LECTURE NO. | TOPIC | LEVEL |
1* | The Time Vale of Money | Medium |
(Week 1-2) | ||
a. Interpret interest rates as | ||
required rate of return | ||
discount rate, or opportunity | ||
cost. | ||
b. Explain interest rates as the | ||
sum of a real risk-free rate, | ||
expected inflation, and | ||
premiums that compensate | ||
investors for distinct types of | ||
risk. |
2 | The Time Vale of Money | High | |
(Week 1-2) | |||
c. | Calculate and interpret the | ||
effective annual rate, give the | |||
stated annual interest rate and | |||
the frequency of | |||
compounding. (May involve | |||
numeric questions) | |||
d. | Solve time value of money | ||
problems when compounding | |||
periods are other than annual. | |||
(May involve numeric | |||
questions) | |||
3 | The Time Vale of Money | Medium | |
(Week 1-2) | |||
e. | Calculate and interpret the | ||
future value (FV) and present | |||
value (PV) of a single sum of | |||
money an ordinary annuity an | |||
annuity due perpetuity (PV | |||
only) and a series of unequal | |||
cash flows. (May involve | |||
numeric questions) | |||
4 | The Time Vale of Money | High | |
(Week 1-2) | |||
f. | Draw a time line and solve | ||
time value of money | |||
applications (for example | |||
mortgages and savings for | |||
college tuition or retirement). | |||
(May involve numeric | |||
questions) | |||
5 | Discounted Cash Flow | Medium |
Applications | |||
(Week 3-4) | |||
a. | Calculate and interpret the net | ||
present value (NPV) and the | |||
internal rate of return (IRR) of | |||
an investment. (May involve | |||
numeric questions) | |||
b. | Contrast the NPV rule to the | ||
IRR rule, and identify | |||
problems associated with the | |||
IRR rule. | |||
c. | Define, calculate and interpret | ||
holding period return (total | |||
return). (May involve | |||
numeric questions) | |||
6 | Discounted Cash Flow | High | |
Applications | |||
(Week 3-4) | |||
d. | Calculate interpret, and | ||
distinguish between the | |||
money weighted and time | |||
weighted rates of return of a | |||
portfolio and appraise the | |||
performance of portfolios | |||
based on these measures. | |||
(May involve numeric | |||
questions) | |||
e. | Calculate and interpret the | ||
bank discount yield, holding | |||
period yield effective annual | |||
yield and money market | |||
yields, for a US treasury bill. | |||
(May involve numeric | |||
questions) | |||
f. | Convert among holding period | ||
yield money market yields, | |||
effective annual yields, and | |||
bond equivalent yields. (May | |||
involve numeric questions) | |||
7 | Discounted Cash Flow | Medium | |
Applications | |||
(Week 3-4) | |||
g. | (cont.) Calculate and interpret | ||
the bank discount yield, | |||
holding period yield effective | |||
annual yield and money | |||
market yields, for a US | |||
treasury bill. (May involve | |||
numeric questions) | |||
h. | Convert among holding period | ||
yield money market yields, | |||
effective annual yields, and | |||
bond equivalent yields. (May | |||
involve numeric questions) | |||
8 | Statistical Concepts and | Medium | |
Market Returns | |||
(Week 4-5) | |||
a. | Differentiate between | ||
descriptive statistics and | |||
inferential statistics, between | |||
a population and a sample, | |||
and among the types of | |||
measurement scales. | |||
b. | Define a parameter a sample | ||
statistic, and a frequency | |||
distribution. | |||
c. | Calculate and interpret | ||
relative frequencies and | |||
cumulative relative | |||
frequencies given a frequency | |||
distribution (May involve | |||
numeric questions) | |||
d. | Describe the properties of | ||
data set presented as a | |||
histogram or a frequency | |||
polygon. | |||
e. | Define calculate and interpret | ||
measures of central tendency, | |||
including the population mean | |||
sample mean sample mean | |||
arithmetic mean, weighted | |||
average or mean (including a | |||
portfolio return viewed as a | |||
weighted mean), geometric | |||
means harmonic means media | |||
and mode. (May involve | |||
numeric questions) | |||
f. | Describe calculate and | ||
interpret quartiles quintiles | |||
deciles and percentiles. (May | |||
involve numeric questions) | |||
9 | Statistical Concepts and | Medium | |
Market Returns | |||
(Week 4-5) | |||
g. | Define calculate and interpret | ||
1) a range and a mean | |||
absolute deviation and 2) the | |||
variance and standard | |||
deviation of a population and | |||
of a sample (May involve | |||
numeric questions) | |||
h. | Calculate and interpret the | ||
proportion of observations | |||
falling within a specified | |||
number of standard deviations | |||
of the mean using Chebyshev’s | |||
inequality. (May involve | |||
