ucla seal ivo welch: 2017 syllabus

MFE 237A is a finance foundation course. Unlike a similar MBA course, MFE 237A is geared more towards technical, data, and computer programming skills.

Personnel

Role Email Office Hours
Instructor Ivo Welch Friday 10:00-11:00am
Lead Teaching Assistant Brett Dunn see below
Teaching Assistant Wenyuan Xu see below
Teaching Assistant Ri Yu see below
Teaching Assistant Iris Tsai see below
Class Email To TAs mfe237a@gmail.com see below

Office hour rules are 1 hour firm presence, plus 1 hour overflow. That is, we close shop after 1 hour if there are no customers. Ivo Welch's office hours are in C524. Others are in B4.13.

Introduction

Meeting Times

Ordinary Class Meetings: Jan 10 - Mar 16

Section 1: B301, Tue Thu, 9:45-11:15. Final: B301, Wed Mar 22, 15:00-18:00.

Section 1: B301, Tue Thu, 12:45-14:15. Final: C301, Wed Mar 22, 15:00-18:00.

Objectives

The point of this course and my textbook (we will be using the 4th edition!) is not to teach institutional details (which change year to year), but to teach the basics, methods, jargon, and ways of thinking of finance. Think of finance and economics as "common sense translated into formulas." A formula or recipe that you do not understand is useless. Always remain skeptical. If something appears not to make sense—here, in other classes, or in the real world—ask!

Knowledge of this material is truly the common ground upon which everything else in finance rests. All the advanced and institutional knowledge in the world will not help you if you have not mastered the material from this course cold. If you are solid in its building blocks, then you will succeed. This is regardless of whether you will work in an investment bank, hedge fund, consulting firm, academic economics or finance, or management.

Prerequisites

  • The subject of finance is by nature technical. You need a thorough and comfortable ability to handle algebra and arithmetic. There are a lot of formulas and equations, but there is no higher math in this course. You need math aptitude, not math knowledge.
  • You need to be able to pick up an accounting and a statistics introductory textbook, for reading up essential knowledge if you happened to have missed or forgotten some.
  • You need good computing skills. This is not 1975. It is 2015.

This class will necessarily be easy for some students and difficult for other students. If you find that the class progress is perfect for you in terms of speed, you will be in the minority. If you find the material very difficult, you must take the initiative to keep up. The TAs and I are committed to provide as much help as we can. Yet, if you wait until the week before the midterm, then it will likely be too late. If you find the material very easy, please throttle your participation during class sessions. Please do not show off if you already knew the material. Do not intimidate newcomers, but help them. We want to engage everyone—and especially students that struggle with the material!

Idiosyncracies and Teaching Philosophy

The single biggest difference between my course and similar finance courses elsewhere in other universities is that in my course, you will learn what really works in the real world and what does not. You will not learn what I wish would work.

In other classes, the models will seem to work and fit together nicely. The world will seem a happy place. The formulas will be nice recipes, ready to be applied. You may not even learn what they mean. You will feel that you have learned the recipes of finance. Unfortunately, it will be all wrong. These courses teach bed-time fairy tales, whose only function is to make you sleep better. I like the explanation by Eric Falkenstein in Asset Pricing Theory Explained.

An analogy: if ninety percent of employers were creationist, would you want me to teach you the ins and outs of creationism? Or, would you want me to teach you first what creationists believe and then why it is wrong? Or, is teaching only creationism the "practical" way? I do have to teach you what the creationists believe, because you will confront it all the time. But I will also teach you why and where they are wrong.

If you are looking for the simple "right" answers, I cannot give them to you. No one can. The real-world data is messier and more confusing than we wish it were. I think it will make you a better decision-maker to understand where you tread on safe grounds and where you do not. If you don't want to hear the truth, if you want to just learn how to apply formulas, take another course.

I also have other views worth noting, both about finance and about teaching finance. I already described them above, but it's worth repeating:

  • I care primarily that you understand the basics of finance, inside and out. I care that you understand why you are using them. I care that you understand the limitations of what you know. I care that you can apply what you know.
  • I do not want you to memorize twiggles. The fact is that you will forget such details. One year after the class, you wouldn't remember them. I tend to forget them, too. I want you to understand the "system."
  • I will want you to do well in interviews. This requires solid knowledge of the basics and an ability to apply them quickly on questions and scenarios (which is what we will be doing a lot). Interviewers rarely ask about institutional details, and they don't do complex 30-page case studies, either. (If nothing else, the interviewers don't want to argue about the less relevant and/or ambiguous aspects about cases in job interviews, either.)

