https://www.ivo-welch.info/teaching/msba/

Meeting Times

Sessions: Room D.313 , Thursday 08:30-11:20 and 13:00-15:50, Jan 9, 16, 23, 30, 2025.

Midterm tentatively scheduled by MSBA program for Thursday, Jan 30, 16:00-17:15h, Crown Auditorium.

Instructor

Ivo Welch, J. Fred Weston Professor of Finance and Economics, Office C.524.

Office Hours: Fri, 10:30-11:30am. (Also, per request 24 hours in advance.)

Teaching Assistant

aleksandr.gevorkian.phd@anderson.ucla.edu

Office Hours: xxx, 1-3pm. (1 hour firm, 1 hour overflow.) Also available by email, but do not expect instant responses. (Allow for 24-48 hours.)

The TA will try his/her best to help. It is good for you to get someone else’s perspective, too. Make use of the TA.

I am ok if students don’t come to class. I am not ok when students are not coming to class, have not prepped by reading the material, and then expect private lessons later. Do your own homework first. Then, please ask for help if needed — then it is appropriate. This is what we are here for! We want to help those who want to help themselves.

Course Description

This is 4-week finance foundations course, with high workload.

The course website is at https://ivo-welch.info/teaching/msba/. There is a self-test website at https://syllabus.space, which we use for homework assignments. The primary focus of this course is investments (also called asset pricing), not financing (also called corporate finance).

Expect glitches. This is the first time I am teaching this particular version of an introductory finance course. Check my course website at least once every 24 hours. You are not assumed to be responsible for having read postings from 3 hours ago, but you are expected to have read postings from 25 hours ago.

Methods

Common sense. We work from simple theory to complex real-world application. Numerical examples. Healthy Skepticism. Methods of Thinking. No pretense that the world is just like the theory. (Reality is not what finance profs wish reality were — our models are flawed. Others may pretend that they have better explanations, but they don’t. Real life is difficult.)

Prerequisites

  • Programming skills (python/perl, R, etc.).

  • Economics: utility functions, risk aversion, briefly reexplained.

  • An ability to pick up further readings, e.g., in accounting or statistics, upon demand.

Readings

The textbook is https://corpfin.ivo-welch.info/home/. It is free! (You can also buy it for $60 from Amazon in print.) We will roughly cover the first half of the book.

Lectures and Topics

Please print the slides and bring them to class. We go fast, about 2 minutes per slide. Please do not use a computer during class, and install a calculator on your phone. (I often cold-call.) Trust me: this will enhance your learning experience.

You can skip class, but please don’t come in late. Please put up name cards without reminder.

Homeworks and Grading

We only record homework completion, not performance. You can work together, but don’t cheat yourself by skipping or not understanding questions and answers. You will do a lot worse on the exam if you do. I have often included homework questions on exams.

Computer homeworks are to be handed in to the TA, who will also grade them. ([S]he will announce how to submit them best. I leave this to the TA.) Homeworks can be talked about in great detail, as much as desired, but students should do homeworks ultimately not in groups but by themselves. (They can be in the same room doing and talking about it.) Syllabus.space homeworks are the “e-quizzes” (not homeworks) and the syllabus.space system automatically records for me your completion thereof.

The textbook, the lecture notes, the homeworks (on syllabus.space) all exist primarily to prepare you for the final, which counts for 80%-90% of the grade. (The exam are usually short questions, just like they are in the textbook or in syllabus.space. They are never tricky or unexpected. I have posted some old exams. I also may ask midterm questions to make sure you have done the computer assignments.) 10% is completion of all assignments. The remaining 10% is entirely at my discretion.

Regrading Policy: We want to be as accurate and fair as possible, but not systematically hand out more points to nitpickers. Ergo, we only regrade full exams, not individual questions. This means that grades can go up or down. (We also make copies of some exams to prevent tampering.)

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.

Scheduled Exam Date: Jan 30.

Homeworks

Learning Etiquette

  • Your education is your job, not mine. I can only help you. You have to do the learning.

  • This is not a Ted talk class. It’s not supposed to be fun. It’s supposed to educate you.

  • I am not a “service” provider. Anderson is not Taco Bell. Our customers are the firms we place you with, not you. You will become our representatives in the future. We want to be proud of what we taught you.

Humor and Political Correctness

I have a very strange of humor. I can be very politically incorrect. I don’t believe in trigger warnings and microagressions. We are adults and not delicate flowers. Our ancestors experienced real discrimination, so we can survive bad words (and I have probably suffered a lot worse than you ever will). It’s ok to be occasionally offensive, although it is not ok to be mean or malicious. I can also take it as good as I can dish it out. If I go beyond the pale, let me or the TA know. I will never hold this against you. In fact, you would be doing me a favor by letting me know, so I can learn.

Coverage

1. Introduction. Perfect Markets. Risk-Neutrality.

Chapters 1-2:

  • <01-intro.pdf> : Introduction .