numeric questions) | |||
i. | Define calculate and interpret | ||
the coefficient of variation and | |||
the Sharpe ratio. (May | |||
involve numeric questions) | |||
10 | Statistical Concepts and | High | |
Market Returns | |||
(Week 4-5) | |||
j. | Define and interpret skewness | ||
explain the meaning of a | |||
positively or negatively | |||
skewed return distribution and | |||
describe the relative locations | |||
of the mean median and mode | |||
for a nonsymmetrical | |||
distribution. | |||
k. | Define and interpret measure | ||
of sample skewness and | |||
kurtosis. | |||
l. | Discuss the use of arithmetic | ||
mean or geometric mean | |||
when determining investment | |||
returns. | |||
11 | Probability Concepts | Medium | |
(Week 5-7) | |||
a. | Define a random variable an | ||
outcome an event mutually | |||
exclusive and exhaustive | |||
events. | |||
b. | Explain the two defining | ||
properties of probability and | |||
distinguish among empirical | |||
subjective and priori | |||
probabilities. | |||
c. | State the probability of an | ||
event in terms of odds for or |
against the event. | |||
d. | Distinguish between | ||
unconditional and conditional | |||
probabilities. | |||
12 | Probability Concepts | Medium | |
(Week 5-7) | |||
e. | Define and explain the | ||
multiplication addition and | |||
total probability rules. | |||
f. | Calculate and interpret 1) the | ||
joint probability of two events, | |||
2) the probability that at least | |||
one of two event will occur | |||
given the probability of each | |||
and the joint probability of the | |||
two events, and 3) a joint | |||
probability of any number of | |||
independent events. (May | |||
involve numeric questions) | |||
g. | Distinguish between | ||
dependent and independent | |||
events. | |||
h. | Calculate and interpret, using | ||
the total probability rule, an | |||
unconditional probability. | |||
(May involve numeric | |||
questions) | |||
13 | Probability Concepts | High | |
(Week 5-7) | |||
i. | Explain the use of conditional | ||
expectation in investment | |||
applications. | |||
j. | Diagram an investment | ||
problem using a tree diagram. | |||
k. | Calculate and interpret | ||
covariance and correlation. | |||
(May involve numeric | |||
questions) | |||
l. | Calculate and interpret the | ||
expected value, variance and | |||
standard deviation of a | |||
random variable and of | |||
returns on a portfolio. (May | |||
involve numeric questions) | |||
14 | Probability Concepts | High |
(Week 5-7) | |||
m. Calculate and interpret | |||
covariance given a joint | |||
probability function. (May | |||
involve numeric questions) | |||
n. | Calculate and interpret an | ||
updated probability using | |||
Bayes’ formula. (May | |||
involve numeric questions) | |||
o. | Identify the most | ||
appropriate method to | |||
solve a particular counting | |||
problem, and solve | |||
counting problems using | |||
factorial, combination, and | |||
permutation concepts. | |||
(May involve numeric | |||
questions) | |||
15 | Common Probability | High | |
Distributions | |||
(Week 8-9) | |||
a. | Define a binomial random | ||
variable. | |||
b. | Calculate and interpret | ||
probabilities given the | |||
binomial distribution | |||
functions. (May involve | |||
numeric questions) | |||
16 | Common Probability | High | |
Distributions | |||
(Week 8-9) | |||
c. | Construct a binomial tree to | ||
describe stock price | |||
movement. (May involve | |||
numeric questions) | |||
d. | Define calculate and interpret | ||
tracking error. (May involve | |||
numeric questions) | |||
Computer Applications and | |||
Course Revision (Week 10-11) | |||
17 | Portfolio Management: An | Medium | |
Overview | |||
From 11 Dec, 2017. | |||
(Week 12) | |||
a. | Explain the importance of the | ||
portfolio perspective. |
b. | Discuss the types of | ||
investment management | |||
clients and the distinctive | |||
characteristics and needs of | |||
each. | |||
c. | Describe the steps in the | ||
portfolio management | |||
process. | |||
18 | Portfolio Management: An | Medium | |
Overview | |||
(Week 12) | |||
d. | Describe compare, and | ||
contrast mutual funds and | |||
other forms of pooled | |||
investments. | |||
19 | Portfolio Risk and Return: Part | High | |
I | |||
(Week 12-13) | |||
a. | Calculate and interpret major | ||
return measures and describe | |||
their applicability. (May | |||
involve numeric questions) | |||
b. | Describe the characteristics of | ||
the major asset classes that | |||
investors would consider | |||
informing portfolios according | |||
to mean-variance portfolio | |||
theory | |||
c. | Calculate and interpret the | ||
mean, variance and covariance | |||
