Financial Market Theory — Fall, 2018

Theory of Financial Markets

Monroe Hall: Room 262 

Email: profetb@virginia.edu; Phone: 434 924-4054

Office Hours: Tues/Thurs 11-12 AM in Monroe Hall, Room 262  

Class will meet on Tuesdays and Thursdays from 9:30 AM until 10:45 AM in Maury Hall 209.  

Main Topics Covered In This Course Are:

1. Fixed Income Markets
2. Modern Portfolio Theory
3  Leverage, Corporate Balance Sheets, Buyouts
4. Alternative Assets

 Schedule:

Our first class meeting of the Fall Semester will be on Tuesday, August 28th, 2018. The last class of the semester will be held on Thursday, December 6th, 2018. The final examination will be held on Monday, December 10th.  The last scheduled office hours will be held on Tuesday, December 4th from 11-12 in Monroe 262.

First Mid-Term Examination:  October 18, 2018 in Maury Hall 209 at regular class time

Second Mid-Term Examination: November 20, 2018 in Maury Hall 209 at regular class time

Monday, December 10, 2018:  Final Examination, 2PM – 5 PM in Maury Hall 209

Reading Materials:

Note:  It will be assumed from the first lecture forward that all students have read Malkiel’s “Random Walk Down Wall Street.”  If you have not read Malkiel, then read it as soon as possible.

Random Walk Down Wall Street, by Burton Malkiel (this book should be read during the summer prior to the first day of class, which is Tuesday, August 28th, 2018)

Main Required Readings:  Professor Burton has a textbook in progress.  Students will be required to read chapters assigned each week.  There is no cost for the text, as the chapters will be available at the Collab Site for this course. The first 15 chapters are already available in Collab.  The assignments for the specific time that each chapter is required will be provided in this syllabus as it is revised from time to time during the semester.

The following books are suggested (for those who really want to go far beyond this course):

Investment Science, by David Luenberger [Oxford, 1998]  {this is a very mathematical treatment of modern finance and will only be readable by mathematically experienced students}

Security Analysis, by Benjamin Graham and David Dodd [McGraw Hill, 1934 Edition] {This is the bible for value investors}

The Following Are Classic Articles in Finance That Will Be Referenced in Lecture:“Capital Asset Prices: A Theory of Market Equilibrium Under Conditions of Risk,” by William F. Sharpe, Journal of Finance, September, 1964

“Risk, Return and Equilibrium: Some Clarifying Comments,” by Eugene F. Fama, Journal of Finance, 1968.

Websites relevant to US Treasury Market:

For definition of bills, notes, bonds: http://www.treasurydirect.gov/indiv/products/products.htm

For answering questions about who owns the national debt in the US: http://www.treasurydirect.gov/govt/reports/pd/mspd/2018/2018_jul.htm

Information about upcoming US treasury auctions (over the next six months or so): http://www.treasury.gov/resource-center/data-chart-center/quarterly-refunding/documents/auctions.pdf

General location of debt information at the US treasury: http://www.treasurydirect.gov/NP/debt/current

Debt to GDP and other economic information (in time series format and graphic format), Federal Reserve Bank of St. Louis research department:

http://research.stlouisfed.org/fred2/release?rid=263

History of Treasury Auctions and Upcoming Treasury Auction Schedule: https://www.treasurydirect.gov/instit/annceresult/annceresult.htm

 Websites for Mathematical Terms

Mean

Variance

Covariance

Correlation_Coefficient

Lectures:

Tuesday, August 28, 2018: Introduction to Financial Markets

For the week of August 28 – September, 2018:  Read Chapters One and Two (from the Textbook section of the Collab site for this course)

Thursday, August 30, 2018: The Risk Free Asset, Default-Free Securities, Arbitrage

For the week of September 4 – September 11, 2018: Read Chapters Three and Four

Tuesday, September 4, 2018: Debt and Equity: What Do They Mean? Bankruptcy

Thursday, September 6, 2018: TBA

Tuesday, September 11, 2018:Class Cancelled

For the week of September 13 – 18, 2018: Read Chapters Five and Six

Thursday, September 13, 2018: The Strange History of “Diversification”

Tuesday, September 18, 2018: Diversification in the “Finite State” World

Thursday, September 20, 2018: Treasury Debt: Part I

Tuesday, September 25, 2018: Treasury Debt: Part II

Thursday, September 27, 2018: Present Value and Treasury “Coupon” Issues

Tuesday, October 2, 2018: Yield-to-Maturity; Duration

For the week of October 4 – October 11, 2018: Read Chapters Seven, Eight and Nine

