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Foundations of Finance

Vak 2013-2014

Tag(s)

[BSc] Ec, En, ID, PSc

Admission Requirements

Numeracy I (2,5 ECTS) and Numeracy II (2,5 ECTS) OR Numeracy (5 ECTS).

Description

Put simply, finance is about decision-making where money is involved. When the monetary costs and benefits of a given course of action are known with certainty and coincide in time, making a decision is easy. When, on the other hand, money flows are risky and scattered over time, as is often the case in situations faced both by individuals and institutions, a specialized analytical framework is called for. As we develop and apply this framework, there will be a good deal of mathematics and computation. However, intuition behind the formulas will always be discussed, and we will take the time to talk about “the big picture”, focusing as much as possible on ideas rather than on numbers. In parallel with developing the analytical tools, we will be discussing current events in the world of finance as they relate to the course content. The course will end with student presentations and class discussions of several classic books about finance.

Course Objectives

This course will introduce many of the central ideas in finance: cost of capital; present value; investment risk and return and their interconnection; investor decision-making; market efficiency. Students will learn to apply these ideas to determine whether a project creates value, assess risks and returns of investments, select investment portfolios, estimate and interpret the relationship between risk and return, and discuss the efficiency of financial markets and its implications. Additionally, the course will give students the tools to understand and critically interpret technical articles in the financial press, and will furnish them with a foundation for more advanced study of finance.

Mode of Instruction

In the first six weeks, the sessions will consist of lectures combined with class discussions of the material being covered as well as of current events in the world of finance. The two sessions of Week 7 will be dedicated to student presentations of assigned books.

Assessment

Assessment: In-class participation
Percentage: 20%
Deadline: Ongoing

Assessment: Weekly homework assignments
Percentage: 30%
Deadline: Weeks 2 – 6 (Mondays at noon)

Assessment: Presentation
Percentage: 25%
Deadline: Week 7 TBA

Assessment: Final sit-in exam
Percentage: 25%
Deadline: Week 8 TBA

The grade for in-class participation will reflect the student’s contribution to class discussion throughout the course: thoughtfully relating course readings to news events, asking and answering pertinent questions, and overall engagement during class. You must also be ready to discuss your work during class.

There will be five weekly homework assignments, each representing 6% of the overall course grade.

Each student will be required to give a presentation, individually or as part of a group, during the final two sessions of the course. The presentation should last approximately 15 minutes. Each individual or group must organize an in-class discussion, to be led by the presenting group. How well the group leads its discussion will account for a fourth of its presentation grade, and participation in the Week 7 discussions will account for a fourth of each student’s class participation grade.

The 2-hour final sit-in exam will take place in Week 8. Lecture notes and printed materials will be allowed, and a calculator is recommended (but no computers are allowed). The exam will consist of both numerical and essay questions.

Literature

The required text for the course is Ivo Welch’s “Corporate Finance” (second edition, 2011). While introductory finance textbooks written by other top experts are generally very expensive ($150 and more), this book is available on Amazon.com for $60 plus shipping (note that shipping to Europe can take several weeks). Even better, Prof. Welch has made the book available to be read for free online from any computer or iPad with an internet connection: http://book.ivo-welch.info/ed2/ (and the first three chapters can be downloaded in PDF). The course will cover Chapters 1, 2, 4, 5.1-5.2, 6.1, 7, 8, 9, 10.1 and 11. (NB: Chapter 3 and the non-required sections of Chapters 5, 6 and 10 are suggested optional readings. So are his alternative chapters on investments, available on http://book.ivo-welch.info/bookg.pdf, which cover the material of Chapters 7, 8 and 9 of the textbook in greater depth and in more technical detail.)

Several general interest books about finance are recommended. Each student will have to read one of these books and present it in Week 7 (individually or as part of a group). Books will be assigned to students in the first week of class. You do not need to buy them as I will be able to lend one copy of each book for the duration of the course. The books are:

  1. Peter Bernstein, 1992, Capital Ideas: The Improbable Origins of Modern Wall Street
  2. Bryan Burrough and John Helyar, 1990, Barbarians at the Gate: The Fall of RJR Nabisco
  3. Michael Lewis, 1990, Liar’s Poker
  4. Michael Lewis, 2010, The Big Short: Inside the Doomsday Machine
  5. Roger Lowenstein, 2000, When Genius Failed: The Rise and Fall of Long-Term Capital Management
  6. Raghuram Rajan and Luigi Zingales, 2003, Saving Capitalism from the Capitalists: Unleashing the Power of Financial Markets to Create Wealth and Spread Opportunity
  7. Robert J. Shiller, 2012, Finance and the Good Society
  8. James Stewart, 1992, Den of Thieves
  9. Nassim Nicholas Taleb, 2001, Fooled by Randomness: The Hidden Role of Chance in the Markets and in Life

Lastly, students are encouraged to read the business and financial press, such as The Financial Times and the Finance & Economics section of The Economist.

Contact Information

d.stolin@tbs-education.fr

Weekly Overview

Week 1: The time value of money and capital budgeting
Session 1 (26 August): Course introduction and rates of return
Session 2 (29 August): Capital budgeting

Week 2: Investment return and risk
Session 1 (2 September): Financial markets and investment performance
Session 2 (5 September): Investment risk

Week 3: Portfolios and diversification
Session 1 (9 September): Portfolio risk
Session 2 (12 September): Diversification and beta

Week 4: Investment choice
Session 1 (16 September): Risk-return trade-off
Session 2 (19 September): The efficient frontier and the capital allocation line

Week 5: Asset pricing
Session 1 (23 September): The Capital Asset Pricing Model (CAPM)
Session 2 (26 September): The CAPM: Practical issues and alternatives

Week 6: Market efficiency
Session 1 (30 September): Market efficiency: the concept and the evidence
Session 2 (3 October): Market efficiency: implications and behavioral finance

Week 7: Presentations
Session 1 (7 October) and Session 2 (10 October):
Each group will do a presentation on one of the assigned books on the workings of the world of finance.

Preparation for first session

Read Chapters 1 through 2.3 (pages 1-16) of Ivo Welch’s “Corporate Finance” (second edition, 2011), freely available on http://book.ivo-welch.info/ed2/ for online reading and downloadable in PDF (http://book.ivo-welch.info/ed2/chap01.pdf and http://book.ivo-welch.info/ed2/chap02.pdf). Be prepared to discuss and answer questions about the readings in class.