Investment Analysis

Investment Analysis


Investment Analysis

Spring I 2008


Robert Castaneda, DBA, CPA







Title / Investments: Analysis and management
Author(s) / Jones, Charles P.
Copyright / (2006)
Publisher / Wiley Publishing
ISBN / 9780470047811
Edition / 10th

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Argosy University



Investment Analysis

Faculty Information

Faculty Name: Robert Castaneda


Contact Information:312-498-2028 Fax: 312-945-3169

Office Hours:9AM to 10PM Mon-Fri 9AM to 5PM Saturday

Short Faculty Bio:Roberto Castaneda received his graduate degree (DBA) in Accounting from Argosy University/Schaumburg; (MM/MBA) in Marketing and Finance from NorthwesternUniversity, and his undergraduate degree in Accounting and Marketing from DePaulUniversity. He is also a Certified Public Accountant. Dr. Castaneda has worked in senior finance positions at American Express, PepsiCo and McDonald’s Corporation in a number of international countries.

Course description:

This course focuses on investment principles and problems. Topics include the effects of current financial events upon the markets and their operations. Students analyze the selection of investments that provide the maximum future return at an acceptable level of risk. Examination of marketable financial instruments, common stocks, preferred stocks, bonds, put options, call options, futures contracts on the traditional commodities, and financial futures.

Course Pre-requisites: None

Required Textbook:

Jones, Charles P. (2006). Investments: Analysis and management. (10th ed.). Wiley Publishing. ISBN# 9780470047811

Course length: 7.5 Weeks

Contact Hours: 45 Hours

Credit Value: 3.0

Program Outcomes:

  1. Communication
  2. Communicate business concepts effectively, both written and orally appropriate to the audience
  3. Team
  4. Define the attributes of an effective team member and leader and the characteristics of an effective team in reaching specific business goals
  5. Cognitive
  6. Problem Solving – Given a business problem, select and defend a business solution chosen from specific alternatives
  7. Information Literacy – Given a business research question, access information from a variety of sources, select appropriate sources to respond to a business question
  8. Analysis/Application
  9. Integration – Describe the interrelationship of the functional business areas of statistics, accounting, operations, finance, marketing, and strategy
  10. Ethics/Diversity
  11. Diversity – Identify the issues and challenges related to diversity in current business organizations
  12. Ethics– Identify the issues and challenges related to ethics in current business organizations
  13. Financial Application

6.1 Given a specific business case, choose a financial strategy to reach a business goal

Course Objectives:

1)Distinguish the differences between liquidity and marketability. (Program Outcomes: 1.1, 3.2, 4.1)

2)Assess the impact of a given monetary of fiscal policy on interest rates and/or security prices. (Program Outcomes: 1.1, 3.1, 4.1, 6.1)

3)Compare and contrast various types of investment risks. (Program Outcomes: 1.1, 3.1, 4.1, 6.1)

4)Describe the terminology, characteristics, and sources of risk of debt securities and preferred stock. (Program Outcomes: 1.1, 3.1, 3.2, 4.1, 6.1)

5)Discuss equity investment valuation models. (Program Outcomes: 1.1, 3.1, 3.2, 4.1, 6.1)

6)Calculate the intrinsic value of a stock value and expected rate of return. (Program Outcomes: 1.1, 3.1, 4.1, 6.1)

7)Calculate the price, compound return, taxable yield equivalent, and yield to maturity of a bond. (Program Outcomes: 1.1, 3.1, 3.2, 4.1, 6.1)

8)Analyze the characteristicsand sources of risk withinvarious option strategies. (Program Outcomes: 1.1, 3.1, 3.2, 4.1, 6.1)

9)Evaluate the risk-adjusted performances of investment securities or portfolios. (Program Outcomes: 1.1, 2.1, 3.1, 3.2, 4.1, 6.1)

10)Determine suitability of equity investment using ration analysis. (Program Outcomes: 1.1, 2.1, 3.1, 3.2, 4.1, 6.1)

