Princeton University

FALL2015
ECO362:FinancialInvestments
Lectures:TTh1:30pm2:50pm
Classroom:FriendCenter101

Precepts
TimesTBA
Classroom:TBA

Instructors

Part1(Weeks16): ProfessorYacineAtSahalia
Office:

BCF209
Telephone:
(609)2584015
email:

[email protected]
WWW:

http://www.princeton.edu/~yacine
OfficeHours:
TTh11:00am12:00pmandbyappointment

Part2(Weeks712): ProfessorHarrisonHong
Office:

BCF210
Telephone:
(609)2580259
email:

[email protected]
WWW:

http://www.princeton.edu/~hhong
OfficeHours:
TTh11:00am12:00pmandbyappointment

Preceptors:
IoannisBranikas:[email protected]

MichaelDobrew:[email protected]

FriedrichW.Herzog:[email protected]

DavidW.Zhang:[email protected]

Coursewebsite:
Blackboard

CourseObjectives

This course provides an introduction to financial investments and asset pricing. Topics
include the properties of asset returns, the construction of investment portfolios, models
forassetprices,andanintroductiontothetermstructureofinterestrates,futures,options,
andderivativesecuritiespricing.

This is a core course for the Undergraduate Certificate in Finance. It is typically taken by
juniors.

Prerequisites

Thecourseassumesnopriorknowledgeoffinance.

However, the course makes use of many tools from mathematics, econometrics/statistics
and microeconomics. Prerequisites are MAT 175 or MAT 200 (or more advanced such as
MAT201202),astatisticscourse(suchasECO202,MAT222,ORF245,PSY251,SOC301,
POL 345, or WWS 332) and a microeconomics course (ECO 310) are prerequisite for this
course.Ascoreof5inAPStatisticscanbeusedtofulfillthestatisticscourserequirement.

One of these prerequisites, such as ECO 310, may be taken concurrently, in which case
studentswillberesponsibleforacquiringtherelevantknowledgeontheirown.

ProblemsetsrequiretheuseofMicrosoftExcel.Basicknowledgeofthisorofacomparable
spreadsheetsoftwareisrequired.

Precepts

You will need to sign up on TigerHub for one of the precept sections offered (see above).
Eachpreceptsectionhasafinitecapacityandisfilledonafirstcomefirstservedbasis.

The precepts are the primary venue for getting your questions about the course material
answered.QuestionsshouldbepostedonthecoursediscussionboardonBlackboard,or
duringprecepts,ratherthansentbyprivateemail.

Precept attendance is mandatory, and attendance is part of your precept

participation/homeworkgrade.

ThefirstpreceptswilltakeplacetheweekofSeptember21andthenweeklythereafter.

GradingCriteria,Exams,AssignmentsandCoursePolicy

Grading Criteria: Homework Assignments and Precept Participation represent 30%, the
Midterm30%,andtheFinal40%ofthecoursegrade.

Homework Assignments: There will be a total of 9 homework assignments, which will be

graded. You will get one free pass in that your precept grade will be based on your 8
highest homework scores only. Assignments will be posted on the Blackboard course site.
Unlessindicatedotherwise,youranswerstothehomeworkassignmentsmustbecompleted
individually: youmaydiscusstheassignmentwithyourclassmatesbutarenotallowedto
share spreadsheets, calculations or compare answers. Your answers must be typed (or
handwritten andscanned)andthenemailedtoyourpreceptorin PDFformat bythe due
date and time indicated below. Late homeworks will receive a zero. When emailing your
homework assignments to your preceptor (see email addresses above) use the following
conventiontonameyourPDFfile:
ECO362_HW[number]_LastName_FirstName.pdf

Exams: The midterm and final exams will be based on the material and the examples
coveredinclass.Thefinalexamwillbecomprehensive,i.e.youwillberesponsibleforthe
materialcoveredduringtheentireclass,althoughtheemphasisonthefinalexamwillbeon
thematerialcoveredinthesecondhalfoftheclass.Themidtermwilltakeplaceinclasson
ThursdayOctober29.ThefinalexamwilltakeplaceduringexamperiodinJanuaryatadate
to be announced later. Permission to reschedule an exam will be granted only under
circumstancescompletelybeyondthestudentscontrol.Calculatorsareallowedduringthe
exams.Themidtermandthefinalexamareclosedbookandclosednotes.Wewillstrictly
enforce the University rules on academic integrity. Sample exams will be posted on
Blackboard.

P/D/F is not allowed for students intending to complete the finance certificate; and this
courseisnotopentoauditors(exceptduringweeks1and2whileyouaredecidingwhether
ornottotakeit).

TextbooksandLectureNotes

Requiredreading,withcopiesonreserveinFirestoneLibrary:

Investments(8th,9thor10thedition)
Authors:ZviBodie,AlexKaneandAlanJ.Marcus
Publisher:IrvinMcGrawHill
StudentsSolutionsManualtoaccompanythetextbook.
Makesuretogetthemanualmatchingyoureditionofthetextbook.
The chapter and problem numbers below refer to the 10th edition of the
textbook, which is the latest and is available from Labyrinth Books and on
reserveatthelibrary.Ifyouhaveanearlieredition,borrowthelatestfromthe
library or a classmate and match the chapter and problem numbers to your
edition.

Recommended as prior reading before the beginning of the course, and available in
FirestoneLibrary:

ARandomWalkDownWallStreet(latestedition)
Author:BurtonG.Malkiel
Publisher:W.W.Norton&Company,Inc

InefficientMarketsAnIntroductiontoBehavioralFinance
Author:AndreiShleifer
Publisher:CambridgeUniversityPress

IrrationalExuberance
Author:RobertShiller
Publisher:PrincetonUniversityPress

Lecture notes will be distributed through Blackboard. You will be responsible for printing
yourowncopyandbringittoclass,orfollowingalongonalaptop/tablet.

