- Introduction and Motivation of the Course Goals, Basic Concepts (Cost of Capital)
- Basic Concepts (Valuation and Valuation Shortcuts, Internal Rate of Return, YTM of Bonds, EXCEL Solver, Basic Concepts of Uncertainty)
- Expected Portfolio Return and Portfolio Risk
- Implementation in Practice (Scenario-Based Implementation, Implementation Based on Historical Data)
- Market Risk, Unique Risk, Diversification, Beta, Efficient Portfolios
- Portfolio Management without Risk-Free Borrowing/Lending, Portfolio Management with Risk-Free Borrowing/Lending, Sharpe Ratio
- Capital Asset Pricing Model (Capital Market Line, Security Market Line, CAPM Implementation in Practice)
- Capital Structure and Cost of Capital, Cost of Equity, Cost of Debt, Weighted Average Cost of Capital
- Use of Cost of Capital (Stock Valuation, Capital Budgeting, Business Valuation)
|Mittwoch||30.10.2019||14:00 - 18:00||TC.2.03|
|Montag||04.11.2019||14:00 - 18:00||D5.1.001|
|Mittwoch||13.11.2019||14:00 - 18:00||TC.3.05|
|Mittwoch||20.11.2019||14:00 - 18:00||TC.4.01|
|Mittwoch||27.11.2019||14:00 - 18:00||TC.3.03|
|Mittwoch||04.12.2019||14:00 - 18:00||D3.0.233|
|Mittwoch||11.12.2019||14:00 - 18:00||D5.1.001|
|Donnerstag||19.12.2019||14:30 - 16:30||TC.0.10 Audimax|
This course intends to give you an understanding in portfolio management. Especially the diversification principle and the separation between market risk and unique risk shall be internalised. On this basis, you will become familiar with the CAPM that in good practice is used to derive the cost of capital, acting as a discount rate in stock valuation, capital budgeting and modern business valuation.
You will be provided with important concepts both for personal and for corporate application. We will put special emphasis on the practical implementation and application of the concepts. You will also learn how to use the EXCEL Solver (with and without constraints) in order to solve financial problems.
After completing this course you will
- be able to work with basic concepts of statistics and probability theory (expected value, variance, standard deviation, covariance and correlation).
- be familiar with the securities traded in financial markets.
- understand the usefulness and applicability of financial markets and instruments.
- be able to shift money across time by discounting and compounding.
- be able to use financial mathematics in order to calculate the present value of some standard cash flow patterns (annuities, growing annuities, perpetuities, growing perpetuities) efficiently.
- be able to identify "siminlar bonds", extract information from traded bonds in order to value "similar" non-traded bonds and detect overvalued and undervalued bonds.
- be able to evaluate the credit risk of a bond by analyzing its credit ratings.
- be able to translate the rating issued by one rating agency into the rating of another rating agency.
- know how to measure risk.
- be able to derive expected return, variance, standard deviation, covariance and correlation coefficient from historical data or from scenario-based forecasts.
- be able to determine the risk/return profile of a portfolio.
- know how to use diversification in order to improve your personal investment strategy (e.g. for your retirement saving).
- be able to minimize the risk, given a fixed target expected return.
- be able to maximize the expected return, given a fixed target level of risk.
- understand the trade-off between risk and expected return.
- understand the difference between market risk and unique risk and be able to decompose risk into these two types of risk.
- understand the importance of beta, know the determinants of beta and how to compute and interpret beta.
- be able to implement Capital Asset Pricing Model using historical data.
- be able to compute different types of cost of capital (cost of equity, cost of debt, weighted average cost of capital).
- know how to include the tax advantage of debt into the discount rate.
- understand what are the determinants of the cost of debt, the cost of equity and the weighted average cost of capital (including the capital structure).
- understand the cost of capital principle and by this be able to derive the risk-adjusted discount rate (e.g. for stock valuation, capital budgeting or business valuation).
- be able to value stocks using Dividend Discount Model in order to detect any overvalued or undervalued stocks.
- be able to derive the cash flows relevant for investment decision-making and to make capital budgeting decisions.
- be able to value businesses using the Discounted Cash Flow technique.
- be familiar with the terminology and some data Providers used in financial markets (e.g. Reuters, Bloomberg, internet).
- know how to apply EXCEL (e.g. the EXCEL Solver with and without constraints) in oder to solve practical financial problems.
