Investment Management

24/02/2013 1 25721 INVESTMENT MANAGEMENT Lecturers: Sean Anthonisz Nadima El-Hassan Jianxin Wang Brandon Zhu Subject Coordinator: Jianxin Wang Objectives 2 ? ? ? ? Why do you take this subject? What do you expect to learn? How much did you pay for this subject? Is this a good investment? Investment Decisions 3 ? ? How much should I invest in risky assets? How much should I invest in different risky assets? ? ? How many risky assets should I hold? When not to diversify? ? How to determine mispricing? Fair value today? Expected return next year? ? How well do asset pricing models work? ? ? 1 24/02/2013

Investment Decisions 4 ? Passive versus active investing ? ? Is market efficient? Why not? What does it take to beat the market? How to hedge and how much to hedge? Derivative pricing Trading cost, liquidity, private information ? How should I manage risk? ? ? ? How should I trade? ? ? Sources of my performance? What Do We Learn in This Subject? 5 ? ? ? ? A theoretical framework for portfolio construction. A theoretical framework for the pricing of equities and bonds. Some practical applications of asset pricing models and portfolio analysis. Issues relating to market efficiency and investor behaviour.

Course Structure 6 Funds Management Information Portfolio Theory Risk and Return Markets and Investing CAPM Factor Models & APT Options Fixed Income Equities Futures 2 24/02/2013 Investment Electives 7 ? ? ? ? ? ? 25705 Financial Modelling and Forecasting 25728 Bond Portfolio Management 25729 Applied Portfolio Management 24731 International Finance 25762 Synthetic Financial Products A whole range of subjects for Quant Fin majors: technical analysis, numerical analysis, fin econometrics, stat methods, derivative pricing, interest rate modelling. Prerequisite 8 ? ? 25742 Financial Management Basic math and statistics

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Ask questions during lecture. ? You paid $$$ for the opportunity ? ? Think & reflect; don’t just summarize & memorize. Practice using back-of-chapter questions. Approach to Learning ?????? ?????? ?????? ?????? —??????? I listen and I forget; I see and I remember; I do and I understand. —Xun Zi Just Do It! —Nike 12 4 24/02/2013 Textbook and Readings 13 ? Bodie, Kane, Marcus, Investments, 9th Ed, McGraw-Hill/Irwin, 2011. ? You take full responsibility if using an earlier edition. ? ? ? ? Harvard Business School case study 9202-024 “Strategic Capital Management”. R.

A. Haugen, Modern Investment Theory, 5th Ed, Pearson Higher Education, 2001. J. H. Cochrane, 2006, Investments Notes. Other fun books on financial markets. Assessments 14 ? Weekly online quizzes: 10 marks ? ? ? ? ? 15 MC questions in 1 hour Unlimited tries with the best mark kept Monday morning to next Wednesday midnight Once closed, quizzes cannot be reopened Best 10 marks for the semester Group-based case report Online group registration Report due 5pm Friday March 29 Late submissions carry point deduction ? Case study in lecture 6: 10 marks ? ? ? ? Assessments 15 ?

Mid-session exam: 40 marks ? ? ? ? Cover lectures 1 – 6, including the case study Multiple-choice (20 marks) Short-answer questions (20 marks) No formula sheet Cover lectures 7 – 13, excluding lecture 8 Multiple-choice (20 marks) Short-answer questions (20 marks) A short list of formulas will be identified and provided during the final exam. ? Final exam: 40 marks ? ? ? ? 5 24/02/2013 Online Group Registration 16 ? ? ? ? ? ? Log in the online course website Click on “Groups” in the left panel Group names contain “1m”, “2m”, “3m”, “4m”, indicating max members = 1, 2, 3, 4, respectively.

The first member is the group leader. Registration closes after 5pm on March 10. Changing group only in the most extreme circumstances. What’s Required? 17 ? ? ? Materials covered in the chapters listed in the lecture program, except certain subsections are explicitly excluded. The midsession and the final exams will focus on materials covered during lectures, with at most 3-4 multiple-choice questions in each exam on materials not covered in lectures. Materials not covered in lectures will be heavily featured in the online quizzes. Administrative Issues 8 ? Name sign: “Open” for the business of learning ? Take it out at the start of every lecture It’s good to make the lecturer know your name ? Come to consultation hours ? ? ? Other times by appointment Email for straightforward questions Complex questions are best answered through interactive discussion ? Emails will be answered before or during the next consultation hours ? 6 24/02/2013 Learning Support – Postgraduate ? ? ? ? ? Need help with your postgraduate studies at UTS Business School? Are you new to university / postgraduate education?

