ACC/FIN 725 Fall 2005 Applied Financial Analysis and Portfolio Management. Phone:

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1 ACC/FIN 725 Fall 2005 Applied Financial Analysis and Portfolio Management Professor Richard Sloan Room: 2016 PAC Phone: INTRODUCTION This course provides a systematic and applied approach to active investment management. The focus of the course is on the active management of a portfolio of equity securities. However, the principles covered are broadly applicable to the active management of any portfolio of financial securities. The course synthesizes three key elements: (i) (ii) (iii) The application of the theory and technical skills taught in RSB accounting and finance courses to active investment management; Mastery of the leading professional investment tools; and The application of the first two elements above to the management of a real equity portfolio. The skills taught in ACC 712 and FIN 608 are particularly relevant. These courses are recommended pre-requisites or co-requisites. ORGANIZATIONAL DETAILS 1. Course Materials: There is no required text for the course. All required readings are listed in the outline below and are available in the ACC/FIN 725 Coursepack or will be handed out in class. The Coursepack can be purchased from Dollar Bill Copying at 611 Church Street and costs approximately $35. Required readings should be covered in advance of the class for which they are assigned. Copies of lecture slides, handouts etc. will be made available on the ACC/FIN 725 CTools page. 2. Course Structure: This course differs from other courses in that we must work as a team to manage a real portfolio. As a consequence, each of you will act as portfolio managers and will have specific responsibilities. In all, there are 12 different responsibility groups with three to four students assigned to each group. The 12 groups are made up of ten sector groups, an economist/strategist group and a sales & trading group. Sector managers are responsible for stock selections in their assigned sector. The economist/strategist group will work with the

2 sector managers to keep track of key macroeconomic factors and manage the sectoral emphasis of the portfolio. The sales and trading group will be responsible for tracking investment performance and portfolio risk, client relations (U of M Chief Investment Officer), portfolio optimizations and for delivering trade lists to the instructor for execution. 3. Course Evaluation: Your grade for the course will be determined as follows: Sector Overview Report/Presentation 10% FactSet Quantitative Screening and Backtesting Case 7% Return Forecasting Case 7% BARRA Risk Analysis Case 7% BARRA Portfolio Optimization Case 7% FTS Trading Simulations 7% Quiz 20% Final Sector Report/Presentation 15% Class Participation 10% Peer Group Evaluation 10% You should work on all the reports and cases in your assigned groups. All cases and reports are due at the beginning of the session indicated in the course outline. I will provide detailed descriptions of the case and report requirements as the course progresses. 4. Tozzi Center Hours: The course meets from 9.30 a.m. to p.m. on Tuesdays in the Tozzi Electronic Finance Center. This facility contains all of the financial applications and data feeds that we will be using during the course. The Center will also be open for lab hours throughout the semester. It will typically be open each weekday from 9.00 a.m p.m., assuming that it is not scheduled for other classes or events. We will add weekend and evening hours ahead of assignment due dates. A schedule of opening hours and events is available on the Center website at: 5. Course Outline: Effective investment management requires consideration of four key elements: 1. Return Forecasting; 2. Risk Management; 3. Cost Management; and 4. Performance Evaluation. In this course, we will develop a systematic approach for considering each of these elements and incorporating them into an active investment management strategy. We will then use this strategy to manage the Ross School of Business Student-Managed Equity Fund.

3 COURSE OUTLINE I. INTRODUCTION Session 1: Tuesday September 6 Course Overview and Sector Assignments Required: A Framework for Active Investment Management (coursepack) Overview of UMBS Student Managed Fund (coursepack) Recommended: esignal Basics (coursepack) Bloomberg Cheat Sheets (coursepack) Cases Due: None II. RETURN FORECASTING Session 2: Tuesday September 13 Overview of Market Efficiency and Stock Return Prediction Techniques Required: Are Financial Markets Efficient? (coursepack) Forecasting Returns (class handout) Cases Due: None Session 3: Tuesday September 20 Sector Overview Presentations Required: Relevant S&P Industry Surveys (available at Link to S&P Industry Surveys) Cases Due: Sector Overview Reports Session 4: Tuesday September 27 Quantitative Analysis Required: Evidence on Forecasting Equity Returns (coursepack) Factset Equity Screening Reports (coursepack) Cases Due: FactSet Quantitative Screening Case Session 5: Tuesday October 4 Valuation Analysis and Catalytic Analysis Background: Valuation Analysis (class handout) Catalytic Analysis (class handout) Cases Due: Return Forecasting Case III. RISK MANAGEMENT Session 6: Tuesday October 11 Modeling and Forecasting Risk Using MFMs/Introduction to the BARRA Aegis System

4 Required: Cases Due: The New Morningstar Style Box Methodology (coursepack) BARRA US Equity Model Handbook (coursepack) BARRA Aegis Portfolio Manager Guide (coursepack) None Tuesday October 18 (No Class) Tuesday October 25 (No Class) Session 7: Tuesday November 1 Portfolio Optimization Background: Readings for Session 6 above Cases Due: BARRA Risk Analysis Case Session 8: Tuesday November 8 Advanced Portfolio Strategies (Benchmark Timing, Long/Short Investing, Use of Equity Derivatives) Required: Cases Due: IV. COST MANAGEMENT The Use of Derivatives in Managing Equity Portfolios (coursepack) Hedge Fund Primer (coursepack) An Overview of Long-Short Equity Investing (coursepack) BARRA Portfolio Optimization Case Session 9: Tuesday November 15 Transaction Costs and Taxes Required: The Market Impact Model (coursepack) BARRA After-Tax Optimization Theory (coursepack) Cases Due: None (FTS Trading Simulations During Session) Tuesday November 22 (No Class) V. PERFORMANCE EVALUATION Session 10: Tuesday November 29 Portfolio Maintenance and Performance Evaluation/Quiz Required: Understanding the Attribution Report (coursepack) Cases Due: None (Quiz will be held during the last half of this session) VI. IMPLEMENTATION

5 Session 11: Tuesday December 6 Sector Presentations and Stock Voting Cases Due: Sector Reports for Presenting Sectors Session 12: Tuesday December 13 Sector Presentations, Stock Voting and Trading Cases Due: Sector Reports for Presenting Sectors