Nbr of Lec(s) Per Week Duration Tutorial (per week) Nbr of Lec(s) Per Week Duration COURSE DISTRIBUTION Core Elective Open for Student Category Close for Student Category ACF-Elective COURSE DESCRIPTION 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 performance management. Emphasis will be put on development and application of techniques that should be part of the tool kit of those interested in becoming professional investors or portfolio managers. The course will utilize the newly established state of the art Trading Center at SDSB. This includes live trading at Karachi Stock Exchange as well as the Bloomberg Terminal to extract the stock, industry and economic data for analysis before taking any buy-sell decisions. The course is divided into following four modules: Module 1: Financial Markets and Asset Allocation Module 2: Portfolio Theory Module 3: Portfolio Management Strategies Module 4: Portfolio Performance Evaluation COURSE PREREQUISITE(S) FINN 200 Intermediate Finance (FINN 200) or Investments (FINN 353) or Economics of Investment and Finance (ECON363)

2 COURSE LEARNING OUTCOMES (CLO) Upon successful completion of the course, students should be able to: 1. Demonstrate understanding of the fundamental concepts, mainstream theories, and practices in portfolio management; 2. Apply relevant financial concepts, tools, and theories to critically analyze and evaluate asset allocation issues and recommend action consistent with the objective of creating value for investors; 3. Discuss and debate investment with ethical and global perspectives in making asset allocation decisions. 4. Present and defend analysis and recommendations effectively, both in oral and written forms. (General Learning Goal) 5. Demonstrate applied portfolio management skills using Bloomberg Terminal, Microsoft Excel and Trading Platform. (General Learning Goal) UNDERGRADUATE PROGRAM LEARNING GOALS & OBJECTIVES General Learning Goals & Objectives Goal 1 Effective Written and Oral Communication Objective: Students will demonstrate effective writing and oral communication skills Goal 2 Ethical Understanding and Reasoning Objective: Students will demonstrate that they are able to identify and address ethical issues in an organizational context. Goal 3 Analytical Thinking and Problem Solving Skills Objective: Students will demonstrate that they are able to identify key problems and generate viable solutions. Goal 4 Application of Information Technology Objective: Students will demonstrate that they are able to use current technologies in business and management context. Goal 5 Teamwork in Diverse and Multicultural Environments Objective: Students will demonstrate that they are able to work effectively in diverse environments. Goal 6 Understanding Organizational Ecosystems Objective: Students will demonstrate that they have an understanding of Economic, Political, Regulatory, Legal, Technological, and Social environment of organizations. Major Specific Learning Goals & Objectives Goal 7 (a) Discipline Specific Knowledge and Understanding Objective: Students will demonstrate knowledge of key business disciplines and how they interact including application to real world situations. (including subject knowledge) Goal 7 (b) Understanding the science behind the decision-making process (for MGS Majors) Objective: Students will demonstrate ability to analyze a business problem, design and apply appropriate decision-support tools, interpret results and make meaningful recommendations to support the decision-maker

3 Indicate below how the course learning objectives specifically relate to any program learning goals and objectives. PROGRAM LEARNING GOALS AND OBJECTIVES Goal 1 Effective Written and Oral Communication Goal 2 Ethical Understanding and Reasoning Goal 3 Analytical Thinking and Problem Solving Skills Goal 4 Application of Information Technology Goal 5 Teamwork in Diverse and Multicultural Environments Goal 6 Understanding Organizational Ecosystems Goal 7 (a) Discipline Specific Knowledge and Understanding (Subject Knowledge) Goal 7 (b) Understanding the science behind the decision-making process GRADING BREAKUP AND POLICY COURSE LEARNING OBJECTIVES CLO#4 CLO#3 CLO#1,2 &4 CLO#5 CLO#4 CLO#1,2,5 CLO#5 COURSE ASSESSMENT ITEM CP, Project Report, Presentation and CP (minor component) CP, Quizzes, Assignments, Cases, and Trading Terminal, Bloomberg Terminal, Assignments Project CP, Quizzes, Assignments, Project, and Project The course grade is based on the following criteria: Source % of Total Class Participation 10 Quizzes/ Assignments 15 TEAM BASED: Investment Policy Statement 10 Analyst Report 15 Portfolio Performance and Report 15 Final ination (comprehensive) 35 Total 100 Class Participation and Attendance: Students are expected to attend all classes. If you are not present at the beginning of a class or leave class during the session without instructor s prior permission, you will be considered absent for the day. You will be required to present a short analysis of impact of one or more major news that appeared in national and (or) international arena on your portfolio (1-2 mins). All the students in the class must regularly go through the major national news papers (specifically the business section). For this purpose students should read The Business Recorder, Wall Street Journal and Financial Times etc. The students will be randomly selected and any one or more can be asked to present the news. The rest of the class is expected to contribute. All the sessions will take place in Trading Center Lab at SDSB. The group project component of the course requires the students to get use to the Bloomberg Terminal for extracting data related to firm, industry and economics. They are expected to use this data to develop stock valuation and portfolio related models in excel. Finally the students will use the results and buy-sell the stock using Trading Platform. The process is recursive.