  • <02-1-returns.pdf> : Returns. Compounding PV.

  • <02-2-npv.pdf> : Annuities/Perpetuities.

  • Homework Assignment: syllabus.space, Chapters 1-2.

  • Computer Assignment 1: Search the Internet for information on Treasury bills and bonds. (Hint: Search for historic Treasury yield curves. You can interpolate the yield in log-time-to-maturity space, and you are allowed to assume these are zero-bonds [paying only one amount at the end], even though this is not entirely correct.) What were the returns of investing at the end of each December 31 for one year in [a] 1-year bonds; and [b] long-term (say, 30-year) bonds? Note that you have to resell the 30-year bond as a 29-year bond after 1 year. Over the period from 1990 to 2023, what were your risks and rewards? Adding for one moment imperfect market problems, if you paid 33% income tax on your nominal rate of return at the end of each year, what were your after-tax risks and rewards? How did it compare to the inflation rate? If you had invested $100 on Dec 31, 1989, how much would you have in December 2023?

  • Computer Assignment 2: Sign up with WRDS. Learn about CRSP. What were the average arithmetic and geometric annual rates of return on the value-weighted and equal-weighted market, as well as their standard deviations (based on daily returns, multiplied by sqrt(252))? Note: CRSP has the market indexes already in them. Compare these stock market returns from Jan 1990 to Dec 2023 to those you calculated above. Assume a capital-gains tax rate of 20%.

2. Fixed Income. Term Structure. Forward Rates.

Chapters 3, 5:

  • <03-annuities.pdf>: Annuities (Coupon Bonds).

  • <05-yieldcurve.pdf>: Fixed Income, Yieldcurve.

  • Homework Assignment: syllabus.space, Chapters 3, 5.

  • Computer Assignment 3: Plot the two time-series of 1-year-ahead 1-year forward Treasury rates, and the actual realized 1-year Treasury rate, then plot both the time-series and an x-y graph (aligned of realized future 1-year rate vs. forward 1-year rate). Was one systematically higher or lower? Did realized inflation minus prevailing inflation (i.e., the shock in inflation) help to predict the actual rate of return?

3. Portfolios, Statistics, and Uncertainty.

Chapter 6:

  • <06-1-randomvars.pdf>: Review of random variables and expectations.
  • <06-2-preferences.pdf>: Diversification.
  • <06-3-stocksbonds.pdf>: First dibs.

  • <06-4-creditrisk.pdf>: Pricing in a risk-neutral world.

  • Computer Assignment 4: Using ETF rates of return (pull down all securities with shrcd=73 from wrds from 2020-2023, with permno, date, daily rates of return; then do the same again with monthly rates of return). Throw out all ETFs that were not at least $10 billion on 2022-12-31, or that had any missing returns from 2020 to 2022 (not 2023!). For each ETF, calculate the standard deviation from daily ETF returns in each year. What was the association between annual risk and annual reward in a sample from 2000 to 2023? Did higher-risk ETFs offer higher average rates of return? BONUS: Repeat this with calculated ETF market-betas instead of ETF standard deviations.

4. Risk Aversion and Optimal Pfio Choice (CAPM).

Chapters 7, 8, 9:

  • <07-invmotive-1-todo.pdf>: A history.
  • <07-invmotive-2-todo.pdf>: More history.

  • <08-invchoice.pdf>: Optimal investment weights.

  • Computer Assignment 6 (Main Project): Assume that the first two moments (daily means, daily-based covariances) of the most recent three years (2020-2022) rates of return are properly representative of their future one-year rates of return moments. Assume that on Dec 31, 2022, you wanted to invest in a portfolio of the largest 10 ETFs (chosen at the end of 2019). Please answer the following questions

    1. How would investing in the individual ETFs have performed from 2020-2022?
    2. How well would an equal-weighted ETF portfolio have performed from 2020-2022?
    3. What would your unconstrained minimum-variance portfolio have been from 2020-2022?
    4. What would your portfolio with 20% targeted risk per year (1.26% per day) have been from 2020-2022?
    5. What portfolio had the highest Sharpe ratio if the interest rate was 0?
    6. Answer the previous three questions if you had short-sales constraints, i.e., no weight could be below 1.
    7. Plot these portfolios into a standard-deviation vs. mean plot.
    8. How did your portfolios actually perform in 2023 (one year)?
    9. BONUS: What would you have invested in Bitcoin if it had been a permissible ETF?

    Note that the answers are specific to this one year. They would not necessarily repeat in other years or if we allowed a different set of securities.

Format of Hand-ins

  1. Executive summary page, boldfaced key “take-aways”

  2. <= 3 pages of text.

  3. <= 2 pages of figures and text.

  4. computer program.

Excess pages will be ignored. For bonus questions, you can use one extra paragraph on page 6.