Not sure to how develop your academic skills in writing, reading, critical thinking etc.? Not sure how to complete assignments or achieve your best? Ask for help from the Learning Support Coordinator ? ? ? ? ? ? Make appointments for confidential individual help Lots of ‘online study resources’ to recommend / hardcopy study resources to share Attend the Study Skills Workshops all semester / or download them / Help by email / phone support / Email: [email protected] edu. au www:http://www. business. uts. edu. au/teaching/student/resources/studen t-learning. tml Join us on facebook UTSBlearningsupport ? Asset Classes 20 ? ? ? ? ? ? The money market The bond market The equity market The real estate market Currency markets Derivative markets ? Financial and commodities ? Others? Trading Platforms 21 ? Organized exchanges Dealership markets Auction markets ? Electronic trading ? ? ? ? OTC – NASDAQ Alternative trading systems (ATS) ? ECNs, dark pools, internal crossings. ? Algorithm/high frequency trading 7 24/02/2013 High Frequency Trading 22 ? Menkveld (2011): a HFTer on Chi-X Dutch stocks from Jan 2007 to June 2008 Trades 1400 times per stock per day ?

Gross profit per trade €0. 88 ? ? ? ? ? €1. 55 profit on the spread net of fees €0. 45 profit on positions < 5 seconds €1. 13 loss on positions >= 5 seconds Max capital committed ? €2 million per stock ? Implied annualized Sharpe ratio = 9. 35! ? ? Sharpe ratio for S&P500 over the period = -0. 16 ? Chi-X is in Australia. Costs of Trading 23 ? Commission: fee paid to broker for making the transaction ? Exchange members/subscribers? ? Spread: Bid and ask prices Spread: ask – bid ? P89, #14 ? Market versus limit orders ? ? ? Price impact of large trades

Stock Margin Trading 24 ? ? ? ? Borrow (from brokers) to purchase shares Initial margin Maintenance margin – minimum level the equity margin can be Margin call ? Call for more equity funds ? Margin arrangements differ for stocks and derivatives 8 24/02/2013 Margin Trading – Initial Conditions 25 ? ? ? ? ? X Corp: P = $70 Initial Margin = 50% Maintenance Margin = 40% 1000 Shares Purchased Initial Position: Stock $70,000 Borrowed Equity $35,000 $35,000 Maintenance Margin 26 ? ? Stock price falls to $60 per share New Position ? $60,000=$35,000(Borrowed) + 25,000(Equity) ? Margin = $25,000/$60,000 = 41. 67% How far can the price fall before a margin call? ? ? (1000P – $35,000) / 1000P = 40% P = $58. 33 ? P88, #9 Short Sale 27 ? ? Purpose: Profit from a price fall Mechanics Borrow stock through a dealer/broker Sell it and deposit proceeds and margin in an account ? Any dividend is passed back to the lender ? Closing out the position ? ? ? ? Buy back the stock and return it to the lender Profits can be deposited into your own account ? Naked versus covered short sale 9 24/02/2013 Short Sale – Initial Conditions 28

Z Corp Initial Margin Maintenance Margin Initial Price Sale Proceeds Margin Account Balance 100 Shares 50% 30% $100 $10,000 $ 5,000 $15,000 Short Sale – Maintenance Margin 29 ? Stock Price Rises to $110 Stock owed Net equity ? Margin % (4000/11000) ? ? $11,000 $ 4,000 36% ? ? How much can the stock price rise before a margin call? ($15,000 – 100P) / (100P) = 30% P = $115. 38 P89, #12 Summary 30 ? Course introduction and requirements ? Think, reflect, and participate ? ? Financial markets and assets Trading of financial assets Trading platforms Transaction costs ? Margin trading and short selling ? ? 10

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