Investments

Lecture 01

Joon H. Song
 Course Outline
 This course explores various issues underlying asset management.
This is the most fundamental attribute of any professionally
managed portfolio. Even if most of the concepts presented in
class are specific to portfolios consisting of shares or stock
market indices, the majority of these concepts apply to a wide
variety of financial asset categories.
 In this course, students will become familiar with fundamental
concepts of investment including market efficiency, risk and
return tradeoff, portfolio theory, CAPM, multifactor models,
arbitrage-free pricing model, market equilibrium and the pricing
of financial derivatives.
 We will cover the analytical tools and finance theory necessary to
make efficient investment decisions and to understand the
paradigm of asset valuation.

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 Finance vs. Money and Banking
 It is educationally important to realize that finance
touches on different subject from money & banking
in its scope and objective.
 M&B is about how money is created and operated in
money market and what is its effect on the macro
economy, i.e. all about money which is one specific kind
of financial assets.
 Finance is about how the various types of financial
assets are underwritten, priced, traded in order to
achieve inter-temporal resource allocation and risk
management.

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 Course Schedule (tentative)
 Sessions 1: Financial markets overview
 Sessions 2, 3, and 4: Construction of Portfolios
 Sessions 5 and 6: CAMP and Factor Models
 Session 7 and 8: Market Efficiency and equilibrium
 Sessions 9: Active Portfolio Management
 Session 10: Bond Portfolios
 Session 11: Equity Analysis
 Session 12-14: Options, futures and other
derivatives

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 Evaluation
 You will be evaluated using the following criteria:
 Midterm Exam: 40%
 Final Exam: 40%
 Class Attendance: 20%

 The midterm and final exams are 2 hours long.

 The exams will be closed book.
 For the exams, you are allowed to bring an
electronic calculator.
 Old exams will not be made available.

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 Contact Information
E-mail: [email protected]
Office: 교수연구동, Room 411
Regular lectures: Monday 12:00 – 2:50 a.m.

Please do not be shy about contacting me if you have

questions about the material!
Please refrain from contacting me via cellular phone calls
without urgent reasons. 

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 Course Information
 Text book: Bodie Zvi, Alex Kane, Alan J. Marcus. (BKM)
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10th international edition,
2015, McGraw-Hill.

 Additional reading:
I will assign reading on newspaper
articles or relevant material as we
move along.

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 Course Information
 Supplementary text book: Bodie Zvi, Robert C. Merton,
David L. Cleeton (BMC)
Financial Economics
2th international edition,
2009, Pearson Education.

■ This is not a required reading.

Just for those who are interested
in reading more materials

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 Course Information
 Supplementary text book: D. G. Luenberger(박구역 외 역)
Investment Science (금융과학)
2014, 교우사

■ Again, this is not a required

reading.
Just for those who are interested
in reading more technical methods
and real-life applications.

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 Course Information

 Google drive: Slides from lectures, handouts, excel

sheets, etc., will be posted here.

 Prerequisites: Financial economics is a quantitative

subject, hence it is important that you have already
taken introductory statistics and calculus courses. If you
do not have a working knowledge in statistics and math,
you may not be well prepared to take this course. Use of
a spreadsheet package like Excel will be crucial for
understanding and replicating class materials.

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 Today’s Lecture
 Objective: To give an overview of financial
assets and its role in the economy.
 Recent development and trends in financial market.
 Major players in financial markets.

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 Real Assets Versus Financial Assets
 Essential nature of investment
 Reduced current consumption

 Planned later consumption

 Inter-temporal allocation of resources and

distribution of wealth
 Real Assets
 Assets (you may think inputs) used to produce
goods and services
 Financial Assets
 Claims on real assets

 Allocative function rather than production.

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 A Taxonomy of Financial Assets
 Fixed income or debt
 Money market instruments

 Bank certificates of deposit

 Capital market instruments

 Bonds

 Common stock or equity

 Derivative securities

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 Financial Markets and the Economy

 Information Role
 The Google effect

 Consumption Timing
 Allocation of Risk
 Separation of Ownership and Management
 Agency Issues

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 Financial Markets and the Economy (Cont’d)

 Corporate Governance and Corporate Ethics

 Accounting Scandals
 Examples – Enron, Rite Aid, HealthSouth
 Auditors—watchdogs of the firms
 Analyst Scandals
 Arthur Andersen (→ now known as
Accenture)
 Sarbanes-Oxley Act of 2002
 Tighten the rules of corporate governance

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 The Investment Process
 Asset allocation  function of researchers or
analysts
 Choice among broad asset classes

 Security selection  function of fund managers

 Choice of which securities to hold within asset
class
 Security analysis  function of fund managers

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 Markets are Competitive
 Risk-Return Trade-Off
 Efficient Markets
 Active Management
 Finding mispriced securities
 Timing the market
 Passive Management
 No attempt to find undervalued securities
 No attempt to time the market
 Holding a highly diversified portfolio

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 The Players
 Business Firms– net borrowers
 Households – net savers
 Governments – can be both borrowers and savers
 Financial Intermediaries
 Investment Companies
 Banks
 Insurance companies
 Credit unions
 Investment Bankers
 Perform specialized services for businesses
 Markets in the primary market

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 Recent Trends—Globalization
 American Depository Receipts (ADRs)
 Foreign securities offered in dollars
 Mutual funds that invest internationally
 Instruments and vehicles continue to develop
(web-based trading, HTS, mobile trading etc.)
 Exchange Traded Funds (ETFs)
 Enlisted or publicly traded funds in the equity
markets

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 Recent Trends—Securitization
 Mortgage pass-through securities
 Other pass-through arrangements
 Car, student, home equity, credit card loans

 Offers opportunities for investors and originators

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 Recent Trends—Financial Engineering
 Use of mathematical models and computer-based
trading technology to synthesize new financial
products
 ELS, ELD, ELN, CDO, CBO etc.

 Bundling and unbundling of cash flows

 Unpackaging and repackaging.
 Law of one prices  linear pricing

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 Recent Trends—Computer Networks
 Online information dissemination
 Information is made cheaply and widely available to
the public
 Automated trade crossing
 Direct trading among investors

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  Read Ch.2-Ch.4

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