ASHESI UNIVERSITY COLLEGE DEPARTMENT OF BUSINESS ADMINISTRATION LEVEL 300 BUSINESS ADMINISTRATION SPRING SEMESTER, 2015/2016 ACADEMIC YEAR BUSA 321 - INVESTMENTS Lecture Times: Mon/Wed Group A 0830 1000 Group B 1330 1500 Course Lecturer: A. Essel-Anderson Office: Room 207 Office Hours: Mon & Wed 1030 1300 E-mail: aenderson@ashesi.edu.gh Tel (office) +233 30 261 0330 Ext 1009 Tel (mobile) +233 24 280 6155 or +233 20 836 3329 Course Description This course surveys the investment media, concepts and techniques to provide an understanding of the investment process in the economic and financial environment. The course covers the elements of investments, portfolio theory and management, security analysis, valuation of stocks and bonds and risk-return trade-off. The instructor will attempt to include only the necessary mathematical and technical details which will provide the intuition that may illuminate the gliding path for students as they confront new ideas and challenges in their later lives as investment practitioners. The instructor believes that theories such as the capital asset pricing model and the efficient market hypothesis are centrepieces of modern research and are as much intellectually satisfying subjects of scientific research as they are important building blocks for the development of solid grounding in investments. Consequently, aspects of these theories will be used generously to determine the value of real and financial assets. The approach to the lecture will be consistent with that of the CFA Institute. Relevant questions from past CFA exams will form an integral part of tutorial sessions. This is meant to give a head-start to those students who intend to pursue a professional career in investment analysis. As the instructor tries to bridge the gap between theory and practice, several real-world examples are presented. This may include names of companies, tools and methods, which should not be interpreted as investment advice. Even though the instructor is qualified to offer personal investment advice, none of the information offered in class and during office hours will be interpreted as Investment Advice. One more caveat is in order: This course does NOT guarantee you investment success. The course will consist of lectures and discussions of contemporary investment and finance problems in Ghana and across the globe. It will also include an applied team project, which will aim at developing, among others, students capability to work in teams for enhanced success. A good dose of data will be used in the analysis part of the course. Students will be required to use Microsoft Excel analytic tools to solve a large part of the problem sets. This is also intended to provide students with a taste of tools they will need to understand and use in their career as investment analysts. Course Pre-requisites Students eligible to register for this course must have taken Financial Accounting and Introduction to Finance in previous semesters. Course Objectives The course is aimed at opening students minds to a broad array of investment opportunities available in Ghana s burgeoning economy and the world at large, and to equip them with the investment tools which will serve as a strong foundation to their pursuit of professional careers in investment and corporate finance. The course seeks to achieve the following objectives: To help students develop the investor s eye for the business end of interactions between economic entities To enhance students ability to use company data company stock returns, financial statements, stock market index returns and general economic data to project a company s value and make appropriate recommendations to the investing public To help students develop technical competence for appraising investments and choosing optimal investments based on value Course Outline - Investment Page 1
Thematic Areas Areas Duration 1. The investment environment 3 weeks 2. Security analysis 3 weeks 3. Portfolio theory and practice 3 weeks 4. Equilibrium in capital markets 3 weeks 5. Fixed-income securities 2 weeks Evaluation Criteria 1. Attendance and participation 10% 2. Weekly markets research and portfolio management reports 15% 3. Quizzes 15% 4. Midterm examination 10% 5. Team Project 15% 6. Final examination 35% Total 100% Attendance, and participation: Attendance is required and participation is encouraged. You will receive a maximum of 5% each for consistent attendance and active participation. That is, attendance and participation will contribute 10% to your final grade. Weekly financial markets report: This is an individual assignment. In the first term, you are required to find out information about selected financial assets and submit a 2-page report on their findings on weekly basis over the semester. In the second term, you are required to identify a potential investor (family/friend/acquaintance), assess the risk profile of that person, recommend an investment portfolio that suits the person s risk profile, and then report on the performance of the investment. Total score for all weekly reports will contribute 15% to your final grade. Quizzes and take-home assignments: There will be 5 announced quizzes, one on each theme, which will be equally weighted. Total score for all quizzes and any take-home assignments will contribute 15% to your final grade. Midterm examination: This is a sit-in examination covering topics treated in the first term of the semester. The examination will last maximum 1 hour and 30 minutes. This will contribute 10% to your final grade. Team project: This is a team assignment. Students will be assigned to teams to value stocks listed on the Ghana Stock Exchange using various valuation techniques. Each team is expected to submit a 15-page valuation report, and each group member is expected to submit peer reviews of each team member. Details of deliverables and format of peer review report will be made available to you in separate documents. Peer reviews will account for 5% and lecturer s grading of the final report from the team will account for 10%. Final examination This is a sit-in examination covering all themes. The examination will last maximum 3 hours. The final examination will contribute 35% to your final grade. Course Outline - Investment Page 2