Assignment Table

Topics / Readings / Assignments
DB: Discussion Board or in Class Assignment. Suggested length is 3-5 Paragraphs ( Approx. 300-500 words), or as determined by instructor
IP : Independent Project
GP: Group Project
1 /
  • Liquidity and marketability considerations
  • The effect of the Monetary and Fiscal Policies on the Financial Markets
/ Chapters: 1, 2, 4 / DB 1.1: (Relates to course objectives 1 & 2)
Discuss the distinctions between liquidity and marketability. In what way(s) are they related? What is the correlation between liquidity and safety? What is the correlation between safety and an investor’s required rate of return? Next, conduct an internet search to find an example of: 1) a specific investment with high liquidity; 2) a specific investment with low liquidity; 3) a specific investment with moderate liquidity and moderate to high returns. Make sure to provide detailed info about each investment’s yield (return) and relative safety.
DB 1.2: (Relates to course objective 2)
The Federal Reserve largely worked to decrease interest rates from 2001 (after the 9/11 terrorist attacks) until 2004. In the early part of 2004, the Fed then began raising interest rates once more. What are some reasons that the Fed lowered rates in the prior time periods and then switch to increasing interest rates in 2004 and 2005? What were some of the effects of Feds actions on the stock markets and the general levels of interest rates? Provide examples to support your rationale.
Next, review the Fed’s most recent Beige Book report at: and comment on how the Fed’s recent monetary actions are affecting the overall economy, the general interest rates levels, and various financial markets.
2 / Equity Investments: Part I
  • Diversifiable versus non-diversifiable risk
  • Beta Coefficient
  • Expected returns
  • The Constant dividend Growth Model
/ Chapters: 6, 10 / DB 2.1: (Relates to course objectives 3, 5, & 6)
Describe systematic and unsystematic risk and discuss which type of risk can be effectively managed through diversification. Next, research the Internet for an article from a reputable source that addresses the issue of how many securities are enough to properly diversify an investment portfolio. Discuss the salient points of the article and argue why you agree or disagree with the article’s main points.
IP 2.1: (Relates to course objectives 6 & 7)
Mr. Martinez is a conservative investor who is interested in a required rate of return of 10% on his stock investments while assuming lower market risk. The three possible stock choices for Mr. Martinez and their respective betas are as follows:
Stock / Expected Return / Beta
AAA / 10% / .75
GHL / 11% / 1.0
BAC / 12% / 1.25
Part I
A)Determine the expected returns and beta for a portfolio consisting of one third of Mr. Martinez’s funds in each stock.
Part II
Assume that:
  • Each AAA stock pays current dividends of $1.50 annually with 6% expected annual increases. The current market stock price for AAA is $30/Share.
  • Each GHL stock pays current dividends of $1.75 annually with 6% expected annual increases. The current market stock price for GHL is $27/Share.
  • Each BAC stock pays current dividends of $2.25 annually with 7% expected annual increases. Current market stock price for BAC is $35/Share.
A)Using the Constant Dividend Growth Model, determine whether AAA, GHL and BAC are over or undervalued.
B)For what types of companies, is the constant growth model an appropriate analysis tool?
C)What are the limitations of the constant growth model?
IP 2.1_ Instructor Answer Key

3 / Equity Investments: Part II
  • The DOD stock investment strategy
  • The Dow Jones Industrial Stocks
  • Stock splits
  • Stock dividends
/ Chapters: 8, 9 / DB 3.1: (Relates to course objectives 4, 9, & 10)
Compare and contrast a stock split with a reverse stock split and a stock dividend with a cash dividend. Explain how each process affects a company’s Earnings Per Share. Discuss whether you, an investor, would take a cash or stock dividend? Justify your rationale.
GP: (Relates to course objectives 6 & 10)
The Dogs of Dow (DOD) stock investment strategy is a fairly simple way of selecting high dividend yield Dow stocks for your investment portfolio. You are part of an investment club and have about $25,000 to invest. You and other members of your club are to:
1)Produce a 500 word summary explaining how DOD works.
2)Provide current stock price, price earnings (P/E), and dividend yield info. For all 30 Dow stocks using an Excel spreadsheet.
3)Using the “Sort” function of Excel, split the $25,000 among three-to-five suitable Dow Jones stock based on the DOD investment strategy and criteria.
4)Pretend that you have bough the stocks this week (week three), and liquidate your positions by the end of week six. Assuming a 2% broker commission, calculate and show each of your stock positions gain or losses.
Useful sites for your project:
Dogs of Dow Info. Page

MSN stock quote page

Dow Jones Stocks List

4 / Fixed Income Debt Securities
  • Taxable equivalent yield calculations.
  • Yield to Maturity Calculations.
  • Bond investment strategies
  • Convertible securities
/ Chapters: 17, 18 / DB 4.1: (Relates to course objectives 4 & 8)
Joseph Paul is a 72 year old retiree whose investment objectives are safety of principal and current income. Mr. Paul is currently in the 25% combined federal and state marginal tax rate. Mr. Paul is considering an investment in one of the following bonds:
JKL Corporate Bond: A-Rated, 6.75% coupon rate, maturing in 7 years (recommended by a friend).
FHR Municipal Bond: AAA-rated, 5.25% coupon, also maturing in 7 years (recommended by her ACG investment advisor).
Using the taxable equivalent yield concept, discuss and argue which bond Mr. Paul should purchase. Your discussion should also include risk and other possible pertinent qualitative considerations. Support your rationale with research.
IP 4.1: The following WORD document contains a set of computational problems. Please solve these and make sure to show your computations. Submit this deliverable to the course instructor by or before 00/00/00.
Problem Document (Relates to course objective 8)

IP4.1_Instructor Answer Key

5 / Technical & Fundamental Analysis
  • The benefits and limitations of ratio analysis.
  • Ratio Calculations.
Current ratio
  • Fundamental versus technical analysis.
/ Chapters: 13, 15, 16 / DB 5.1: (Relates to course objective 10)
Explain how ratio analysis can serve as an effective tool to assess the current and future financial status of firms. Describe the limitations of ratio analysis. Also discuss how fundamental type analysis, such as ratio analysis, differs from a technical analysis. Which types of analysis make the most sense to you? Provide evidence to support your rationale.
DB 5.2: (Relates to course objective 10)
Go to the EDGAR link on the SEC web page at :
to conduct research about a public company of your choice.
Using the information in the company’s 10 K andstock research sites such as and the following information in your post about the Company you chose.
  • Its most current stock price
  • Its stock 52 week highs and lows
  • Company stock’s beta
  • The company’s following financial ratios:
  • P/E ratio
  • Return on Assets
  • Return on Equity
  • Current Ratio