Mutual Responsibilities

Despite rumors to the contrary, a business school is not a service organization. UCLA Anderson is not Taco Bell, and we don't sell degrees. Do not view yourself as our customer. If anything, our customers are our alumns and recruiting employers. Our reputation rests more with them than with you.

My class is difficult. You can watch fun Ted talks or easy PBS shows yourself without me, as can anyone who is not attending business school. I am here to convey a rigorous and difficult subject matter, not to entertain you. Do not confuse me for an employee, for customer service, or for tech support. I am a professor of finance.

Your education is your job. I am only here to help you if you want to learn the material. It is difficult. I don't deliver implants. My job is to help you if you want to learn, and do so in any way we possibly can. I take this very seriously. My TAs and I are here to help. Talk to the TAs and/or me me when you have problems. Make use of the TAs' perspective. If you worry that you are one of the weaker students, I will personally (from my budget) pay to get you extra 1-on-1 tutoring help with a TA. Come and see me. There will be no excuses that you did not have the help you needed. Where there is a will, there is a way.

But it is entirely your responsibility to learn. I can only aid you in your endeavor to learn. I want to help you learn, to the best of my own ability. This is why I want to be a finance professor in the first place—to help students who really do want to learn to actually learn. I could care less about students who think it is my job to entertain them. It is the students' obligation to lean the material, not mine. I already know it. And I do not repeat my lectures in private.

In the end, it is up to you what you make of this course. You should try your best to stay on top of the current material, and take advantage of all resources offered to you. If you find yourself seriously behind, consider hiring a tutor—the earlier the better. Beginning one week before the exam may be too late. If you cannot afford hiring a tutor, talk to me. I have contributed to paying for tutors for students who want to learn and who could not afford one. Again, my goal is to help, in any way possible, those who want and deserve to be helped. I love to teach such students. It's what I want to do in my life.

Workload Warning

Do not assume this class is easy or works on cruise-control. The suggested out-of-course workload is targeted for an average of 6 hours per week, sometimes more, sometimes less. With class time, this is 10 hours/week.

Be religious in your course preparation: print and read the classnotes, do the homework, read the book chapters, attend class. Don't expect to be spoon-fed. Be prepared to research novel problems by yourself. Tackling novel problems is an important skill.

Readings

Classnotes

The class notes are the definite source of required material and the basis of 90% of the exams. They are available on the book website. Although the class notes are posted, I may change them as time goes by. I always try to perfect them. Please print slides about 1 week before they are used in class. (Otherwise, you may have to look at a slightly different set of notes from what will be used in class). Class notes are not spaced by class, but spaced by topic. We should be able to cover roughly 10--25 pages of notes per class.

Textbook

The textbook for this course is Ivo Welch, Corporate Finance: An Introduction, 3rd ed. Although the book is free online, I would suggest you purchase a printed copy. This way, you can mark up text and you are immune to website downtime. (My website may well go down for a week before the exam; I am not a pro sysadmin.)

You cannot use a computer during the exam. If the class votes the exam to be open-book, you may be at a disadvantage without a printed copy, too.

The book is deliberately priced at cost, at about 1/4 the price of its peers.

Ungraded Practice Quizzes

You can also test yourself on the equiz.xyz course website. There are questions for each chapter.

Beyond

There are many other useful sources of information. For example:

  • You may also find it useful to have access to a book on valuation, such as Copeland, Koller, Murrin's Valuation (McKinsey Press).
  • I can also recommend some other corporate finance textbooks: Berk-DeMarzo Corporate Finance, Allen-Brealey-Myers' Fundamental of Corporate Finance; Ross-Westerfield-Jaffe Corporate Finance; and the higher-level Grinblatt and Titman Financial Markets and Corporate Strategy. The GT text is more complementary to my own textbook than the first three.
  • Professional Readings: Everyone in the class should regularly read business publications such as The Wall Street Journal. You absolutely cannot walk into an interviewing situation without knowledge of (and/or an opinion about) current events. Similarly, you should not walk into a financial services or consulting interviewing situation if you are not tech-savvy. For example, what are the best financial websites and why?
  • Professional speaking and writing is very important. Take an acting course. It helps you to learn how to present yourself. This is especially useful for foreign students.
  • The ability to manipulate data quickly is very important. Take a computer programming course. The world is becoming more analytical and data-oriented. Are you sure you are equipped to handle it?