Course Materials and Resources Required textbook Investments and Portfolio Management (9th Ed) by Bodie, Kane, and Marcus, McGraw Hill, 2011 Recommended readings Business and Financial Times Ghana Stock Exchange publications Quarterly market reports and the Factbook The Economist Global Financial Stability Report, published by of the IMF World Economic Outlook (WEO), published by IMF Recommended websites Bank of Ghana [look for rates on Government of Ghana Securities and tender results] http//www.bog.gov.gh The International Monetary Fund [look for recent edition of Global Financial Stability Report and WEO] http//www.imf.org Ghana Stock Exchange [look for market information volumes and prices, GSE stock indexes, structure and functions, rules and regulations] http//www.gse.com.gh Bloomberg [look for stock indexes on stocks around the world DJIA, S & P 500, NASDAQ, FTSE 100, NIKKEI, DAX] http//www.bloomberg.com Expectations and Class Conduct Ashesi rules concerning classroom conduct and academic work (presentations, quizzes, take-home assignments and examinations) apply fully in this course (for details of what is acceptable and what is not refer to student handbook and any other college documents containing such rules). Take note of the following: Students are required to attend all lectures and discussions. Those who stay away from class, walk into class late, or walk out of class unnecessarily will receive poor score for the attendance and participation category. Those who stay away from class for too long (i.e. contrary to maximum period allowed under College rules) will receive a fail grade for the course. The use of mobile phone, laptops, and other entertainment or communication devices during class sessions is not allowed. However, when a specific class activity requires the use of a specific device, instructor will give specific permission to students to use that device. And the device shall be used for that purpose only. Students are expected to do required readings for a lecture before attending that lecture, and to participate fully in all class discussions. You should not do anything that will deter others from expressing their views. Students are required to participate in all quizzes and exams. Students who miss quizzes and exams without prior permission for a legitimate reason will receive zero score. Cheating in quizzes and exams is punishable under College rules. Submission of take-home assignments will be fixed on lecture days. Students are expected to submit their work in class and not after class. Sources used for assignments should be disclosed; plagiarism is punishable under College rules. Students who fail to meet deadlines without prior permission for legitimate reasons will receive a score of zero. Course Outline - Investment Page 3
Weekly schedule Weeks 1 to 3: The Investment Environment Week 1: Overview of the Investment Environment: We will discuss three topics that will provide a useful perspective for the material that will be covered later in the course. We shall consider the role of financial assets in the economy and discuss the relationship between securities and real assets that actually produce goods and services for consumers. We shall also discuss why financial assets are important to the functioning of an economy, emphasizing Ghana s financial market and its role in economic development. We shall then take a look at the types of decisions that confront investors as they assemble a portfolio of assets. Week 2: Asset Classes and Financial Instruments. This topic will explore the important features of the broad classes of securities. It will describe money market instruments and move on to debt and equity securities. We shall discuss the structure of various stock market indices and examine the role of market benchmark portfolios in portfolio construction and evaluation. Week 3: How Securities are Traded Ghana Stock Exchange: This chapter will provide the students with a broad introduction to the many venues and procedures available for trading securities in Ghana and other international markets. We shall see that trading mechanisms range from direct negotiations among market participants to fully automated computer comparison of trade orders. We shall take an introductory look at the workings of the recently-introduced Ghana Stock Exchange Automated Trading Platform. Week 3: Mutual Funds and Other Investment Companies: We shall examine types of investment companies such as mutual funds and unit trusts. We shall then focus on the functions of mutual funds, their investment styles and policies and the cost of investing in these companies. We shall conclude our discussion with a look at how to measure the performance of investment funds Quiz 1 This may be conducted on the Friday of the 3rd week or the Monday of the 4th week. It covers Topics under the Investment Environment Weeks 4 to 6: Security Analysis Week 4: Macroeconomic and Industry Analysis: This section treats the broad based aspects of fundamental analysis macroeconomics and industrial analysis. We begin with a discussion of international factors relevant to firm performance and move on to the overview of the significance of the key variables usually used to summarize the state of the macro economy. We then discuss government macroeconomic policy. We conclude the analysis of the macro environment with a discussion of business cycles. Finally, we move to industry analysis, treating issues concerning the sensitivity of the firm to the business cycle, the typical life cycle of an industry and strategic issues that affect industry performance. Week 5: Company Analysis: This section analyses the target company whose stocks will be valued. It discusses how a deep understanding of the company s business model opens the door to determining, with a good degree of certainty, the future prospects of the company s cash flows and hence, its value. It begins with an analysis of the company s revenue and cost models, its SWOT and its financial statements using financial ratio analysis. It must be stressed here that students do not just describe the financial ratios but discuss the reasons (or at least, possible