A83011 Financial Modelling and Management

Scuola di Economia e Management
Syllabus
Academic Year 2019/20 First Semester

foto
Docente TitolareLuca Ghezzi
E-maillghezzi@liuc.it
Office"Edificio 1" (in front of main tower), ground floor
Phone0331 572343

Learning Objectives

At the end of the course students will be at ease with

  • data
  • as well as qualitative and quantitative procedures

that come in useful in the fields of financial analysis, discretionary portfolio management, and financial consulting.

In addition, they will be

  • familiar with the regularities of US financial markets,
  • aware of the possible cognitive biases of investors and traders,
  • and well informed about equity research and value investing.

Learning targets

Course Content

This course, worth 8 ECTS credits, is about financial analysis and discretionary portfolio management. The presentation is both qualitative and quantitative.

Emphasis is placed on data, models, and procedures that are used or taken into consideration by financial advisors, financial analysts, and portfolio managers, e.g. of mutual or hedge funds. Students will learn which data to analyse and how to go about financial analysis and discretionary portfolio management, especially in connection with stocks, bonds, and exchange-traded funds. After drawing a distinction between trading and  long-term investing, students will also understand in depth

  • how to diversify between asset classes, i.e. how to obtain the greatest possible long-term return from a financial portfolio with a given degree of risk;
  • how to take advantage of social, technical, economic, or political trends by following a top down approach;
  • how to pick mispriced stocks or bonds by relying on fundamental analysis, i.e. a bottom up approach. As for equity research and value investing, students will focus on whether a listed company benefits from a stable competitive advantage and whether stock price and fundamental value are consistent. In doing so, Benjamin Graham’s, Philip Fisher’s, and Warren Buffett’s guidelines will be mentioned;
  • how hedge funds typically trade in stocks and bonds. The link between short-term macroeconomic bets and financial crises may be examined briefly.

A problem-oriented and hence multidisciplinary approach is adopted. Therefore,

  • attention is paid to the empirical evidence on US financial markets, with historical data on their performance being appropriately classified;
  • the informational and fundamental efficiency of US financial markets is discussed at length, with attendant neoclassical and behavioural interpretations being contrasted. As investment decisions are likely to be both rational and emotional, emphasis is placed on the possible occurrence of speculative bubbles caused by cognitive biases and hence irrational exuberance;
  • teaching includes practical sessions that are computer assisted. Use is made of electronic spreadsheets to display data and their descriptive statistics as well as procedures, which also perform linear-quadratic optimization based on simple matrix algebra. Homework may involve the completion of an electronic spreadsheet that processes historical data from various sources. Altogether, students may improve their coding skills as a by-product.

The main findings of selected empirical studies are consistently reported by means of educated summaries. Different inspiring regularities of US financial markets are taken into consideration, including the relationship between current forward rates and future spot rates, the performance of corporate bonds, heteroskedasticity and mean reversion of stock returns (price-earnings ratios and dividend yields as predictors of long-term returns), the dissimilar behaviour of growth and value stocks, the effects exerted on stock prices by the most unexpected news in quarterly reports, the performance of equity mutual funds and its persistence, the performance of hedge funds and its persistence. Such regularities lay the foundations for active portfolio management by individual and institutional investors alike. Notably, any kind of informational efficiency would be precluded from the lack of financial analysis and active portfolio management. At any rate, passive portfolio management is especially suited to uninterested or inexpert individual investors.

Course Delivery

To take this course, students must be familiar with mathematics (basics of calculus and optimisation), statistics (sample statistics and their distributions, hypothesis testing, multiple linear regression) and accounting (reclassified financial statements, main accounting ratios). Knowledge of the financial system (markets and intermediaries as institutions and their functions, financial contracts and their use) is very helpful.

Individual active learning is needed on the basis of 1-2 hours per week, so as to keep up with all lessons and practical sessions. Whenever homework is poor, office hours are highly recommended.

Slides and electronic spreadsheets are available by e-mail.

Course Evaluation

Punctuality and active participation are graded (9% of the best possible score). After completing both individual and communal homework (36%) during the course, attenders will take a closed-book written exam (55%) at the end of the course.

The exam for the remaining students is oral. Whether the final exam is written or oral, a pocket calculator is needed. Attenders can’t register for the exam, unless they have filled in an anonymous questionnaire on the course. Non-attenders may contact their lecturer for advice on how to go about this subject.

Syllabus

Session 1
Hours of lesson: 4
Instructor: L. Ghezzi

Topics:

Review of financial mathematics

Outline of the course.

Overview: the investment process in practice (stages, tasks, and tools), passive/active management (block diagrams).

Risk/return & income/growth: historical data on US financial markets, nominal/real rates of linear/logarithmic return.

1st homework.