In Class Setup

I want you to learn. I will always welcome challenge(s). I am not (too) sadistic. I am never malicious. I am not (too) arrogant, and I can take it as well as I can give it. I am hard to offend. Please participate. Enjoy this class. Work is serious enough. Make the class fun!

I am a believer in the Socratic method and learning by doing. I am a fan of Prof. Kingsfield.

I have a very strange sense of humor. Please don't take offense to innocent but inappropriate remarks. I try to control myself, but I am not always politically correct. If you are very sensitive, and you support the UC Microaggressions list, then please take another course.

Necessary Class Preparation

  • Read the relevant book chapter before class. You will not understand everything, but you should understand the "drift." Having preread the material should help you to follow the discussion in class—and enjoy the cold-calling more.
  • Print and look over the relevant classnote(s) ahead of time.
  • Attend class. Bring an ordinary calculator to class. Bring the classnotes for the previous, the current, and the next session.
  • Read the relevant classnotes and book chapter again after class, and in more detail.
  • Do the assignments and homeworks.
  • Bring 5 single dollar bills. I sometimes like to bet impromptu for kicks, though never for more than $1 a bet.
If you stick religiously to these instructions, you will most likely do very well in the course—with an A or at least a B.

Attendance

If you have managed others, you already know that attitude is everything. Bring a mature, professional attitude to class. Attendance on-time is proper business etiquette and a minimal requirement for classroom participation. Even though everyone can be late once or twice for an emergency, being regularly late is unprofessional. Because I have discretion and I can use participation as part of the grade, frequent late appearance is not to your advantage.

If you are more than 10 minutes late, please do not bother to come. Coming in late interrupts the class. If you already know the material, you do not need to attend class, at all. However, all students are expected to attend the outside-speaker presentations if we have one.

Name Cards

Please always set up your name card without me having to remind you. Having a name sign is useful not only to me, but also to other students who do not know you personally.

Computer Use

You are not permitted to use a computer or other internet connected device during class. I do not use powerpoint but pdf classnotes. Print the relevant classnote(s) and bring them to class, as well as a calculator. Pencil your own notes on them. If you want to make computer readable notes, transcribe your pencilled notes afterwards. This improves both your learning and the overall classroom atmosphere—even though answering your emails will have to wait until after class. Please abide by this policy without me having to remind you.

Summary of Ground Rules

  • Put up your name sign.
  • Be on time.
  • Bring a printed copy of the slides, a pocket calculator (not a computer app that is a calculator), and a pencil (with eraser). Do not use an electronic device (such as a computer or cell phone) during class, unless specifically asked to do so by me. They are simply too distracting and have negative externalities on other students. Please do not force me to remind you.

Grading

Grade Weights
Part Weight
Midterm 30%
Final Exam 40%
Book Homeworks 5%
Class-Specific Components 25%

Experience tells me that most of the grading variation will come from midterm and final. Only 1 in 10 students is affected by all the other parts. A good rule of thumb is that everything not-exam related matters only for students that are close to a letter-grade margin.

Letter grades are relative to other students. The class roughly obeys the quasi-mandatory Anderson grade curve—about 40% A's, 40% B's, 15% C's, and 5% F's, although I have upped this on occasion when it was clear that my class had drawn an unusual sample from our top students. (As far as your transcript is concerned, you should neither be punished nor rewarded for taking this course. I am not here to fight or condone grade inflation or deflation.) We will give it our best efforts to be appropriate and fair, but it is never perfect.

In assigning course letter grades, I often put more weight on the better of the midterm and the final. After the midterm+final computation, I would add in the project score, the homework score, and my discretionary score.

Exams

We will vote whether you prefer closed-book and closed-note exams (which will be easier), or open-book and open-note exams. If open-book, then time pressure will make it difficult for you to look up too many answers. If closed-book, you may bring one single 3'' by 5'' index card on which you may write anything you wish, front and back.

You may bring a calculator, but not a computer.

