EXP 481 -- Capital Markets
Reading List and Course Outline
Spring 1995
Prof. G. William Schwert
3-110L Carol Simon Hall, 275-2470
Fax: 461-5475
Secretary: Helen Johnston, Dewey 3-110M, 275-8127
This course is an introduction to securities markets and the pricing of
capital assets. Topics covered include efficient markets theory,
models for portfolio selection, and asset pricing theory. Emphasis
will be on the empirical evidence available on these topics. The
required texts for the course is:
- Zvi Bodie, Alex Kane, and Alan J. Marcus,
Investments (3rd ed.), Irwin, 1996 (hereafter "BKM").
In addition, I have provided references to appropriate sections of the
books
- Principles of Corporate Finance, (4th ed.), by R. Brealey and S.
Myers, and
- The New Corporate Finance: Where Theory Meets Practice, edited by Don Chew
that were used in the Capital Budgeting course (EXP 480).
The reading assignments will be announced in class and will more or
less follow the sequence given below. The readings marked with an
asterisk "*" are required. Since you are already familiar with the
Brealey & Myers and Chew books, you might want to read the appropriate
material in those books. In most cases, it should not be necessary
for you to read more than one discussion of a particular topic. You
will be provided with copies of required readings not contained in
the textbooks. Most of my lectures will use Freelance slide shows
and you will receive copies of the slides for each lecture.
Grading
Your grade will be based on class participation (about 10%), homework
(about 10%), three case studies (each about 10%), and a final exam on
May 31 (about 50%). Copies of old exam questions will be distributed
in class and used for the homework assignments. Class time will be
spent reviewing each homework assignment to highlight material that
might have been confusing to some students. I expect each student to
work on each homework problem, although the graded homework assignments
will be submitted by the study groups. Groups should reach a consensus
answer only after debating the relative merits of each member's
proposed answer. I will generally not hand out copies of my "model"
answers, unless I feel that most of the students in the class missed
the point of the problem. On the exam, I will hand out a portfolio
of the best answers from the students in the class.
The case assignments will involve microcomputer analysis of security
returns using Excel and/or Eviews. The first case will use stock
returns from Rochester-area companies. The second case will use prices
on options and futures contracts. The third case will analyze the
past performance of several open-end mutual funds and the University
of Rochester endowment portfolio. You will have two weeks to complete
each case assignment. The case assignments and the homework are group
projects. The rules for assigning grades for group work are described
in the attached sheet.
I will use a teaching assistant to help me with grading, especially on
the homework, but I can assure you that the assistant I will be using
is knowledgeable, fair, and tolerant. Moreover, I will be monitoring
his work closely. I am always willing to consider grading disputes,
although I reserve the right to make adjustments in both directions.
WWW and Simon School Computing Resources
Virtually all of the handouts for the course will be available
as Acrobat files on the home page for this course [http://www.ssb.rochester.edu/fac/schwert/e481.htm]
and on the Simon School file server [in the exp481 directory].
I will also put all of the relevant data files in both places.
Finally, the Web page has some links to places on the Internet
that students can use to augment the research they do for cases,
homework assignments, and/or analyses of personal or professional
interest. I strongly encourage all students to spend some time
browsing ("surfing") the Internet to see all of the
things that are available and relevant for this course.
Topics & Readings
I. Introduction: The Statistical Properties Of Stock Returns
- *BKM, Chapters 2-4 and 26.
- *Siegel, Jeremy J., "The Equity Premium: Stock and Bond Returns Since
1802," Financial Analysts Journal, 48 (January-February 1992) 28-38.
- *Schwert, G. W., "Stock Market Volatility,"
Financial Analysts Journal, 46 (May-June 1990) 23-34.
- *Kritzman, Mark, "What Practitioners Need to Know . . . About
Lognormality," Financial Analysts Journal, 48 (July-August 1992) 10-12.
II. Efficient Capital Markets
- *BKM, Chapter 12.
- *Brealey & Myers, Chapter 13 (287-310).
- *Brown, Keith, W. V. Harlow, and Seha M. Tinic, "How Rational Investors
Deal With Uncertainty," (in Chew, 21-51).
- *Mikkelson W., and M. M. Partch, "Stock Price Effects and Costs of
Secondary Distributions," Journal of Financial Economics, 14 (June 1985) 165-194.
III. Bond Markets & Interest Rates
- *BKM, Chapters 13-14.
- *Brealey & Myers, Chapter 23.
IV. The Pricing of Options
- *BKM, Chapters 19-20.
- *Brealey & Myers, Chapters 20 and 21.
- *Brenner, Menachem and Marti G. Subrahmanyam, "A Simple Approach to
Option Valuation and Hedging in the Black-Scholes Model," Financial Analysts
Journal, 50 (March-April 1994) 25-28.
- *Black, Fischer, "How to Use the Holes in Black-Scholes," (in Chew, 419-425).
- *Kritzman, Mark, "What Practitioners Need to Know . . . About Option
Replication," Financial Analysts Journal, 48 (January-February 1992) 21-23.
V. The Pricing of Futures
- *BKM, Chapters 21-22.
- *Brealey & Myers, Chapter 25 (627-645).
- *French, Kenneth R., "Pricing Financial Futures Contracts: An
Introduction," (in Chew, 411-418).
VI. Portfolio Selection - Diversification and Efficient Portfolios
- *BKM, Chapters 5-7 (review from Capital Budgeting).
- *Bloomfield, T., R. Leftwich, and J. Long, "Portfolio Strategies and
Performance," Journal of Financial Economics, 5 (November 1977) 201-218.
- Brealey and Myers, Chapter 7 (125-148).
VII. The Capital Asset Pricing Model: Theory, Tests and Extensions
- *BKM, Chapters 8 and 9 (review from Capital Budgeting).
- *BKM, Chapter 11 (new material).
- *Amihud, Y. And H. Mendelson, "Liquidity and Cost of Capital
Implications for Corporate Management," (in Chew, 117-125).
- *Fama, Eugene F., Kenneth R. French, David G. Booth, and Rex
Sinquefield, "Differences in Risks and Returns of NYSE and NASD Stocks,"
Financial Analysts Journal, 49 (January-February 1993) 37-41.
- Brealey and Myers, Chapters 8-9, pp. 155-208.
VIII. Portfolio Evaluation and Management
- *BKM, Chapter 24.
- *Black, Fischer, "The Investment Policy Spectrum: Individuals,
Endowment Funds, and Pensions," Financial Analysts Journal, 32 (January 1976) 23-31.
- *Ippolito, Richard A., "On Studies of Mutual Fund Performance,
1962-91," Financial Analysts Journal, 49 (January-February 1993) 42-50.
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