Readings:

G II  3.7

G II stands for Ghezzi (2019), a work in progress that is reserved to LIUC students.

Session 2
Hours of lesson: 4
Instructor: L. Ghezzi

Topics:

Review of financial mathematics

Mean reversion and heteroskedasticity in US stock returns. Irrational exuberance and speculative bubbles: empirical evidence.

Fixed income securities: accrued interest, clean and dirty price, actual yield, yield to maturity, Makeham's formula.

Readings:

G II  3.7; 3.6

C-G I  1.4; 4.1

C-G I stands for Cuni-Ghezzi (2018), which is available at the web address

www.biblio.liuc.it/pagineeditoria.asp?codice=214.

Session 3
Hours of lesson: 4
Instructor: L. Ghezzi

Topics:

Review of financial mathematics

Fixed income securities: trading versus investing, yield curves.

Euribor and euro swap rates. Term structures of interest rates: spot rates, measurement (money market).

Readings:

C-G I  4.1; 5.1

Session 4
Hours of lesson: 4
Instructor: L. Ghezzi

Topics:

Review of financial mathematics

Term structures of interest rates: measurement (Treasury market), forward rates.

Classical term structure explanations: financial insight and explanatory power.  

2nd homework.

Readings:

C-G I  5.1; 5.2

Elton et al. (2014, pp. 531-539)

Session 5
Hours of lesson: 4
Instructor: L. Ghezzi

Topics:

Basics of outside financial analysis

Review: main approaches to the appraisal of a company.

Product/industry life cycles. Growth & value companies: classification & empirical evidence. Gordon growth model.

Readings:

C-G I  3.5

G II  2.1

Session 6
Hours of lesson: 4
Instructor: L. Ghezzi

Topics:

Basics of outside financial analysis

Two-stage growth model. Driving factors of price/earnings and price/book value ratios.

Wells Fargo critical line: implicit mean rates of return and adjusted beta coefficients.

Fundamentals versus market sentiment: multiples and cheapness, implied volatility, momentum and volume.  

3rd homework.

Readings:

G II  2.1; 2.2

Session 7
Hours of lesson: 4
Instructor: L. Ghezzi

Topics:

Basics of outside financial analysis

Essentials of value investing: competitive advantage & corporate performance, fundamental analysis.

Concise research report: a large oil and gas company.

4th homework.

Readings:

G II  3.8; 3.9

Session 8
Hours of lesson: 4
Instructor: L. Ghezzi

Topics:

Basics of outside financial analysis

Top down investing in commodities according to Jim Rogers. Benjamin Graham’s, Philip Fisher's, and Warren Buffett’s guidelines.

Basics of discretionary portfolio management

Portfolio rebalancing. Portfolio return: mean and variance, applied matrix algebra in Excel.

Readings:

G II  3.10; 3.8; 3.1

Keasey et al.  (1998, chapts. 12-13)

Session 9
Hours of lesson: 4
Instructor: L. Ghezzi

Topics:

Basics of discretionary portfolio management

Feasible combinations of 2 stocks, feasible set, efficient frontier.

Safe asset. One-fund theorem, two-fund theorem, applied matrix algebra in Excel.

5th homework.

Readings:

G II  3.2

Session 10
Hours of lesson: 4
Instructor: L. Ghezzi

Topics:

Basics of discretionary portfolio management

Portfolio return: sample size determination. Equity diversification: statistical properties of systematic and diversifiable risks.

Single-index model, estimation of the beta coefficient of a listed stock.  

6th homework.

Readings:

G II 3.1; 3.3; 2.2

Session 11
Hours of lesson: 4
Instructor: L. Ghezzi

Topics:

Basics of discretionary portfolio management

Efficient stock markets: theoretical hypotheses, operational implications, outline of the empirical evidence, tentative conclusions.  

Cognitive biases and irrational decisions.  Active portfolio management: market-trend timing, mispriced-stock picking, group rotation.

Readings:

G II  3.6; 3.7

Session 12
Hours of lesson: 4
Instructor: L. Ghezzi

Topics:

Basics of discretionary portfolio management

Hedge funds: comparison with mutual funds, typical trading policies, empirical evidence.

Credit risk: default and recovery rates, rating scales and credit rating by international agencies. Actual yields on corporate bonds: breakdown by credit-risk class.

Readings:

G II  3.11

C-G I  4.3

Session 13
Hours of lesson: 4
Instructor: L. Ghezzi

Topics:

The use of accounting ratios when firms are unrated: a simplified case study. The management of a loan application made by a natural person. How graduates may start their careers in Italian banking today.  How the performance of Italian bank employees may be assessed on a yearly basis.

Presentation given in Italian by Dr Ettore Cuni (credit supervisor, Segreteria Crediti, Banco BPM). Simultaneous English translation made by the lecturer.

Final recapitulation.

Readings:


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