FINA5210 Investment Analysis

Course Introduction

Zhanhui Chen

Fall 2022

FINA5210 Investment Analysis- ©CHEN 2022 FINA5210 Investment Analysis – 1

 Your Professor...

● Worked in asset management industry before going to U.S.

Background
❖ Me
❖ Course Info
● [Link]. from Tsinghua University and Texas A&M University.
❖ Course Materials
❖ What Should I Do?
Investments ● Previously worked at Nanyang Technological University:
Introduction

Big Ideas Explored

Places lived before.
Keywords
● Research areas include theoretical and empirical asset pricing, in
connection with corporate finance, macroeconomics, insurance,
FinTech, and sustainable finance.

● Teaching
✦ Taught Investments at all levels
■ Undergraduate
■ Master: MSc; MBA
■ Ph.D. program
■ Executive programs
✦ Current year: MSc (3 sections); MBA; PhD

FINA5210 Investment Analysis- ©CHEN 2022 FINA5210 Investment Analysis – 2

 Course Information

● All class information is summarized in the syllabus.

Background
❖ Me
● Grading:
❖ Course Info
❖ Course Materials
✦ Attendance and class participation (10%)
❖ What Should I Do? ✦ Online quiz (20%): 3 quizzes, only the best 2 quiz results counted
Investments ✦ Group projects (25%): 5-7 members, with same grades
Introduction

Big Ideas Explored ■ Presentation (10%): 4 slides/5 mins; on Session 6 or 7

Keywords ■ Report (15%): due on Session 7
✦ Final Exam (45%): 2 hrs, Oct 22
● Office Hours:
✦ LSK 5075 / Zoom; Wed 4-5 PM or by appointment; Tel.: 2358-7670;
E-mail: chenzhanhui@[Link]; Zoom Meeting ID: 967 6025 7466,
passcode FINA5210
✦ Flexible hours: I will be in classroom/Zoom about 15 mins before/after
classes.
✦ TA:
■ Zhuang CHU (zchu@[Link]), Jia ZHANG (jzhanggx@[Link]), Zexin
ZHENG (zzhengaq@[Link])
■ LSK4063 / Zoom; Thursday 2-4 PM; Meeting ID: 912 7285 0159, passcode FINA5210.

FINA5210 Investment Analysis- ©CHEN 2022 FINA5210 Investment Analysis – 3

 Course Materials

● Textbooks:
Background
❖ Me ✦ Bodie, Kane, and Marcus, Investments, 12th edition
❖ Course Info
❖ Course Materials
✦ Or, its variations: US version, International Student Edition, Asia Global
❖ What Should I Do? Edition, titled “Investments” or “Essentials of Investment”.
Investments ✦ MSc office provides e-textbook.
Introduction

Big Ideas Explored ● All teaching materials will be posted on Canvas prior to class.
Keywords
✦ Lecture slides
✦ Quizzes
✦ Additional notes
✦ Problem sets/solutions
✦ Additional materials (e.g., videos, readings)
● I also recommend:
✦ Burton G. Malkiel. 2020. A Random Walk Down Wall Street. W. W. Norton
& Company, 12th edition.
✦ Peter L. Bernstein. 2005. Capital Ideas: The Improbable Origins of
Modern Wall Street. Wiley. A good book for casual reading.
✦ Other light reading/viewing/listening materials suggested in the syllabus.

FINA5210 Investment Analysis- ©CHEN 2022 FINA5210 Investment Analysis – 4

 What Should I Do?

● Before each class: read the textbook/slides.

Background
❖ Me
❖ Course Info
● Attend all classes.
❖ Course Materials
❖ What Should I Do? ● Ask questions.
Investments
Introduction ✦ In class:
Big Ideas Explored
■ You are probably not the only one who has that question.
Keywords
Learn from your peers.
■ I will ask questions.
✦ Visit office hours.
● After each class: review and do the problem sets.

✦ Required: Problem sets posted on Canvas, including solutions

✦ Optional: End-of-chapter questions in the textbook. Check the
solutions with TA.
● Improve your finance literacy.
● Work hard! Don’t fall behind.

FINA5210 Investment Analysis- ©CHEN 2022 FINA5210 Investment Analysis – 5

 What is this course about?

