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Faculty
Paul Eberle, Florida Southern College

Course Coordinator
ISUP Secretariat

Prerequisite/progression of the course

Completion of finance course that studied the principles of finance.
Closed for CBS students studying BSc.IB.

Aim of the course

The objective of this course is to help students develop a basic understanding of the theory and practice of investment analysis. Course coverage includes security trading mechanism, investment theories, equity and bond valuations. Emphasis is on developing an understanding of the investment process. The course includes basic analysis and valuation of stocks, bonds, options and futures.

Course content, structure and teaching

• Financial Instruments
• How Securities are Traded
• Risk and Return
• Efficient Diversification
• Capital Asset Pricing and Arbitrage Pricing Theory
• The Efficient Market Hypothesis
• Bond Prices and Yields
• Equity Valuation
• Options Markets
• Futures Markets

Learning Objectives

Using the content of the course (from readings, research, discussion, lectures, problem solving, and inquiry), students will be able to:

• Identify and distinguish between various forms of investments.
• Explain how individual securities are valued and traded.
• Identify and evaluate the risk and return characteristics of various types of investments.
• Explain the risks to which an investor may be exposed.
• Evaluate the relationship between risk and return in the investment markets.
• Conduct a security analysis.
• Explain the Capital Asset Pricing model (CAPM) and its application to portfolio management.
• Discuss the properties of the Efficient Portfolio Selection model.
• Evaluate the three versions of the efficient market hypothesis and explain their application to portfolio management.
• Discuss the concept of market efficiency.
• Explain the concept of stock market and stock price equilibrium.
• Explain the concepts involved in the formation of the Efficient Markets Hypothesis in its weak, semi-strong, and strong form.
• Provide an illustrative example of a violation of market efficiency.
• Discuss the lessons of market efficiency.
• Discuss the impact of investment diversification upon portfolio management.
• Discuss the impact of behavioral finance on asset prices and financial markets.
• Discuss the link between stock price and earnings per share.
• Explain the concept of present value of growth opportunities (PVGO).
• Demonstrate the calculation of PVGO.
• Explain the difference between growth and income stocks.
• Explain the concept of price-earnings ratios.
• Discuss the primary elements of equity capital.
• Differentiate between majority and cumulative voting.
• Differentiate between market and book value of equity.
• Identify the characteristics of traditional and non-traditional debt.
• Discuss the major advantages and disadvantages to long-term debt.
• Discuss the concept of protective covenants associated with debt.
• Discuss the major elements that influence the firm’s long-term financing decisions.
• Discuss the major characteristics of preferred stock.
• Discuss the advantages and disadvantages of preferred stock in long term financing.
• Discuss the major characteristics of a convertible security.
• Define the term “going public” in the context of equity security issuance.
• List and explain the major advantages to a firm that decides to go public.
• List and explain the major disadvantages to a firm that decides to go public.
• Differentiate between a listed stock and a stock traded over-the-counter.
• Discuss the five major ways for a firm to go public including rights offerings, initial public offering (IPO), private placement, employee stock ownership plan (ESOP), and dividend reinvestment plan with particular attention paid to the advantages and disadvantages of each.
• Discuss the major advantages and disadvantages of financing with common stock.
• Discuss IPO under pricing paying particular attention to potential causes.
• Discuss the role of the Securities and Exchange Commission (SEC) in the security issuance process.
• Define the term “derivative” as it applies to risk management.
• Discuss the key features of an option contract including put, call, strike, and expiration.
• Discuss the determinants of the value of an option contract.
• Describe the effect on the value of an option contract for a change in each of the following: stock price, exercise price, term, risk-free rate, and variance.
• Draw the profit/loss curve for a holder and writer of a given put or call option given data on stock price and option premium.
• Demonstrate the calculation of a profit (loss) of a given option position and movement in the underlying asset price.
• Differentiate between a forward and a futures contract.
• Describe the process by which a firm may reduce risk through “hedging” with derivative securities.
• Demonstrate the calculation of a gain (loss) with a hedged position.
• Evaluate the features and risk/return characteristics of financial derivatives including put and call options, forwards.
• Evaluate the factors that affect the value of an option.
• Explain the rights, characteristics, and features of both common and preferred stock.

Teaching methods

Lectures and working problems.

Examination

Final exam: 4-hour written exam (open book)

Exam aids:

• Open book – Open notes
• Students have four hours to complete the exam.
• Problems, essay and multiple choice.
• Financial & programmable calculators, etc allowed.
• Dictionaries allowed

Re-take exam: 24-hour written exam

Recommended literature

Essentials of Investments, Zvi Bodie, Alex Kane, & Alan J. Marcus, ISBN: 0073405175, 2008

Sidst opdateret af ISUP Secretariat 23.02.2010