Student guide International Program A.Y. 2006/07

Portfolio Investment to Japan (2007)

Introduction to Investment in Japan:

This section introduces students to the general concept of investment. Real assets are differentiated from financial assets and the major categories of financial assets are defined. The risk-return tradeoffs among financial assets and the reality that most assets are fairly priced most of the time are introduced. The empirical evidence in the Japanese stock market will be shown as well.

The Efficient Market Hypothesis and the Investment Style:

This section briefly examines the concept of market efficiency in the context of portfolio investment. In general, in the risk-adjusted sense, securities are fairly priced in the efficient market and no investor can expect to outperform the market consistently over time. The investment style, so-called active investment management that contradicts the hypothesis, is defined and introduced here.

Equity Valuation:

This section explains the basics of the common stock valuation. The relationships between the intrinsic value, the market value, and the book value are explained.

Risk Premium Estimation Using Capital Asset Pricing Model:

This section presents the Capital Asset Pricing Model, which is an equilibrium model for the pricing of assets based upon risk. We use this model to estimate the risk premium of individual stocks.

Securities Analysis:

This section handles the basic financial information as well as stock price data-set. Three factors that decide the stock price are clarified and the value relevance of each financial data is examined. Financial statement analysis, cash-flow analysis, the difference between the accounting and the economic income, return on asset (ROA), and other financial ratios supposed to be relevant for stock pricing will be explained. The keywords such as momentum trading and mean reversion, and the aspects of country-specific fundamental analysis (macroeconomic and industry indicators) will be presented. The difference between the fundamental and the technical analysis will also be explained.

After studying this section, students should be able to analyse Japanese/universal firms based on the financial statements disclosed by each firm.

Time series data-set for Assignment-1will be provided to students, which should be completed and submitted at the start of the next section.

Portfolio Selection and Risk Diversification:

This section emphasizes the important function of risk diversification by means of portfolio investment. We examine the link between the diversification effect and the securities analysis. Various types of portfolio weighting will be shown and equally weighted portfolio will be chosen so as to fit to the active management purpose.

Active Portfolio Management:

This section discusses the feasibility of the active portfolio management in a world of efficient markets. The investment style called indexing (or index fund) is introduced which is the key financial product to perform the passive investment management. Then, two types of active management strategies are introduced: (1) market timing/mean reversion, and (2) stock selection. Students will be able to create index funds after this section, which is going to be their Assignment-2.

Measuring Investment Management Performance:

This section discusses several ways to measure investment management performance.

International Diversification:

This section notes that Japan offers a relatively small portion of the entire assets available for world-wide investors. The benefits of increased risk diversification effect as a result of cross border investing are examined using the international market indexes. Exchange rate risk to international investors is also presented.