There are no surprises in my exams. There never have been. They are just like my lectures, which are just like my slides, which are just like my book. One student last year told me that my lectures were not adding a lot over the book, and he was perfectly fine missing some---he ended up getting the 5th-lowest score on the final. The material is deceptive: it is a lot harder than it seems. Yes, you may think the material is somewhat redundant, but it takes redundancy to absorb it. And this is exactly the material that you need to know inside-out to succeed in finance. If the material seems too easy for you to bother with, you are putting yourself in danger of a low grade.

Many of my old exams are on my course website.

The midterm questions are basically the same format and level of difficulty as the homeworks. If you have no problems answering similar questions under time pressure, you will also have no problem in the midterms. If you are not present for the midterm, we will use your final as the sole grade determinant. This also means that you are just losing the option of improving your score, though.

The final is similar to the midterm in format, but cumulative in coverage. If you cannot make the scheduled final on (with prior justification sent to the TA team), then you can attend the makeup final. If you miss both final exam dates, then you have the choice between taking an oral exam with me that I will administer (my advice: avoid this!) and taking the final exam next year from another instructor teaching the same course.

Book Homeworks

The homeworks are the questions at the end of each chapter of the book. They are due seven days after completing a chapter, and even if the receptacle upload date is open longer than this. (We usually leave it open another day for stragglers.) Of course, you can work ahead on homeworks if you so wish.

We only record the chapters for which you have handed in a reasonable attempt to answer the homework questions. Our intent is that you gain nothing from copying answers from previous years (or your colleagues). On the contrary, doing so will only guarantee that your exam performance will be worse. Don't cheat yourself.

You should do your homework individually, although group discussion prior to the writeup is just fine. The goal is for you to learn from the homeworks, not to get a high score on them. When handing in homeworks, please keep a copy for yourself. Brevity rules.

The most important aspect of the homeworks is that they prepare you for the course exams. For 9 out of 10 students, the homeworks will be irrelevant to the final course grade.

There will be more homework early in the course. In particular, capital structure theory is more conceptual and thus has fewer homeworks. Instead, you are expected to spend the time producing a pro forma with your team in the last third of the course.

In the past, there was little variation across book homeworks, no matter how I structured them. Thus, I eventually decided to have book homeworks graded only check, check-plus, check-minus. Students that do not hand in satisfactory homeworks and who are anywhere close to a letter grade notch (e.g., A to A-) receive the lower grade.

The homeworks are the questions at the end of each chapter in the book. They are not graded. They exist to prepare you for the midterm and final. After we have completed a chapter, on the day after the homework has been due, you can visit a TA at their office hours (every day!) and ask him to grade the answers for you right there and then.

Discretion

I use my discretion to take into account positive class participation and the number of requests to regrade. Participation: Please note that I much prefer to have lively and funny students (yes, I can take humor as well [or as poorly] as I dish it out) than wet sacks in the audience. Be alive! It may help your grade. Regrading: To the extent that grading is relative, we do not want to make this a race of nitpicking. You learn nothing by squeezing the last point out of your obscure answer to question 12. We try to be (as) accurate (as possible) in grading, and we do not take it lightly. However, it is not possible to get everything perfectly right. Every student will get a few extra points on some questions where they don't deserve it, and a few missed points where they did not deserve it. It should roughly average out. The average question grade is more precise than an individual question grade. It would be unfair to those never asking for a regrade not to take this into account. Of course, if there is a big mistake in grading, we want to know. Our most important job here, just after providing you with the knowledge you need, is to keep the grading fair.

My discretion rarely makes a difference. I have never pushed a student more than one letter notch up or down and only if they started on the correct half. That is, if a student stands at 3.1, I can push to a B+, but not to a B-. Similarly, I can push a 3.6 from an A- to a B+.

There is no appeal or discussion here---discretion is my judgment call.

Honor Code

UCLA Anderson has an honor code, which prohibits cheating and plagiarism. Please report any violations to me.

You must agree not to cheat on the exams; and to inform me if you see other students cheating. Seating space may be at a premium, and it is tempting to glance at your neighbor's solutions. Do not do it: the penalties far outweigh the benefit. If I catch a student, I will try to press for the maximum possible penalty—and I have a reputation to defend: I have caught cheaters in the past.

We had an unpleasant experience two years ago. Don't cheat. It is not worth it. We have expelled students for cheating. Please bring any cheating to my (not the TA's) attention.

