The College of Wooster
Professor John W. Sell
Business Economics 271 - Portfolio Theory and Analysis

OUTLINE AND READING LIST

Note: Readings marked with an asterisk (*) are required for this course. Except for the Final Examination, examination dates are approximate.

Text

Frank K. Reilly and Edgar A. Norton, Investments 7th ed. (Chicago: The Dryden Press 2006)

Commonly Used Abbreviations

Malkiel = Burton G. Malkiel, A Random Walk Down Wall Street (Cincinnati: Thomson/SouthWestern, 2004)

FAJ = Financial Analysts' Journal
JB = Journal of Business
JF = Journal of Finance
JFE = Journal of Financial Economics

Shared Folder: A number of items relevant to the course will be found in my shared folder which you can access 24 hours per day on the Novell Server.  Follow the instructions below to access this folder.

From a Mac:

• Make sure that you are in the “Finder” by clicking on the desktop.  Select, “Connect to Server” from the GO Menu. A window will open.  Type, “facultyserver.wooster.edu” (no quotes) in the box labeled “server address” and then press the CONNECT button. 
• In the authentication window that appears, enter your Novell username (the part of your e-mail address before the @) and password and then click, CONNECT. A window will open.  Select “Facdata” and click OK. You will then see a number of folders that are available for you to view.  If these folders do not appear, then click on the Facserver icon that is on the desktop.
• Navigate to the Economics folder and locate the JWSELL Folder.  Inside this folder you will find a drop box and the shared folder containing items for this class.

From a Windows PC (from the IT Department’s instructions):

• From the START Menu select “Run.”
• In the window that appears, enter the address: \\140.103.223.28\  and click OK.
• Continue from the second bullet in the Mac description and supply your authentication information as requested.

Reading List and Course Outline

I. Introduction

*Text: Chapters 1 and 2

Ibbotson, R.: Stocks, Bonds, Bills and Inflation, 2005 Yearbook (Chicago: R.G. Ibbotson & Associates, 2006)

Malkiel:  Chapter 1

Modigliani, F. and Pogue, G.: "An Introduction to Risk and Return," FAJ (March/April, 1974) pp. 68-80 and (May/June, 1974) pp. 69-86

II. Securities Markets

A. Institutions

*Text: Chapter 6

New York Stock Exchange: Fact Book (Annual)

Harris, L. and J. Hasbrouck, "Market vs. Limit Orders", Journal of Financial and Quantitative Analysis (June 1996) pp. 213-231

Sanger, G. and J. McConnell: "Stock Exchange Listings, Firm Value, and Security Market Efficiency: The Impact of NASDAQ," Journal of Financial and Quantitative Analysis (March 1986)

Schwartz, Robert [1988]: Equity Markets: Structure, Trading, and Performance (New York: Harper & Row, 1988)

Sell, John [2003]: "Market Microstructure and Security Pricing in the Warsaw Market," International Advances in Economic Research 9, No. 2, pp. 101-13.

Sell, John [2006]: "The Neuer Markt is Dead.  Long Live the Neuer Markt," International Advances in Economic Research 12, No. 2, pp. 191 - 202.

Smidt, S.: "Trading Floor Practices on Futures and Securities Exchanges: Economics, Regulation, and Policy Issues," in A. Peck (ed.), Futures Markets: Regulatory Issues (Washington, DC: American Enterprise Institute, 1985)

B. Performance Measures

*Text: Chapter 7

This Problem Set will test your statistics knowledge as it applies to investments. Key here.

Cutler, M.: "Market Indices: A Learning Exercise Using Warsaw Stock Exchange Prices, Financial Practice and Education (Fall/Winter 1995) pp. 99-106

Butler, H. and Allen, J.: "The Dow-Jones Industrial Average Reexamined," FAJ (November/December 1979) pp. 23-30

Cootner, P.: "Stock Market Indexes -- Fallacies and Illusions," Commercial and Financial Chronicle (September 29, 1966)

Schultz, J.: "Misleading Averages," Barrons (July 7, 1977) p. 5

C. The Efficient Markets Hypothesis

*Text: Chapters 10, 16

Malkiel: Chapters 6, 7, 8 (optional, but recommended)

*Fama, E.: Market Efficiency, Long Term Returns, and Behavioral Finance (Working Paper, June 1997) Read for overview.

Cootner, P. (ed.): The Random Character of Stock Market Prices (Cambridge, MA: MIT Press, 1964)

Dann, L; Myers, D.; and Raab, R.: "Trading Rules, Large Blocks and the Speed of Price Adjustment," JFE (January 1977) pp. 3-22

Dimson, E. (ed.): Stock Market Anomalies (Cambridge: Cambridge University Press, 1988)

Ibbotson, R.: "Price Performance of Common Stock New Issues," JFE (September 1975)

Jaffee, J.: "Special Information and Insider Trading," JB (July 1974) pp. 410-28

LeRoy, Stephen: "Efficient Capital Markets and Martingales," Journal of Economic Literature (December 1989) pp. 1583-1621

Merton, R.: "On the Current State of the Stock Market Rationality Hypothesis," in Fisher et. al. (ed) Macroeconomics and Finance: Essays in Honor of Franco Modigliani (Cambridge, MA: MIT Press, 1987)

Throop, A.: "Interest Rate Forecasts and Market Efficiency," Federal Reserve Bank of San Francisco Review (Spring 1981) pp. 29-43