(or correlation) of asset | |||
returns based on historical | |||
data. (May involve numeric | |||
questions) | |||
d. | Explain risk aversion and its | ||
implication for portfolio | |||
standard deviation | |||
20 | Portfolio Risk and Return: Part | High | |
I | |||
(Week 12-13) | |||
e. | Calculate and interpret | ||
portfolio standard deviation. | |||
(May involve numeric | |||
questions) | |||
f. | Describe the effect on a | ||
portfolio risk of investing in | |||
assets that are less than |
perfectly correlated. | |||
g. | Describe and interpret the | ||
minimum variance and | |||
efficient frontiers of risky | |||
assets and the global | |||
minimum variance portfolio. | |||
h. | Discuss the selection of an | ||
optimal portfolio given an | |||
investor’s utility (or risk | |||
aversion) and the capital | |||
allocation line. | |||
Computer Applications | |||
(Risk and Return Calculations | |||
regarding portfolios on excel | |||
using real time data) | |||
21 | Portfolio Risk and Return: Part | High | |
II | |||
(Week 13-14) | |||
a. | Discuss the implication of | ||
combining risk free asset with | |||
a portfolio of risky assets. | |||
b. | Explain and interpret the | ||
capital allocation line (CAL) | |||
and the capital market line | |||
(CML). | |||
c. | Explain systematic and | ||
non-systematic risk and why an | |||
investor should not expect to | |||
receive additional return for | |||
bearing non-systematic risk. | |||
22 | Portfolio Risk and Return: Part | High | |
II | |||
(Week 13-14) | |||
d. | Explain return generating | ||
models (including the market | |||
model) and their uses. | |||
e. | Calculate and interpret beta. | ||
(May involve numeric | |||
questions) | |||
f. | Explain the capital asset | ||
pricing model (CAPM) | |||
including the required | |||
assumptions, and the security | |||
market line (SML) | |||
23 | Portfolio Risk and Return: Part | High |
II | |||
(Week 14-15) | |||
g. | Calculate and interpret the | ||
expected return of an asset | |||
using the CAPM (May | |||
involve numeric questions) | |||
h. | Illustrate applications of the | ||
CAPM and the SML. | |||
24 | Multifactor Models and APT | Medium | |
(Week 15-16) | |||
a. | Describe and compare | ||
macroeconomic factor | |||
models, fundamental factor | |||
models, and statistical factor | |||
models. | |||
b. | Calculate the expected return | ||
on a portfolio of two stocks, | |||
given the estimated | |||
macroeconomic factor model | |||
for each stock. (May involve | |||
numeric questions) | |||
25 | Multifactor Models and APT | Medium | |
(Week 15-16) | |||
c. | Describe arbitrage pricing | ||
theory (APT), including its | |||
underlying assumptions and | |||
its relation to multifactor | |||
models, define arbitrage | |||
opportunity and determine | |||
whether an arbitrage | |||
opportunity exists and | |||
calculate the expected return | |||
on an asset given an asset’s | |||
factor sensitivities and the | |||
factor risk premiums. | |||
26 | Derivative Markets and | Medium | |
Instruments | |||
(Week 17) | |||
a. | Define a derivative and | ||
differentiate between | |||
exchange-traded and over-the- | |||
counter derivatives. | |||
b. | Define a forward commitment | ||
and a contingent claim. | |||
c. | Differentiate among the basic | ||
characteristics of forward
contracts, futures contracts,
options (calls and puts), and
swaps.
- Discuss the purposes and criticisms of derivative markets.
- Explain arbitrage and the role it plays in determining prices and promoting market efficiency.
27 | Forward Market Contracts | High | |
(Week 17) | |||
a. | Explain delivery/ settlement | ||
and default risk for both long | |||
and short positions in a | |||
forward contract. | |||
b. | Describe the procedures for | ||
settling a forward contract at | |||
expiration, and discuss how | |||
termination alternatives prior | |||
to expiration can affect credit | |||
risk. | |||
c. | Differentiate between a dealer | ||
and an end user of a forward | |||
contract. | |||
d. | Describe the characteristics of | ||
equity forward contracts and | |||
forwards contracts on zero- | |||
coupon and coupon bonds. |
28 | Forward Market Contracts | High | |
(Week 18) | |||
e. | Describe the characteristics of | ||
the Eurodollar time deposit | |||
market, and define LIBOR and | |||
Euribor. | |||
f. | Describe the characteristics | ||
and calculate the gain/loss of | |||
forward rate agreements | |||
(FRAs) (May involve | |||
numeric questions) | |||
g. | Calculate and interpret the | ||
payoff of an FRA, and explain | |||
each of the component terms | |||
(May involve numeric | |||
questions) | |||
h. | Describe the characteristics of |
currency forwards contracts.
