ECON 4751H Honors Course: Financial Economics

Fall 2004

General information

Prerequisite: Econ 3101, Econ 3102, Math 1271, Stat 3011. Knowledge of calculus and statistics is required. Also you should be familiar with Excel or a similar spreadsheet software.

Course objectives and synopsis:

This course will present the centerpieces of modern financial economics: the capital asset pricing model, the arbitrage pricing model, the efficient market hypothesis, the option-pricing model. It will also give an introduction to corporate finance issues such as payout policy and capital structure. Our focus will be on models, but we will use them to shed light on many practical aspects.

After taking this class you should be able to fully understand the major issues concerning investors and other players in the financial markets. Also if you interview for a job related to  Finance you should appear as well-read, aware of the important issues and with a good grasp of the pertinent tools. The textbook will be also a good preparation for the Chartered Financial Analyst exam.

 

Text:

Investments  -6th edition, Bodie, Kane and Marcus - McGraw-Hill Irwin

It is a comprehensive textbook for courses in Finance, with a lot of institutional detail in addition to the cornerstone models of modern finance.  The lecture notes I will provide as we go along will be also a required reading. They will add a lot of detail on some issues and build some new models.

WWW Homepage

The URL for this class is www.econ.umn.edu/~florin/4751H/fall2004.html

A copy of this syllabus is available online. Material from lectures will also be posted following (or before)  the lectures. The homeworks will be available for downloading on the class homepage. The homepage also provides links to some web sites related to Economics.

Grades:

Probability and Statistics test        3%
Homework Assignments        22%
Midterm              30%
Final                45%

I will also give some bonus points to students that enhance the quality of the class discussion.

Grading scale:


92%-100% A
90%-91% A-
88%-89% B+
82%-87% B
80%-81% B-
78%-79% C+
72%-77% C
70%-71% C-
68%-69% D+
60%-67% D
-59% F
I reserve the right to lower the cutoffs but not to raise them.


Homeworks/Exams
There will be 4 homeworks. Each assignment is due in class at the due date, unless otherwise stated. No late assignments are accepted. The homeworks must be typed (except graphs and formulas). The penalty for not typing is 25% (of the points at stake).

Statistics Background Test (Sept. 9th.): This test will help you refresh some probability and statistis concepts that will be used later in the class. It will  also give you a hint of the statistics and probability  background that will be required in order not to struggle in this class. If this test will look extremely hard, you should reconsider your choice of taking this course.

There is a midterm and a final exam. The midterm is during the regular class hours and the final's time is listed below. Both exams are closed book, but you can bring one (two-sided and regular size) sheet of notes for the midterm and final. You need to bring a calculator. You must take the midterm and final exams at the scheduled times; I will grant no exceptions to the CLA rules. The final is cumulative. If the midterm must be missed for a documented excuse, the final will carry the extra weight. The final must be taken at the scheduled time. Nevertheless, if you have examination conflicts or three exams within a 16-hour period, you must contact me at least 2 weeks before the examination period starts.

 



Tentative Class Schedule

I will attempt to follow the schedule outlined below.

Week

Class

Reading

Remarks

1-Sep 7,9

Introduction -overview of the course; what finance is about

Probability and Statistics test

Ch 1-4

 

2-Sep 14,16

Present Values -present and future value, compounding, perpetuities, annuities

Valuation of fixed-income securities I - price and yield to maturity of bonds, term structure of interest rates

Ch 14,15

 

3-Sep 21,23

Valuation of fixed-income securities II - bond returns, duration, fixed income portfolio management

Ch 16

HW 1 distributed

4-Sep 28,30

Facts on stock returns

Portfolio theory I - mean and variance of a portfolio, diversification

Ch 5

Ch 6

HW 1 due

5-Oct 5,7

Portfolio theory II

Ch 7,8

HW 2 distributed

6-Oct 12,14

The Capital Asset Pricing Model (CAPM) I -derivation and uses of CAPM, other pricing models

Ch 9,11,13

HW 2 due

7-Oct 19,21

CAPM II

Ch 9,11,13

 

8-Oct 26,28

MIDTERM

Valuation of stocks-discounted cash flow model, price-earnings ratios

Ch 18,19

 

9-Nov 2,4

Market efficiency -notions of ME, statistical evidence, implications

Ch 12,13

HW 3 distributed

10-Nov 9,11

Derivatives I - Forwards and Futures: examples, trading strategies, prices of forwards and futures

Ch 20,22,23

HW 3 due

11-Nov 16,18

Derivatives II - Options: Put-call parity, binomial option pricing, introduction to Black-Scholes model

Ch 7

 

12-Nov 23

Nov 25 NO CLASSES

Corporate finance topics I -payout policy and capital structure, Modigliani-Miller theorem

lecture notes

 

13-Nov 30,Dec 2

Corporate finance topics II

lecture notes

HW 4  distributed

14-Dec 7,9

Current research topics - financial crises, bubbles, empirical puzzles

lecture notes

HW 4 due

15-Dec 15

Review

Prepare questions to ask me

 

16- Dec 21

Final Exam: 08:00am-10:00am Tuesday, December 21

 

 


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