4 Quizzes: Several unannounced quizzes will be given on the assigned material during the term. No make-up quizzes will be given. Team Project: Students are required to form teams of 3 members in this course for preparing the investment policy statements (IPS), analyst reports, and portfolio performance reports. i) Team Formation If the class size at the second week of class (for the class size to stabilize) is not a multiple of 3, then at most N = Remainder of (class size/3) teams can have 4 members. The composition of a team cannot be changed once the term is formed, and each team is at its own risk that its members may later withdraw or be dropped from this class during the semester. The team formation is due on 3 rd session. Each team should send the instructor an on or before the due date with a list of team members for the official record. Students who are not in a team by the due date will form teams of 1 member, and those students will face a grade penalty on failing to meet the team formation deadline. Individual teams will be evaluated on the same basis regardless of team size, and students in the same team will receive the same grade on the team-based grade components regardless of their responsibilities within the team. The formation of team is on a first come, first served basis. ii) Investment Policy Statement: Each team is required to prepare an investment policy statement for a moderately aggressive equity fund that aims to achieve superior portfolio performance through capital gains. The statement is due on 4 th Session, at the beginning of class. iii) Portfolio Construction Each team is required to construct an equity portfolio through LUMS Trading Platform over the course of this semester, with no less than 10 stocks listed on KSE 100 index accounting for 90% or more of the portfolio value on the market close of 5 th Session. The performance of this portfolio from inception (5 th Session) to the market close of 25 th Session is subject to an evaluation and contributes to the team-based grades under Portfolio Performance and Report. You should visit the website and look into fundamentals section for information that can help you in your initial stock selection. iv) Analyst Report: Each team is required to prepare an analyst report for each stock included in its investment portfolio, and present the report to the entire class on the scheduled date. Each team should submit its analyst report to the instructor on the last day scheduled for analyst report presentation, i.e., 14 th Session, at the beginning of class. There are no specific content requirements. The data must be downloaded from Bloomberg Data Base available in trading center. The text book that we will use in this course will be of great help in developing analyst reports especially you can use the chapters in Part 3 and Part 4 of the book. Please visit the following websites for sample reports as well: The submitted report is in general subject to the following format requirements: Format 1. Margin: 1 inch 2. Font size: Font: Times New Roman 4. Line spacing: Page limits: Maximum 10 pages (excluding cover page and exhibits) 6. Executive Summary (1 pages) 7. Introduction 8. Analysis (Stock 1, Stock 2.) 9. Conclusions 10. Exhibits

5 v) Portfolio Performance and Report: Each team is required to prepare a performance evaluation report for its investment portfolio from inception to the market close of 25 th Session. Each team must submit the portfolio performance report (soft & hard copy) to the instructor before the beginning of 26 th Session. The submitted report is in general subject to the same format requirements as the analyst report. The report contents will be different and you are expected to provide the i) investment policy statement (IPS), ii) Analysis of stocks in the portfolio in line with IPS iii) comparative analysis of portfolio performance over the given period (comparison with local regional and global indices), iv) any transaction after the construction of the portfolio with adequate reasoning and its impact on the portfolio value. v) going forward. Please look at the web links given in analyst report section which also includes the portfolio performance reports. The teams are expected to meet regularly outside the class in preparing the analyst report, trading sessions as well as portfolio performance report. To minimize the free-rider problem, the instructor will provide a peer evaluation form to each student to evaluate the contribution of his/her team members in developing the reports, carrying out the trade and preparing for the presentation. Assignments: Spreadsheet-based assignments are designed to sharpen your financial analysis skills. The format and other requirements will be specified by the instructor. All assignments must be submitted on the due date. Late submissions will not be accepted. ination: The final examination will comprise a mix of MCQs and/or open-ended questions. Calculator Requirement: You will need a financial calculator capable of performing present value/future value functions. For example, Texas Instrument BA II meets these criteria. Many other brands are equally suitable for this course. EXAMINATION DETAIL Midterm Yes/No: No Combine Separate: - Duration: - Preferred Date: - Specifications: Final Yes/No: Yes Combine Separate: Combined Duration: 2 Hours Specifications:

6 COURSE SCHEDULE MODULE/ SESSION SESSION TOPIC Session 1 Investment Process Chapter 1 Session 2 Asset Allocation Decision Chapter 2 Session 3 The Investment Decision Chapter 3 Session 4 Indexes Chapter 5 Session 5 Session 6 Session 7 Session 8 Professional Asset Management (PAM) Efficient Market Hypothesis (EMH) Efficient Market Hypothesis: Testing and Implications Markowitz Portfolio Theory (MPT) Session 9 Capital Market Theory (CMT) Chapter 8 Session 10 Capital Asset Pricing Model (CAPM) Session 11 Testing CAPM Chapter 8 Session 12 Arbitrage Pricing theory (APT) Chapter 9 Session 13 Fama French Factor Models Chapter 9 Session 14 Behavioral Finance Chapter 6 Lahore University of Management Sciences SESSION OUTCOME(S) READING MATERIAL (STUDENTS WILL BE ABLE TO ) Module 1: Investment show the knowledge regarding individual investments criteria, its measurement and the various factors that cause change in investors required returns. display the asset allocation and portfolio management process as well as the differing objectives and constraints across investors. demonstrate the knowledge of different instruments trading in the domestic and global markets, their individual characteristics and relationships with other factors such as risk. define and explain the major equity and bond market indexes, there characteristics as well as how to construct and maintain it. explain the difference between various types of Chapter 24 PAM based on how they are organized, their management structure and investment style. Module 2: Investment Theory understand the EMH along with the three subhypotheses and their application in the real world. Chapter 6 learn and explain the various tests historically Chapter 6 conducted to test the EMH. They will be able to run similar tests. explain the assumptions behind MPT, derive the portfolio risk and return equations for two or Chapter 7 more assets. They will be able to show these equations graphically. explain the assumptions behind CMT, derive the capital market line (CML) and show the line graphically. conceptually develop the CAPM and show graphically the security market line (SML). They Chapter 8 will be able to identify the under and overvalued assets. relax certain assumptions related to CMT and analyze the SML behavior. They will be able to test capm using various testing methods. define APT with respect to the deficiencies as well as anomalies in CAPM. They will be able to develop APT equation and apply it. identify and explain the Fama French three and four factor model. They will learn to identify various risks factors and construct their own factor model. demonstrate the knowledge of how various psychological traits affect investors, analysts and portfolio managers.

7 Session 15 GUEST LECTURE Able to differentiate between the portfolio management theory and the practice in Pakistan financial markets. Portfolio Management Strategies differentiate various equity portfolio management Active and Passive Equity Session 16 Chapter 15 styles based on goals and explain the techniques Portfolio Strategies for constructing passive index portfolios. apply integrated, strategic, tactical and insured Session 17 Asset Allocation Strategies Chapter 15 asset allocation. differentiate various bond portfolio management Active and Passive Bond Session 18 Chapter 19 styles and strategies along with knowledge of how Portfolio Strategies to practically apply it. Session 19 Session 20 Session 21 Session 22 Core-Plus Management Strategies Performance Management Techniques and Measurements Portfolio Performance Evaluation Reporting Investment Performance Session 23 Forward and Futures Chapter 21 Session 24 Option Contract Chapter 22 Session 25 SWAP contracts Chapter23 Session 26 Portfolio Risk Management TBD Session 27 Group Presentations Session 28 Group Presentations Final ination (Comprehensive) apply mix (active and passive) bond portfolio Chapter 19 strategies. Module 4: Portfolio Performance explain what is required from a portfolio manager Chapter 25 and how to measure it. evaluate the portfolio performance using Chapter25 different measures. show how to report the portfolio investment Chapter25 performance. Module 5: Portfolio Hedging demonstrate knowledge of forward and futures contract mechanics, their use in hedging, their valuation and application. develop an option contract, explain its mechanics and its basic uses in hedging. They will be able to value an option as well. build a SWAP contract, its application in hedging risk and its valuation. TEXTBOOK(S)/SUPPLEMENTARY READINGS Textbook: -Analysis of Investment & Management of Portfolios, 10e, Frank K. Reilly, Keith C. Brown (R&B), 2012, South-Western, Cengage Learning. Reference Books: - Options, Futures, and Other Derivatives, 8e, John C. Hull. -Quantitative Equity Portfolio Management, Ludwing, Daehwan, McGraw-Hill. Additional Recommended Readings: Students are encouraged to read financial publications such as The Wall Street Journal, Financial Times; Business Recorder to stay abreast of developments related to this course.