University of Victoria, Econ 435, Spring 2014
Financial Economics – CRN 20902
Course Outline
Class times: MR, 11.30-12.50pm, COR B143
Instructor: Dr. Paul Schure, BEC 336, Email:
Office hours: by email appointment (always suggest three 15-minute time slots that work for you)
Course website: http://web.uvic.ca/~schure/econ435/econ435.html
Description
This is a course on asset pricing and financial markets, while Econ 454 focuses on corporate finance. Models as well as institutional detail will matter for successful completion of this class. The models are organized around three pricing principles: arbitrage pricing, present-value pricing, and general-equilibrium-asset pricing. These principles are fairly abstract and the associated models are quite mathematical.
We will cover a lot of material and this is viewed to be a challenging course. The course material is tricky and is best learned by working on analytical problems. Many of the end-of-chapter questions of the course text are excellent. Success on the midterms and final requires that you have done many of them. You are expected to self-select relevant questions. Work in groups! Class attendance is expected from students, but you will not normally be unsubscribed if you haven’t. You may be unsubscribed if you fail to write the first midterm exam.
Textbook
The main textbook for this course is Investments, 7th Canadian Edition, by Bodie, Kane, Marcus, Perrakis and Ryan (McGraw-Hill Ryerson, ISBN 978-0070071704). Online support: http://highered.mcgraw-hill.com/sites/0070071705/student_view0/index.html
· “Bodie” is the leading advanced undergraduate text in the field. It is designed to be consistent with the Chartered Financial Analysts (CFA) curriculum and also covers material in the Canadian Securities Course (CSC). For the most part, we will follow the philosophy in Bodie and use asset-pricing models that assume financial markets are “nearly” efficient.
I-clicker: You will also need to pursue an i-clicker device, if you haven’t got one yet.
Assessment
Your final grade will be determined as follows:
Midterm 1 20% [Thursday Feb 6 (Chapters 1-7)]
Midterm 2 20% [Monday Mar 17 (Chapters 9 & 12-15)]
Group project 20% [due Monday Feb 17 --> both in 435 assignment box & by email]
Participation 5% [i-clickers]
Final examination 35% [Date TBA by UVic record services]
Total 100%
There will be a few opportunities for extra credit. Successful participation can reduce the weight of your lowest midterm grade to 10%. The final examination will cover material from the entire course. The group project will be done in groups of normally three students.
Outline
The lectures generally follow readings from Bodie. Some extra reading material may be announced down the line. The list of topics below is not necessarily discussed in that order in our course.
INTRODUCTION
1. Basics / Review [Bodie Chapters 1-3 (primarily done by self-study!)]
· Topics include: Real vs. Financial Assets; Taxes; Compound Interest; Real vs. Nominal Rates of Return; Stock Markets, and Stock Listings; Leverage, and Margin Transactions; The risk-return trade-off; plus institutional knowledge about assets and markets
GENERAL-EQUILIBRIUM-ASSET PRICING
2. Risk Aversion, Portfolio Theory and CAPM [Bodie Chapters 4-7 (with perhaps parts of Ch.11)]
- Review Chapter 4 independently. Chapters 5-7 address Risk and Risk Aversion, Diversification and Optimal Portfolios, The Capital Asset Pricing Model (CAPM), Extensions and Evidence
3. Market Efficiency [Bodie Chapter 9 (which perhaps parts of Ch.10 on Behavioral Finance, Grosman and Stiglitz (1980).]
- Strong, Semi-Strong, and Weak Forms of Information Efficiency, Innovations in Information and Prices, Random Walks.
PRESENT-VALUE PRICING
4. Common Stock Valuation [Bodie Chapter 15]
- Fundamental Analysis, Dividend Discount Models
5. PV Pricing of Fixed-Income Securities [Bodie Chapters 12]
- Bond Yields and Bond Prices, Mortgages
NO-ARBITRAGE PRICING
6. Fixed-Income Securities (cont.) [Bodie Chapters 13-14]
- The Yield Curve and the Term Structure of Interest Rates
- Duration and the sensitivity of bond prices
- Managing Bond Portfolios
7. Arbitrage Pricing of Derivative Assets [Bodie Chapters 17-19]
- Options
· Futures, Forwards, and Swaps
8. (possibly) Back to the Future of Arbitrage [Bodie Chapters 8 & 11, notes]
- The Arbitrage Pricing Model (APT), Extensions and Evidence
- The Limits to Arbitrage
Policies
You are expected to visit and review http://www.uvic.ca/socialsciences/economics/undergraduate/home/courses/course-policies.php for the applicable Departmental Policies on:
· Academic Integrity
· Attendance
· Term assignments and debarment from exams
· Grading
· Late assignments
· Academic Concession (but, see the additional note below)
· Travel plans
· Students with a disability
· Policy on inclusivity and diversity
In addition, note the following:
Waitlisted students. Waitlisted students are to write the tests while on the waitlist. The exact same grading schedule applies as to students on the class list.
Tests. There are no retake exams. Bring your UVic identity card to the tests.
Calculator. Only the standard Math 100/102 calculator, i.e. the Sharp EL-510L, is allowed.
Academic concession (e.g. illness). Besides the instructions found through the Academic Concession link, students should also (a) notify the instructor by email no later than the time of the test or due date of the assignment and (b) supply the instructor with a phone number where they can be reached [Check the ground rules on emailing below].
Grading concerns. You must inform me within a week from the date the class got the test back. There is only one way to inform us, namely by email to the instructor [Check the ground rules on emailing below].
Students on a UVic sports team. Your instructor may well be sympathetic as long as you follow a path which is analogous to the path to be followed by students with a disability. Students on a UVic sports team get in touch with their head coach or manager, rather than the Resource Centre for Students with a Disability. This is to happen ASAP, so that the instructor knows who you are and knows your schedule by the end of the second week of classes.
Web access. I will assume you frequently check the course website as well as the email address you passed on to UVic. If web access is an issue for you, then let me know on the first day of classes.
Emails. When sending me emails always identify yourself and always make up an appropriate header that starts with “Econ435”. If not, we will assume your email has not been written and I won’t process it. Let us from both ends make sure to get back to emails within 24 hours (send me a reminder if I haven’t). If you ask an involved question, then please leave a call-back number.