ItisagoodideatoreadtherelevantBKMchaptersindicatedbelowintheCourseOutline
prior to the lecture, and to complete the selfstudy end of chapter exercises after the
lecture.

FirstClassAssignment:Beforethebeginningofthecourse,youshouldreviewintheBKM
textbookChapters14,whichcontainadescriptionoffinancialassets,howtheyaretraded,
andofinvestmentvehicles.

Scheduleexceptions

There will be no lecture on Thursday October 1. This lecture is rescheduled on Friday

September18,1:30pm2:50pm.

Any other scheduling exceptions will be indicated in the Announcements section of the
Blackboardcoursesite.PleasecheckitandsetupBlackboardtoinformyouautomaticallyby
emailofanynewpostings.

CourseOutlineandAssignedReadings

Part1

ThursdaySeptember17
FridaySeptember18

DiscountingandPresentValueCalculations
ReviewofEconometricsandStatistics
BKM:Chapters14tobereadbeforethecoursebegins.

TuesdaySeptember22
ThursdaySeptember24

RiskandReturn
BKM:Chapters5,6.
Suggestedproblemsforselfstudy:BKMChapter5Problems#3,7,8,9,10,11,
12,13,14,16,18.
BKMChapter6Problems#2,3,4,6,7,8,9,10,12,14,16,17,18,20,23,28,29.

TuesdaySeptember29
TuesdayOctober6

PortfolioTheory
BKM:Chapter7.
Suggestedproblemsforselfstudy:BKMChapter7Problems#4,5,7,9,10,11,
17,22,23.

[Homework 1: Present Value Calculations, due by email to your preceptor on

FridayOctober2by8pm]
4


ThursdayOctober8

PortfolioTheory,continued

[Homework 2: Risk and Return, due by email to your preceptor on Friday

October9by8pm]

TuesdayOctober13
ThursdayOctober15

TheCAPM,FactorModelsandtheAPT
BKM:Chapters9,10.
Suggested problemsforselfstudy:BKMChapter9 Problems#2,3,4,8,9,10
16,20,21.
BKMChapter10Problems#2,4,5,7,8,11,14,18.

[Homework 3: Optimal Portfolio Construction, due by email to your preceptor

onFridayOctober16by8pm]

TuesdayOctober20
ThursdayOctober22

TheCAPM,FactorModelsandtheAPT,continued
MutualFundsandHedgeFunds
[Homework 4: CAPM, Factor Models and the APT, due by email to your
preceptoronFridayOctober23by8pm]

TuesdayOctober27

IntroductiontoPortfolioPerformanceEvaluation
BKM:Chapters24,26.
Suggestedproblemsforselfstudy:BKMChapter24Problems#8,14,20,3,4,10,
11,13

ThursdayOctober29:MidtermExam

FallRecess:WeekofNovember2nd

Part2

TuesdayNovember10
ThursdayNovember12

AnalysisofFinancialStatements
BKM,Chapter19
Suggestedproblemsforselfstudy:BKMChapter19#1,2,4,13,8,12,
15
MerrillLynch,HowtoReadaFinancialReport(Blackboard)
5

GrahamandDodd,AnalysisoftheIncomeStatement,Chapter11in
SecurityAnalysis,5thed.,McGrawHill,1988(Blackboard)

UseofPresentValueTechniquesinFinance;IntrinsicValue
MethodsofStockValuation:Technicalvs.FundamentalAnalysis
BKM:Chapter18.

[Homework 5: Performance Evaluation, due by email to your preceptor on

FridayNovember13by8pm]

TuesdayNovember17
ThursdayNovember19

MarketEfficiency
EventStudiesandMarketAnomalies
BKM:Chapter11.
Suggestedproblemsforselfstudy:BKMChapter11#1,9,14,29,2,3,4,5,6,
10,12,23

[Homework 6: Stock Valuation, due by email to your preceptor on Friday

November20by8pm]

TuesdayNovember24

IntroductiontoShortSellingandArbitrage

[Homework 7: Market Efficiency, due by email to your preceptor on Friday

December4by8pm]

Suggestedproblemsforselfstudy:BKMChapter3#3,5,7,9,10,15andBKM
Chapter24#8,14,20,3,4,10,1113

TuesdayDecember1
ThursdayDecember3

HighRisk,LowReturnPuzzle
SpeculationandtheCAPM
BKM:Chapter12.
Suggestedproblemsforselfstudy:BKMChapter12#3,10,12,16

[Homework 8: Trading Strategies, due by email to your preceptor on Friday

December4by8pm]

TuesdayDecember8
ThursdayDecember10

IntroductiontoBondsandtheTermStructureofInterestRates
BKM:Chapters14,15.
Suggested problems for selfstudy: BKM Chapter 14 #2, 5, 8, 10, 16, 22 and
6

Chapter15#4,5,6,8,12,18

Recommended:FixedIncomeMarketsandtheirDerivatives
Author:SureshSundaresan
Publisher:AcademicPress

[Homework 9: Bond Markets, due by email to your preceptor on Friday

December11by8pm]

TuesdayDecember15
ThursdayDecember17

IntroductiontoFutures,Options,SwapsandOtherDerivativeSecurities
BKM:Chapters22,20,21.
Suggested problems for selfstudy: BKM Chapter 22 Problems #4, 5, 6, 7, 8,9,
10,13,14,18,19.
BKMChapter20Problems#5,6,7,8,10,11,12,13,15,20,26,29.
BKMChapter21Problems#1,2,3,4,6,17,18,34,45.

[Homework10:FuturesandOptionsduebyemailtoyourpreceptoronFriday
December18by8pm]

DateTBAinJanuary

FinalExam