29 | Futures Markets Contracts | Medium | |
(Week 18) | |||
a. | Describe the characteristics | ||
of futures contracts. | |||
b. | Distinguish between futures | ||
contracts and forward | |||
contracts. | |||
c. | Differentiate between | ||
margins the securities | |||
markets and margin in the | |||
futures markets, and explain | |||
the role of initial margin, | |||
maintenance margin, | |||
variation margin, and | |||
settlement on future trading. | |||
d. | Describe price limits and the | ||
process of marketing to | |||
marker, and calculate and | |||
interpret the margin balance, | |||
given the previous day’s | |||
balance and the change in | |||
the future price (May | |||
involve numeric | |||
questions) | |||
e. | Describe how a future | ||
contracts can be terminated | |||
at or prior to expiration. | |||
f. | Describe the characteristics | ||
of the following types of | |||
futures contracts: Treasury | |||
bill, Eurodollar, Treasury | |||
bond, stock index, and | |||
currency. | |||
30 | Option Markets and Contracts: | Medium | |
(Week 19-20) | |||
a. Describe call and put options. | |||
b. | Distinguish between European | ||
and American options. | |||
c. | Define the concept of money- | ||
ness of an option. | |||
d. | Differentiate between | ||
exchange –traded options and | |||
over-the –counter options. | |||
e. Identify the types of options in | |||
terms of the underlying | |||
instruments. | |||
f. | Compare and contrast interest | ||
rate options with forward rate
agreements.
31 | Option Markets and Contracts: | High | |
(Week 19-20) | |||
g. | Define interest rate caps | ||
floors, and dollars. | |||
h. | Calculate and interpret option | ||
payoffs, and explain how | |||
interest rate options differ | |||
from other types of options | |||
(May involve numeric | |||
questions) | |||
i. | Define intrinsic value and time | ||
value, and explain their | |||
relationship. | |||
j. | Determine the minimum and | ||
maximum values of European | |||
options and American options. | |||
k. | Calculate and interpret for | ||
minimum values and lower | |||
bounds. (May involve | |||
numeric questions) | |||
32 | Option Markets and Contracts: | High | |
(Week 19-20) | |||
l. | Explain and calculate how the | ||
value of an option is | |||
determined using a one- | |||
period binomial model. (May | |||
involve numeric questions) | |||
m. Explain how option prices are | |||
affected by the exercise price | |||
and the time to expiration. | |||
n. | Explain put-call parity for | ||
European options and relate | |||
put-call parity to arbitrage and | |||
the construction of synthetic | |||
options. | |||
o. | Contrast American options | ||
with European options in | |||
terms of the lower bounds on | |||
option prices and the | |||
possibility of early exercise. | |||
p. | Explain how cash flows on the | ||
underlying asset affect put-call | |||
parity and the lower bounds | |||
of option prices. | |||
q. | Indicate the directional effect | ||
of an interest rate change or |
volatility change on an
option’s price.
33 | Swap Markets and Contracts: | High |
(Week 20-21) | ||
a. Describe the characteristics of | ||
swap contracts and explain | ||
how swaps are terminated. | ||
b. Define, calculate, and | ||
interpret the payments of | ||
currency swaps, plain vanilla | ||
interest rate swaps, and equity | ||
swaps. (May involve | ||
numeric questions) | ||
Course Revision and | ||
Presentations/Projects | ||
(Week 21) |
- *Lecture 1 includes the course introduction, exam format and marking scheme. and marking scheme.
- Financial calculator is a MUST
- Expected Hours: 48 (including computer applications) or 45 (without computer applications)
ASSIGNMENT/PRESENTATION/SEMINAR
- 1 session on Asset Pricing Models (Mid of November 17 or J anuary 18) [5 marks]
- Project based on Portfolios Risk and Return. (Deadline: 15th J anuary, 2018) [10 marks].
- Group presentation on the performance of Futures Market. (Deadline: First week of Feb, 2018) [5 marks].
COMPUTER APPLICATIONS
- Calculation of NPV and IRR on MS Excel.
- Descriptive Statistics on SPSS (Return distribution using real time data).
- Tree diagram using MS Excel.
- Risk/Return calculation regarding portfolios using MS Excel.
- One period binomial model for option pricing