Regrading Policy

We regrade only full exams, not just specific questions, except in cases where we obviously blundered (such as missing that you wrote something at all).

The TAs will make small mistakes grading all exams, some in the student's favor, some against. Because grading is relative to other students, we do not want to systematically reward nitpicking. However, we also do not wish to make a systematic mistake in particularly hard cases. So, our regrading policy is as follows.

A student requesting a regrade can choose between one of two options:

  1. A regrade only of specific questions in dispute. However, this "costs" an immediate penalty of one question. Thus, a student with two incorrectly graded questions in favor and two against should choose this option.
  2. A regrade of the entire exam, with a clear directive for the TAs to reexamine every answer. Thus, a student with one incorrectly graded question in favor and none against should choose this option. It is possible for the overall exam score to decline when this option is chosen.

We do make random copies of exams. We have caught at least one student in the past who thought it was a good idea to clarify his answers in the exam with the same pen after the fact. We disagreed, even though his answers were indeed greatly improved. His grade was not. He was duly expelled.

Other Issues

Conflicts and Problems

If you have problems with me or the TAs, our strong preference is that you please come to see us first—either the person who you have problems with, or one of the other two members of our teaching team. (You can ask to keep your identity confidential, and we will honor this.) We want to make this class a great experience for everyone involved, and we are open to learning from you how to do it better. (In particular, I know that I occasionally go over the top with my brand of cynical and politically incorrect sense of humor, even though I wish I did not. If you are sensitive to inappropriate humor [or perhaps my lack of humor, depending on your point of view], you may be better off taking the class from another instructor.)

Electronic Attendance

Each student is required to check the class web site at least once every day. Important news will be flagged at the top. Students are responsible to have read posted announcements. They may even contain new assignments, and it is not an excuse that you have not bothered checking the website. Similarly, my computer died is not an excuse—backup is your friend.

This year (Winter 2017), we will be using a new computer system, http://mfe237.welch.equiz.xyz/. Expect some glitches.

Office Hours and Learning

We have deliberately scheduled TAs for many days of the week. Note that I (the instructor) have already tried to explain the answer to questions in my book, lectures, and classnotes. Thus, I believe it may well be better if you first see if you can get another perspective from another person. This may well be a co-student. It may be a TA to give you a different perspective. (Being confused at first when learning is normal! Your goal should be to unconfuse yourself by trying yourself and by asking questions.) The TAs will also try to answer questions by email. Of course, if none of this works, please come and see me. I am here to help (though not usually by email).

I become very grumpy when students do not come to class, have not prepared well, and then ask for private class sessions from TAs or me. I become understanding when a student could not come to class due to an interview, but then spent many hours trying to catch up, and comes to see costudents, TAs, and me for help for something that really did not click.

Do not expect the TAs to know everything. They are there to try to help you, but they are not me—and, besides, even I do not know everything about finance, either!

237A Plan

Finance 237A is the second finance course in our 1.5-course sequence. 237A focuses less on the mathy nitty-gritty (which is important but covered in other courses) and more on the conceptual underpinnings of financial economics. This means that 237A is more intuitive than most of our more quantitative MFE courses---but it is not easier. It is different. This MFE class also has a lot of overlap with the Anderson Finance MBA 430 course, but it covers subjects in different order and with different emphases. However, some lectures on the same subject can be similar or the same.

The strongly suggested computer language in this course is R. It is the standard in the industry. It sucks. R does not know whether it wants to be a parsimonious programming language or an interactive environment, so it has lots of inconsistencies. The worst R aspect is that errors don't even give a line number. The best debugging advice: insert a lot of cat statements in your code and see where the error occurs. I am actively exploring Julia as an alternative, and you are allowed to use it, but it is still too raw and you will be on your own. I am still learning it myself. Similarly, preferably do not use and do not ask me about Matlab. I don't know it. Matlab is rapidly losing ground to R and Julia in the real world. Excel, Basic, etc., are not permissible solutions in this class.

Advance Homework and Preparation

Before the first day of class, i.e., over winter break, please review Chapters 1-10 of the textbook, ed4.

The computer assignments are loosely connected to the rest of the course. They are useful, relevant, and necessary, but they are not 1-to-1 in sync with the material covered in the class itself.