reasons) for the trends established in the financial statements. Week 6: Equity Valuation Models: This chapter describes the valuation models that stock market analysts use to uncover mispriced securities. The models presented are those used by fundamental analysts, those analysts who use information concerning the current and prospective profitability of the company to assess its market value. We start with a discussion of the alternative measures of the value of a company and progress to quantitative tools called dividend discount models, which security analysts use to measure the value of a firm as an ongoing concern. We next discuss price-earnings ratios, explaining why they are of such interest to analysts and highlighting some of their shortcomings. We close this topic with a discussion of free cash flow models used by analysts to value firms based on forecasts of the cash flows. Quiz 2 This may be conducted on the Friday of the 6th week or the Monday of the 7th week. It covers Topics under Security Analysis Course Outline - Investment Page 4
Weeks 7 to 9: Portfolio Theory and Practice Week 7: Measuring Risk and Return from Historical Records: We begin this topic by discussing interest rates and investments in safe (risk-free) assets and examine the history of risk free investments in Ghana over the past 20 years. We shall also use statistical tools to analyze historical returns on stocks (this time, from the USA: obtaining returns on Ghana stocks is a nightmare). We shall end our discussion with a look at the implications of the historical record for future investments. Week 8 Risk Aversion and Capital Allocation to Risky Assets: We begin by introducing two themes in portfolio theory that investors will avoid risk unless they can anticipate a reward for engaging in risky investments, and that investors do quantify trade-offs between portfolio risk and expected return. Using this knowledge, we shall attempt to resolve the question of how much of an investor s wealth to put at risk for the greater expected return that can be achieved. Week 9: Optimal Risky Portfolios: This section will look at the potential gains from simple portfolio diversification into many assets and examine the process of efficient diversification, starting with only two assets, and subsequently adding on a risk-free asset. We conclude the topic by demonstrating how diversification can reduce risk without affecting returns. Quiz 3: This may be conducted on the Friday of the 9th week or the Monday of the 10th week. It covers Topics under Portfolio Theory and Practice Weeks 10 to 12: Equilibrium in Capital Markets Week 10: The Capital Asset Pricing Theory: We examine the relationship between the risk of an asset and its expected return. We shall then examine two key functions of the CAPM that it provides a benchmark rate of return for evaluating possible investments and that the model helps make an educated guess as to the expected return on an asset that has not yet been traded in the marketplace. We shall then find out why, despite its challenges, the CAPM is deemed acceptable for important investment decisions. Week 11: Arbitrage Pricing Theory and Multifactor Models of Risk and Return: We continue the discussion on limitations of the CAPM in describing security returns, and then move into how multifactor models can provide better descriptions of security returns. We examine how expected returns on securities might be affected by several macro risk factors. We consider how to identify risk factors and how to compute factor risk premiums. And then conclude with the Fama-French (FF) Three-Factor Model. Week 12: The Efficient Market Hypothesis: In this section, we shall explore the features of an efficient market and attempt to show how competition among analysts leads to market efficiency and examine the efficient market hypothesis for investment policy. We then shall ask and attempt to answer the question: Is the Ghana Stock Market Efficient? Quiz 4: This may be conducted on the Friday of the 12th week or the Monday of the 13th week. It covers Topics under Equilibrium in Capital Markets Weeks 13 and 14 - Fixed Income Securities Week 13: Bond Yields and Pricing: We shall start with an overview of the universe of bond markets, including treasury, corporate and international bonds. We turn next to bond pricing, showing how bond prices are set in accordance with market interest rates and why bond prices change with those rates. We then show how bond prices evolve over time, discuss certain tax rules that apply to debt securities and show how to calculate after-tax returns. We finally take a look at the impact of default or credit risk on bond pricing. Quiz 5: This may be conducted on the Friday of the 13th week or the Monday of the 14th week. It covers Bond Yields and Pricing Week 14: The Term Structure of Interest Rates: We use the knowledge acquired in the preceding topic to prepare yield curves for selected securities from the Ghanaian and other markets and observe the trends. We then examine the theories of term structure the expectations hypothesis, liquidity preference, and the market segmentation theory. Finally, we try to answer the big question: Is the general belief that rates are higher for longer-term securities and lower for shorter-term securities valid? Course Outline - Investment Page 5
Ashesi Learning Goals 1. Critical Thinking and Quantitative Reasoning: An Ashesi student is able to apply critical thinking and quantitative reasoning to approach complex problems. This goal will be addressed by having the students value equities and determine returns on portfolio of bonds that are listed or unlisted. 2. Communication: An Ashesi student is an excellent communicator in a variety of forms. The various presentations of group work to the class and other faculty will serve to hone the communication skills of the students and prepare them for the real world. 3. Technology: An Ashesi student is an effective and flexible user of technology. Students will learn to use Microsoft Excel tools as part of the course. Students will have practical laboratory sessions devoted to using Microsoft Excel to solve contemporary investment challenges. Course Outline - Investment Page 6