Thursday, October 4, 2018: Modern Portfolio Theory, Part I

Fall Reading Break: October 6 – October 9, 2018

Thursday, October 11, 2018: Modern Portfolio Theory Part II

Tuesday, October 16, 2018: Modern Portfolio Theory Part III

First Mid-Term Examination:  Thursday, October 18, 2018 (Maury Hall 209)

Week of October 23 – 25, 2018:  Read Chapters Ten and Eleven

Tuesday, October 23, 2018: Modern Portfolio Theory, Part IV

Thursday, October 25, 2018: Applications of the Capital Asset Pricing Model

Week of October 30 – November 1, 2018: Read Chapters Twelve and Thirteen

Tuesday, October 30, 2018: Arbitrage Pricing Theory

Thursday: November 1, 2018: MPT Using Finite Number of States

Week of November 6-8, 2018: Read Chapters Fourteen and Fifteen

Tuesday, November 6, 2018: Money Markets

Thursday, November 8, 2018: Corporate Bonds

Week of November 13 – November 15, 2018: Read Chapter Sixteen

Tuesday, November 13, 2018: Asset-Backed Securities (ABS)

Thursday, November 15, 2018: More on Asset-Backed Securities (ABS)

Tuesday, November 20, 2018: Second Mid-Term Examination (site: Maury Hall 209)

Thanksgiving Break: November 21 -25, 2018

Week of November 27-29, 2018: Read Chapter Eighteen

Thursday, November 27, 2018: Derivatives:  The Options Market

Thursday, November 29, 2018: Final Scheduled Class of the Semester: Options and Review for Final

Tuesday, December 4, 2018: Class Cancelled

Thursday, December 6, 2018: Options Part II; Review for the Final Exam

Monday, December 10, 2018: Final Examination; 2 PM – 5 PM in Maury Hall 209

Power Point Slides:

Lecture 1: August 28, 2018: Introduction to Finance:

Lecture 2: August 30, 2018: The Concepts of Default-Free and Risk Free

Lecture 3: September 4, 2018: Bankruptcy

Lecture 4: September 6, 2018: More on Bankruptcy; Intro to Diversification

Lecture 5: September 13, 2018: US Treasury Market

Lecture 6: September 18, 2018: Returns in Stock Markets, Yields in Bond Markets

Lecture 7: September 20, 2018: Compounding, Time-Weighted Returns, Duration

Lecture 8: September 25, 2018: Introduction to MPT

Lecture 9: September 27, 2018: Mean-Variance in the Two Asset Case

Lecture 10: October 2, 2018: Adding a Risk-Free Asset to Markowitz Theory

Lecture 11: October 4, 2018: The Capital Asset Pricing Model

Lecture 12: October 11, 2018: Applications of CAPM

Lecture 13: October 25, 2018: More Applications of CAPM; Intro to APT

Lecture 14: October 30, 2018: Arbitrage Pricing Theory

Lecture 15: November 1, 2018: The Finite State Approach to MPT

Lecture 16: November 6, 2018: Money Markets

Lecture 17: November 8, 2018: The Corporate Bond Market and High Yield Debt

Lectures 18, 19: November 13-15, 2018: Asset-Backed Securities

Lecture 20: November 27, 2018: Options

Lecture 21: November 29, 2018: Churchill Franklin Lecture

Lecture 22: December 6, 2018: Finish Options, Review for Final Exam

 

There will be two mid term examinations and one final examination,with the final grade determined by a weighting of 30/30/40 with the final amounting to 40 percent. The final examination is cumulative. The final examination is scheduled for Monday, December 10, 2018 beginning at 2 PM and ending at 5 PM.  The examination will be held in Maury Hall 290. No examination may be skipped without a bona-fide excused absence (illness, etcetera).  There is no option available for missing exams. There will be grading reviews held for each of the two mid term examinations (the final examination cannot be reviewed except for numerical mistakes in adding up the grade). The grading reviews for mid term exams are normally a two hour office period held within ten days after the exams have been distributed back to students in class. It is the student’s responsibility to pick up their exam in class or arrange to pick it up at a later date. In order to have an exam reviewed, the student must show up with their exam in hand at the review. If a student cannot attend the review session, they must contact the grader prior to the review office hours and arrange an alternate date for the review.

Exam Schedule:

Examination I – October 18, 2018 in Maury Hall 290 at our regular class time

Examination II – November 20, 2018 in Maury Hall 209 at our regular class time

Final Examination – Monday, December 10, 2018 2PM – 5PM, Maury Hall 290

Please Note: If you cannot make the examinations as scheduled, please do not take this course. We do not give make-up examinations. If you are unable to take the final on time as schedule, you will, at best, receive an incomplete for this course. There are no exceptions.