Data work requires your own WRDS account. Most data assignments are based on CRSP data. Some are based on S&P Compustat data. (You are welcome to use the Bloomberg terminals in the Anderson library instead, but do not expect any help if you do.) You are expected to hand in written reports that are between 1 page and 5 pages long (the following week after I noted in the syllabus), and post your program on a website in case the TA wants to check.

When a computer assignment requests results up to "now", any data series that ends within the last two years (i.e., December 2014) is acceptable.

Your homeworks should be uploaded and then may be posted (publicly!) on the class website. If so, then potential employers can see it. The submission format must be plain html, so your homework will be viewable in a browser. I don't mean a .docx file saved as an .html file. I mean real clean html. Learn basic html if you don't know this yet: html, head, title, style, body, div, span, hr, p, table, tr, td, th, ul, ol, dl, li, dt, dd, h1, h2, h3. Learn basic css styles, but note that we will use a standard style sheet http://teaching.ivo-welch.info/hw.css to make every student's output look similar and non-gaudy.

Topics

Eduardo Schwartz has covered basic financial markets, present values, risk and return, utility and risk aversion, portfolio choice, the CAPM, and multi-factor models. Although we will spend the first week recapping Eduardo's class subjects (and getting started on WRDS), mine is just a review. You are already expected to know the earlier material. All of his course content is fair game for the exam in my class, too.

Computer homeworks have to follow a strict outline:

  1. an executive summary page, with boldfaced key "take-away" numbers;
  2. the homework text;
  3. tables or figures (note that your code can create them!);
  4. the computer code.
The page lengths for these are limited to 1 page, 5 pages, 3 pages, and 3 pages respectively. A page is about 40 lines with 10 words each, 500 words total maximum. Always start with http://teaching.ivo-welch.info/hwtemplate.html.

As noted, homeworks are only mildly related to the specific subject covered at the same time. Nevertheless, neither is redundant.

Course Schedule

Every topic in our teaching schedule should take about 2 weeks, plus or minus 1 week. About 1 in 4 classroom sessions can be quite short in order to look jointly over your programming assignments. All programming assignments have to be your own work, i.e., they are not group assignments. Writing a simple computer program is also a fair-game request on the midterm or final exam.

You are not permitted to use a computer or other internet connected device during class. I do not use powerpoint but pdf classnotes. Always print the relevant classnote(s) and bring them to class, as well as a calculator. Pencil your own notes on them. If you want to make computer readable notes, transcribe your pencilled notes afterwards. This improves both your learning and the overall classroom atmosphere—even though answering your emails will have to wait until after class. Please abide by this policy without me having to remind you.

Note: The numbering scheme and slides may change in the following, as they still are from ed3.

Approximate 237A Schedule
Week Dates Classnotes Topic
Basics (1.5 Weeks) Computer Assign due
1 Jan 6 extended review Introduction. Ext. Review 1 HW1: Indexes Jan 20
2 Jan 13 extended review Extended Review 2
3 Jan 17 extended review Extended Review 3
Perfect and Imperfect Markets (1.5 Weeks)Computer Assign due
4,5 Jan 19,24 s11-imperfect Market Imperfections HW2: EvtStudy Jan 26
5,6 Jan 24,26 s12-effmkts Inefficient Markets (+Causality)
Capital Budgeting (2 Weeks)Computer Assign due
7 Jan 31 Discussion of Event Studies, Statistics, Shrinkage na HW3: AnnRetSet Feb 2
8-10 Feb 2,7,9 s13-npvapplications NPV Applications HW4: FinlSet Feb 9
HW5: Reconcile Feb 19
11 Feb 14 Midterm
Acctg, Comps, Valuation (1.5 Weeks)Computer Assign due
12 Feb 16, 21 s14-valuation Financial Statements HW6: Comps Feb 23
13 Feb 21, 23 s15-comparables Comparables
Capital Structure (2 Weeks)Computer Assign due
14 Feb 23 s16-capstruct-intro Perfect Capital Structure (Governance) HW7: Fm-McBeth Mar 9
15 Feb 28+ s17-capstruct-perfectmkt
s18-capstruct-withtaxes
Perfect Capital Structure, Brief Taxes
16-20 Mar s19-capstruct-nontax WACC and Capstruct w/ Other Forces
or Finance Research
  • Informational Cascades
  • Levered Returns
  • Cost of Capital
  • Disaster Risk
  • "Model" Work -- Bailouts and Menus
  • Powerful Politicians
  • Referees
  • Structure Modeling

Iff my server is down on the homework submission date for more than 30 minutes within 2 hours of midnight, the homework will be due the following day at 5pm.