For this lecture participation is obligatory. Students are allowed to miss a maximum of 30% (i.e. two double-classes each of which is lasting 2 times 90/120 minutes).
The teaching approach is based on a mix of methods that includes presentations by the professor, class discussions, numerical examples, real-life case studies, mandatory and optional homework exercises, enrichment material and a final exam.
Based on an explanation of the underlying theoretical concept, small numerical problems ("examples") will be solved in class. When useful, these examples will be interpreted from an economic point of view. Some of the examples are linked in a case study like manner to provide more insight into existing cross-links. To enable you to further connect the knowledge acquired in the individual examples, the Learn@WU platform also includes two optional case studies that represent more complex situations where the pieces have to be put together and knowledge has to be transferred to a comprehensive real world problem.
To reinforce knowledge of the Finance terminology and to optimize the transfer from the "theoretical" concepts to the practical application, some enrichment material (e.g. newspaper material, journal articles, screen shots from data providers like Reuters or Bloomberg, web pages, ...) has been included in the enrichment booklet.
At the end of some lectures, mandatory homework exercises will be announced to be solved in teams and to be submitted via Learn@WU before the deadline stipulated. Note that with this respect any co-operation between the teams is strictly forbidden. Any signs of inter team co-operation in solving the mandatory homework exercises will be dealt strictly according to the plagiarism rules of WU.
The lectures have been designed in a very structured form to make things easier to comprehend. This particularly regards to the order of the stuff components and the careful and successive increase in complexity. The course is structured in a way that puts the different pieces of content into context with the pieces already covered before. At the end of the class, you will get a good overview how all the concepts are related to each other.
The course ends with a final exam that includes numerical exercises, maybe accompanied by verbal questions (e.g. questions that test your understanding of the course contents like interpretation of the results received) but no multiple choice questions or questions for definitions.
10 % Mandatory homework exercise A (team work)
10 % Mandatory homework exercise B (team work)
10 % Mandatory homework exercise C (team work)
70 % Final exam (individual work)
For participants of the Cross-Functional Management program and WU incoming exchange students.
For questions concerning enrolment and waiting lists please contact the CFM coordinator at firstname.lastname@example.org
All students must attend the first class!
The text and the solution of a representative sample exam can be downloaded from the Learn@WU platform. The exam will take place in the last session of the course (for details including date, time and place see the course catalogue on the homepage of WU. Make sure to have with you a pocket calculator and the "List of Formulas for the Exam" (included in the course materials; only the original list without any modifications or additions may be used).
You are allowed to use pocket calculators that are able to solve numerical differential equations, to calculate standard deviation and mean. E.g., you are allowed to use the following calculators:
Texas Instruments: TI-30 series, TI-34, TI-106, TI-BAII PLUS;
Sharp: EL-500M, EL-501W, EL-509W, EL-510R, EL-520G, EL-520W, EL-531W,
EL-531WH, EL-531X, EL-733A, EL-735;
Casio: FX-82, FX-82ES Plus, FX-82 MS, SL-82SX, FX-83GT Plus, FX-85MS, FX-86DE PLUS, FX-92B, FX-115D, FX-220, FX-350MS, SL-450L, FX-992s;
HP: HP 10 Bii, HP 12C, HP 17 Bii Plus;
KARCE Kc 186 Scientific Calculator;
Sencor SEC 183
You are not allowed to use pocket calculators that have a memory function (with add-ins), calculators that calculate matrices, calculators that perform symbolic differentiation, calculators that include financial mathematical functions, calculators that can be programmed or calculators that can solve linear equations. Mobile phones with calculator function, laptops and tablet PCs are not allowed either. Examples of pocket calculators that are not allowed:
Texas Instruments: TI-68, TI-82, TI-83, TI-83 Plus, TI 84 PLUS, TI-89, Voyage 200;
Sharp: EL-506W, EL-512 H, EL-546L, EL-546X, EL-5120, EL-9450, EL-9650/9600c, EL-9900;
Casio: FX-50 FH, FX-570ES, FX-991ES, FX-991MS, FX-3650, FX-4500PA, FX-4800P, FX-5500LA, FX-7400G Plus, FX-9750G Plus, ClassPad 300, Algebra FX20 Plus, FX 1.0 Plus, CFX-9850GB Plus;
Even though use of the EXCEL Solver is an integral part of this class, you will not use a laptop or the EXCEL Solver during the exam. So you do not have to apply the Solver at the exam. However, you may be required to describe verbally how you would operate with the Solver.