Investments develops the theories and tools needed to analyze publicly

Background

Investments
traded securities, form optimal investment portfolios, and apply these
Introduction tools to real-world situations (including corporate decisions). Investments
❖ What is this course
about? is a quantitative and analytical field. You should be comfortable with
❖ Who uses these
tools? economic, mathematical, and computing tools applied to financial
Big Ideas Explored markets. But the course is not about math — instead it is about applying
Keywords some basic investment ideas to various situations.

The course deals with

● the nature of market places, e.g., financial instruments and trading
mechanism;

● and the optimal portfolio choice involving these securities;

● the determination of security prices (asset pricing models);

● the information role of financial markets.

FINA5210 Investment Analysis- ©CHEN 2022 FINA5210 Investment Analysis – 6

 Who uses these tools?

● Institutional investors, e.g., asset managers

Background

Investments
Introduction ● Individual investors
❖ What is this course
about?
❖ Who uses these
tools? ● Corporate sector, e.g., CFOs
Big Ideas Explored

Keywords ● Government agencies, e.g., economic development, budgeting,

sovereign funds, pensions

FINA5210 Investment Analysis- ©CHEN 2022 FINA5210 Investment Analysis – 7

 Ideas: Diversification Benefits

Background

Investments
● Risk can be reduced by combining different securities.
Introduction

Big Ideas Explored

✦ Some risks can be diversified away. Not all risks provide
❖ Ideas: Diversification compensation.
Benefits
❖ Ideas: Risk/Return
Tradeoffs
❖ Ideas: No Arbitrage
in Financial Markets
● The benefits of diversification depend on how securities comove
❖ Ideas: Informational
Efficiency of Markets
together.
Keywords ✦ Combinng G (good) with B (bad) might be better than G or B
individually.
✦ Optimal hedging and portfolio strategies.

● Evaluate performances as a whole (e.g., a portfolio), not individually.

FINA5210 Investment Analysis- ©CHEN 2022 FINA5210 Investment Analysis – 8

 Ideas: Risk/Return Tradeoffs

Background

Investments
● What risks are not rewarded and so should be diversified away?
Introduction

Big Ideas Explored

● What risks are rewarded? Systematic risk.
❖ Ideas: Diversification
Benefits
❖ Ideas: Risk/Return ✦ Take some systematic risk and grow with the economy.
Tradeoffs
❖ Ideas: No Arbitrage
in Financial Markets
❖ Ideas: Informational
Efficiency of Markets
● Risk/Return Tradeoffs: What’s the price of risk?
Keywords
● This leads to equilibrium asset pricing models.

✦ Provides benchmarks to evaluate investment strategies.

✦ Factor investing

FINA5210 Investment Analysis- ©CHEN 2022 FINA5210 Investment Analysis – 9

 Ideas: No Arbitrage in Financial Markets

Background

Investments
● No ‘free lunch’ in financial markets.
Introduction

Big Ideas Explored

● Imposes restrictions over asset prices.
❖ Ideas: Diversification
Benefits
❖ Ideas: Risk/Return
Tradeoffs
❖ Ideas: No Arbitrage ✦ The price of systematic risk should be largely identical across
in Financial Markets
❖ Ideas: Informational
assets.
Efficiency of Markets

Keywords
● Allows us to value many securities, e.g., derivatives.

FINA5210 Investment Analysis- ©CHEN 2022 FINA5210 Investment Analysis – 10

 Ideas: Informational Efficiency of Markets

● Generally, the market is very efficient and assets are fairly priced.
Background

Investments ✦ The market is full of clever people using the latest tools.
Introduction

Big Ideas Explored

❖ Ideas: Diversification ✦ Competition is everywhere in financial markets.
Benefits
❖ Ideas: Risk/Return
Tradeoffs
❖ Ideas: No Arbitrage ✦ Generally, the market integrates information fairly well.
in Financial Markets
❖ Ideas: Informational
Efficiency of Markets

Keywords
● Any tool, technique, or strategy should respect market prices. It’s
difficult to beat the markets (i.e., receive abnormal returns).

● The techniques in this class can also be used to think about situations
when markets are less efficient.

FINA5210 Investment Analysis- ©CHEN 2022 FINA5210 Investment Analysis – 11

 Keywords for Investments

Background

Investments
Introduction
● Risk
Big Ideas Explored

Return
Keywords
❖ Keywords for ●
Investments

● Credit
● Leverage

FINA5210 Investment Analysis- ©CHEN 2022 FINA5210 Investment Analysis – 12