Again, the schedule is approximate. The last class is March 16.

Computer Homeworks

Please note that for large data pull requests from WRDS, you should download once and then save your work to a local file. This will make your and WRDS' lives (and debugging) a lot happier.

hw1 (indexes)
Learn WRDS!!

Indexes: For the (CRSP) S&P500 with dividends, what was the average arithmetic and geometric historical mean rate of return for daily returns, for monthly returns, for annual returns, and for 5-year returns from 1/1/1973 through 1/1/2015? Do the same for excess rates of return above the prevailing short rate, the 30-day Treasury rate, the 1-year Treasury rate, and the 5-year Treasury rates, respectively. This answers the questions of "how would each of these four self-financed strategies have performed?" (Does overlapping the longer-term series lead to different inference?)
Optional future assignment = how did HML, SMB, XMKT, etc. do in the last 5 / 10 / 20 / 50 years? What was the worst month?

hw2 (evtstudy)
We are interested to learn how stocks perform in terms of excess rates of return when they are actually paying a dividend. (The cum to ex-dates are noted for each stock in CRSP.) What happened to the stock return (minus the S&P500 on the same day) from days -20 through day +20, each day by day? Line up all stock excess returns on the event dates, and calculate the mean across all stock-days. This is the day 0 event mean excess rate of return. Eventually, your result will be 41 mean excess rates of return, that you can graph with relative day on the x-axis and mean rate of return (across all excess returns) on the y-axis. You can do this assignment only for calendar years after 2010 to make it simpler. (O: How does each stock's rate of return relate to the amount of the dividend it actually paid?).
hw3 (annretset)
Create an annual data set of compounded rates of return for each stock: perm, ticker, cusip, year, marketcap, rate of return. do not drop stocks in their year of disappearance!
hw4 (finlset)
Create an annual data set of earnings, cash flows, and leverage ratios (FD/TA, market and book-based), as available for sure in December of the year. Note that a firm that closes its financials in December 2012 usually won't release these financials until March 2013. Also, you may want to read ahead to learn more about what earnings mean if you do not remember your accounting courses.
hw5 (reconciliation)
How do you check your and others' results? There is really only one way: independent replication. (It is also helpful to trace individual stocks and to look at extreme values.) For our reconciliation application, return to your computer homework 2 and computer homework 3. Each student is paired with one other student (ideally, different students for both homeworks). Each student needs to share his/her writeup, take the other's data set, merge it with their own, and reconcile what is different:
  • For homework-3, create a PERM,YYYYMMDD,RET0 (rate of return at event day 0) data set for a merge with the other's data set. Each student, take the other's data set, merge it in, and diagnose the individual data points that are different.
  • For homework-4, do the same for all PERMNO's that begin with 100, i.e., 100*.
As the handin, write a report of what was different, how you would reconcile it, and what, if anything, you learned about your and their code from this exercise. The point is not to trash your costudent, but to learn therefrom.
hw6 (comps)
P/E: Produce a figure with E/P on the y-axis, and (the 3-year average of the) lagged change in percent earnings on the x-axis. Truncate both X and Y at the 10th and 90th quantiles.

Extra Credit: Scrape Yahoo!Finance to do it as of this moment. You can use an extra 5 pages for this.

hw7 (fm-mcbeth)
Do a basic Fama-Macbeth type of regression predicting cross-sectional stock returns with independent variables: firm-marketcap, price-normalized accruals, the earnings-price ratio, and 1/price. You can run this based on the annual data sets you created earlier. (If annual, you want to predict year t calendar stock returns with year t-2 variables, because a firm could end its fiscal year in May and report results in October.) The minimum requirement is Fama-Macbeth overall coefficients from one predictive set of (four) independent variables. (Each Fama-Macbeth coefficient is the average over the cross-sectional coefficients.) Extra Credit: are the differences between being scrupulous in knowing the variables (e.g., a 6-month lag post earnings disclosure), and one where you are "casual" (i.e., wrong)? Extra Credit: Any other variables that predict future calendar year returns reliably?

Recognize that you have to make choices in how you deal with missing data, strange date, etc. Spell out and justify your choices. When do they matter?