First Examination (approximate date: 28 Sept.) (Exam. Review, Stat. review)

III. The Valuation of Individual Securities

A. "Riskless" and Fixed-Income Securities

*Text: Chapters 11, 12 also pp. 365 -  374

*Yield Problem Set, Bond Value Problem Set, Duration Problem Set

Fielitz, B.: "Calculating the Bond Equivalent Yield for T-Bills," Journal of Portfolio Management (Spring 1983) pp. 58-60

Fisher, I.: The Theory of Interest new ed. (New York: Augustus Kelly, 1961)

Fisher, L. and Weil, R.: "Coping With the Risk of Interest Rate Fluctuations: Returns to Bondholders from Naive and Optimal Strategies," JB (October 1971) pp. 408-31

Kaplan, R. and Urwitz, G.: "Statistical Models of Bond Ratings," JB (April 1978)

Macaulay, F.: Some Theoretical Problems Suggested by the Movement of Interest Rates, Bond Yields, and Stock Prices in the United States Since 1856 (New York: National Bureau of Economic Research, 1938)

Reilly, F. and Sidhu, R.: "The Many Uses of Bond Duration," FAJ (July/August 1980) pp. 58-72

Yawitz, J. and Marshall, W.: "The Shortcomings of Duration as a Risk Measure for Bonds," Journal of Financial Research (Summer 1981) pp. 91-101

B. Equity Securities

*Text: Chapters 13, 14, 15

*Lee, Bong-Soo: Time Series Implications of Aggregate Dividend Behavior, Review of Financial Studies, (Summer 1996) pp. 589-618

Banz, R.: "The Relationship between Returns and the Market Value of Common Stock," Journal of Financial Economics (March 1981) pp. 3-18

Malkiel: Chapters 3 and 4

Miller, M. and Modigliani, F.: "Dividend Policy, Growth, and the Valuation of Shares," JB (October 1961) pp. 411-33

Moor, R.: "The Use of Economics in Investment Analysis," FAJ (November/December 1971) pp. 63-69

OBrian, Patricia: Analysts Forecasts as Earnings Expectations, Journal of Accounting and Economics (January 1988) pp.

Sharpe, W.: "Likely Gains from Market Timing," FAJ (1975) pp. 60-69

Zweig, M.: Understanding Technical Forecasting (Princeton, NJ: Dow Jones & Co., 1978)

Second Examination (Approximate date: 9 Nov.) (Exam. Review)

IV. Security Packaging -- Portfolio Analysis

A. Portfolio Theory

*Text: Chapters 6, 19

Ibbotson, R.; Carr, R.; and Robinson, A.: "International Equity and Bond Returns," FAJ (July/August 1982) pp. 61-83

Malkiel: pp. Chapter 9

Markowitz, H.: "Portfolio Selection," JF (March 1952) pp. 77-91

Sharpe, W.: "A Simplified Model of Portfolio Analysis," Management Science (January 1963) pp. 277-93

Solnik, B.: "Why Not Diversify Internationally Rather than Domestically?" FAJ (July/August 1974) pp. 48-54

B. The Capital Asset Pricing Model (CAPM)

*Text: Chapters 8, 9

Arbitrage Pricing Problem Set

Malkiel: Chapter 10

Mikkelsen, H. The General Cross-Sectional Relation between Expected Return and Beta,(Working paper, November 1999)

Sharpe, W.: "Decentralized Investment Management," JF (May 1980)

Treynor, J. and Black, F.: "How to Use Security Analysis to Improve Portfolio Selection," JB (January 1973)

Weston, J.: "Investment Decisions Using the Capital Asset Pricing Model," Financial Management (Spring 1973) pp. 25-33

V. Alternative Investments

A. Mutual Funds and Investment Companies

*Text: Chapter  4

McDonald, J.: "Objectives and Performance of Mutual Funds," Journal of Financial and Quantitative Analysis (June 1974) pp. 311-33

Sharpe, W.: "Mutual Fund Performance," JB (January 1966) pp. 119-38

Treynor, J.: "How to Rate Management of Investment Funds," Harvard Business Review (January/February 1965) pp. 63-74

B. Options

*Text: Chapter 17

Black, F.: "Fact and Fantasy in the Use of Options," FAJ (July/August 1975) pp. 36-41

Black, F. and Scholes, M.: "The Valuation of Option Contracts and a Test of Market Efficiency," JF (May 1972) pp. 399-417

Smith, C.: "Option Pricing: A Review," JFE (January/March 1976) pp. 3-51

Welch, W.: Strategies for Pur and Call Options Trading (Boston: Little, Brown and Company, 1982)

C. Commodities and Futures Markets

*Text: Chapter 18

Mayo, Herbert: Investments: An Introduction (Chicago: Dryden Press, 1984) Chapter 23.

Fama, E.: "Forward Rates as Predictors of Future Spot Rates" Journal of Financial Economics (June 1976) pp. 361-77

Powers, M.: "Does Futures Trading Reduce Fluctuations in the Cash Market?" American Economic Review (June 1970) pp. 460-64

Telser, L. and Higinbotham, N.: "Organized Futures Markets: Costs and Benefits," Journal of Political Economy (October 1977) pp. 969-1000

FINAL EXAMINATION (Examination Review)

Thursday, December 14 at 9:00am