Our segment of this course will focus on costs of trading and market microstructure. We will distribute a few journal articles that should be read before the assigned classes. There is no required text for this part of the course. Grading will be based on "grading cash" from use of the Financial Trading System (FTS) and on a group project that is due in class on Thursday May 29. The classes taught by Dewan and Schwert are denoted [DS] below.
The text for the fixed income segment of this course is Fixed Income Securities by Bruce Tuckman (John Wiley and Sons, New York). You should review the first four chapters of Tuckman's book to refresh your memory of topics covered in FIN 402 and FIN 411. The classes taught by Barclay are denoted [MB] below.
The text for the equity portfolio management segment of this course is Investments by Bodie, Kane, and Marcus (Third Edition). There will also be a packet of additional readings. You should review chapters 5-8 of the BKM book to refresh your memory of portfolio theory topics covered in FIN 402 and FIN 411. Grading will be based on a group assignment or two, a group project due on June 3, and a quiz given on May 27. The classes taught by Shanken are denoted [JS] below.
| Date | Instructor | Class Schedule & Assignments |
| 1-Apr | All | Introduction to Markets and administrative discussion [project assignments, FTS handouts, Bloomberg information] - form study groups for course |
| 3-Apr | DS | Costs of Trading [projects assigned, trading experiment, market microstructure] |
| 4-Apr | DS | Lab: RE1 case using FTS [not graced] |
| 8-Apr | DS | Arbitrage - Implementation Issues [relative costs of trading different kinds of instruments, NYSE vs. NASDAQ, block trading, transactions taxes] |
| 10-Apr | MB | Measuring risk in fixed income portfolios for parallel shifts in interest rates. The price value of a basis point, duration and convexity. Tuckman, Chapters 10-12. |
| 11-Apr | DS | Lab: RE2 case using FTS [graded] |
| 15-Apr | MB | Applying duration measures to fixed income securities with embedded options: The case of CMOs. Tuckman, Chapters 15 and 18. |
| 17-Apr | MB | Arbitrage based pricing of interest-rate derivative securities. Tuckman, Chapters 5-7. |
| 18-Apr | MB | Lab: Using Bloomberg information Systems to analyze CMOs. |
| 22-Apr | MB | Models of the term structure of interest rates. Tuckman, Chapters 7-8. |
| 24-Apr | MB | More term-structure modeling. Tuckman, Chapters 7-8. |
| 25-Apr | MB | Lab: Using the BARRA Cosmos System to manage risk in a fixed income portfolio. |
| 29-Apr | MB | Measuring risk in fixed-income portfolios for more general shifts in interest rates. Multi-factor models and duration, key rate duration. Tuckman, Chapter 13. |
| 1-May | DS | Information and Trading [discussion of Barclay-Warner "Stealth Trading" paper]. |
| 2-May | DS | Lab: RE3 and RE4 cases using FTS [graded]. |
| 6-May | DS | Further discussion of "Arbitrage" - Implementation Issues |
| 8-May | JS | Active portfolio management and the use of various investment performance measures. BKM: Chapters 23 and 24. |
| 9-May | JS | Lab: Barra - Analysis of portfolio risk and diversification. |
| 13-May | JS | Style analysis and mutual fund performance. BKM: Section 5 of Chapter 24. Bill Sharpe website: articles on performance and styles of large, seasoned U.S. mutual funds. "Setting the Record Straight on Style Analysis," an interview with Bill Sharpe. Carhart, 1997, "On Persistence in Mutual Fund Performance," Journal of Finance 52, 57-82. |
| 15-May | JS | Review of market anomalies, return predictability, and asset pricing model tests. BKM: Chapter 11, Section 4 of Chapter 12, Section 2 of Chapter 29. |
| 16-May | JS | Lab: Barra - generation of portfolio expected returns and use of the macroeconomic model in the Aegis Alphabuilder System. Review chapter 17 of BKM to refresh your memory of valuation topics covered in FIN 402. |
| 20-May | JS | Portfolio Optimization/Asset Allocation. Richard Michaud, "The Markowitz Optimization Enigma: Is Optimized Optimal?" Financial Analysts Journal, January-February 1989, 31-42. Black and Litterman, "Global Portfolio Optimization," Financial Analysts Journal, September-October 1992, 28-43. |
| 22-May | JS | A case for inefficient markets. Haugen and Baker, "Commonality in the Determinants of Expected Returns," Journal of Financial Economics, July 1996, pp. 401-439. |
| 23-May | JS | Lab: Barra - Constructing superior portfolios with the Aegis optimizer |
| 27-May | JS | Quiz and some final thoughts. |
| 29-May | DS | Projects turned in - renewed discussion of trading costs. |
| 30-May | DS | Lab: RE5 case using FTS [graded] – possible. |
| 3-Jun | DS | Student presentations of projects. |
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