| 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