6 / Portfolio Management
  • Asset Allocation Considerations.
  • Suitability Factors
  • Mutual Funds Investing
/ Chapters: 3, 21, 22 / DB 6.1: (Relates to Course objectives 9 & 10)
Shaun McGregor is a single, 47 year-old, plastic surgeon who currently owns a condominium in San Francisco worth $1,400,000. Dr. McGregor is doing quite well financially. His gross income from his practice last year exceeded $450,000. Due to his hectic schedule, Dr. McGregor has seldom taken the time to evaluate his portfolio performance; however, he thinks it isn't “quite up to par.”
Dr. McGregor has $325,000 in available funds currently sitting in a tax-exempt money market fund. He also has $130,000 invested in several stocks at a local discount brokerage house and he owns an IRA account funded with three mutual funds, currently worth about $270,000.
Dr. McGregor has the following investment objectives:
  • A sum of $20,000 is to be earmarked for Dr. McGregor’s upcoming wedding and honeymoon trip in June of next year. Dr. McGregor wants this portion invested in a very safe place with no expense, sales, or early withdrawal charges.
  • He is also planning to assist his nephew with college expenses in six years. To this end, he wants $30,000 earmarked in an account with higher than current certificate of deposit or money market rates but minimal market volatility.
  • His average, long-term (5+ years) minimum required rate on equity investments is 8%.
  • Dr. McGregor has a moderate risk tolerance.
  • Construct an asset allocation model for Dr. McGregor, including his financial objectives and risk tolerance level. Explain and defend the rationale behind recommending the model. The asset allocation must have between 3-5 asset classes.
1)Recommend at least two suitable investment alternatives for Shaun’s wedding.
2)Recommend a suitable stock for Dr. McGregor’s tuition assistance objectives. Explain how you came about your recommendation
DB 6.2: (Relates to course objectives 9 & 10)
Research the Internet and choose a suitable mutual fund that you can use to fund your IRA account. Provide detailed information about the fund, including the following:
  • The name of the fund
  • Its portfolio manager’s name, experience, and qualifications
  • Its investment philosophy and strategy.
  • How long this fund has been in existence.
  • It’s current NAV (share price).
  • Its yearly management fees (must not exceed 1% of amount invested).
  • The fund’s 1, 3 and 5 year returns*.
  • An assessment of some of the risks involved in investing in this fund.
  • Names of some popular mutual fund families. (Please note that a mutual fund family is comprised of many funds. Make sure to recommend specific funds.) Do not pick a mutual fund that has been in existence for less than five years, as it will not have an established track record. Providing a link to a fund web page is NOT an acceptable substitute for your discussion.
Franklin-Templeton / T. Rowe Price / Evergreen / Jennison Dryden
Thornburg / American funds / Vanguard / Utopia Funds
Oppenheimer / Fidelity / Van Kampen / Strong Funds
Washington Mutual Group of Funds / Pioneer / Scudder / Nuveen
7 / Leveraged Investing
  • Options & Futures
  • Basic Hedging Strategies
/ Chapters: 19, 20 / DB 7.1: (Relates to course objective 8)
In your own words, provide a brief explanation each of the following terms. For each term, define its potential risks and corresponding rewards. In addition, identify the type of investor who may be interested inpurchasing (not selling) such securities.
Futures contract
Financial future
IP 7.3-
The following WORD document contains a set of computational problems. Please solve these and make sure to show your computations. Submit this deliverable to the course instructor by or before 00/00/00.
Final Comprehensive IP ( relates to course objectives 6, 7, & 8)

IP 7.3Instructor Answer Key

8 / DB 8.1: (Relates to course objective #8)
Peggy Jones, an investment portfolio manager at a local bank, is in charge of managing a $5,000,000 stock portfolio. Ms. Jones is considering the purchase of a large block of VCX stocks in several weeks, but believes that the stock VCX stock prices are very likely to go up by then. If Ms. Jones consults with you in regard to the best plan of action for investment and portfolio management of this account. How would you counsel her? Should she consider a long or short hedge strategy? Explain your reasoning behind your suggestion.
GP due - See Module 3 for the requirements for this group project.

Grading Criteria

Grading ScaleGrading Requirements

A / 100 – 93
A- / 92 – 90
B+ / 89 – 88
B / 87 – 83
B- / 82 – 80
C+ / 79 – 78
C / 77 – 73
C- / 72 – 70
D+ / 69 – 68
D / 67 – 63
D- / 62 – 60
F / 59 and below
Attendance/participation / 10%
Weekly DB assignments / 30%
IP Assignments / 30%
GP / 15%
Final IP (8.3) / 10%


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