NYU Stern School of Business

Undergraduate College


Spring 2013

Instructor Details

Brown, Stephen


MW 11:00-12 Noon and 1:30PM-3:00PM and by app

MEC 9-89

While I will be available to students on the office hours specified, I am always willing to talk to students whenever I am in the office and I monitor the Discussion Board on a continuous basis throughout the Semester. If you have any questions about course expectations or examinations please direct them to the Discussion Board so that I can answer once and for everyone.


Michael Reidler


5:00PM-6:30PM Tuesday

E&Y Center, Tisch


Course Meetings

MW, 3:30pm to 4:45pm

Tisch T-201

Final Exam:

Schedule exceptions
    Class will not meet on:
    Class will meet on:


Course Description and Learning Goals

This course covers the elements of financial markets, financial securities and how they are valued and traded. The perspective is that of the investment manager, responsible for the investment portfolios of insurance companies, banks, pension funds, mutual funds, endowment funds and personal trusts. What we cover in this course has obvious implications for stock selection strategies by individuals and for financial decisions within firms. However, these topics are covered in greater depth in other courses in the Finance sequence and are merely introduced here. We discuss several outstanding problems of investment management, including the definition of appropriate standards of prudence, security valuation, performance measurement, the asset mix decision and alternative risk control procedures.


Course Pre-Requisites

C22.0103 Statistics for Business, V31.0002 or V31.0004 Economic Principles, C10.0001 Principles of Financial Accounting (co-requisite) and Sophomore Standing


Course Outline

Week 1:                                                                                                                January 28-30

            Investors and the Investment Process

    What are the investment objectives of individual and institutional investors? What constraints apply? We discuss the characteristics of different investors, and the types of securities available to them. It is important to understand the basic characteristics of security markets and the way in which these affect the investment process. In particular, we demonstrate how a very basic understanding of these markets leads to a simple basis for the valuation of all financial claims.  

Readings: Bodie, Kane and Marcus (BKM) Chapters 1.1-1.6, 22, Ross Westerfield and Jordan (RWJ) Chapter 4

Concept Check: BKM 22.1 (p.703), 22.2 (p.706),22.3 (p.709), RWJ 1-5 (p. 108-109)

Problem sets BKM with answers in Solutions Manual 22:1-7 (p712), RWJ 1-5 (pp.109-110)

Week 2:                                                                                                                 February 4-6

            Principles of Security Valuation

The idea that a financial security is worth no more than the present value of the stream of anticipated payments is a very basic principle of security valuation. We motivate this general idea, and illustrate it in the context of equity, fixed income and real estate valuation. An understanding of this idea suggests why it is so hard to predict future movements in security values.

Readings: BKM Chapter 13 pp.394-418, Ross Westerfield and Jordan Chapters 5,8

Concept Check: BKM 13.2 (p.402), 13.3 (p.405), 13.5 (p.413), RWJ 1-7 (p.114), RWJ 1,2,5,6,7 (p.122-123)

Problem Sets: RWJ 1,3,4,5 (pp.115-116), 2,3 (p.124)

Week 3:                                                                                                                  February 11-13

            Mathematics of Return

Comparison of rates of return is often a shortcut to valuing different financial securities. Unfortunately, there is no general consensus as to how to measure rates of return. Arithmetic, geometric, and internal rates of return are often confused with each other and with measures such as bank discount rates. Each of these measures of return are used in different contexts and for different purposes and should not be confused.

Readings BKM Chapter 5.1, 2.1, 2.2,2.4,10.1

Concept Check: BKM 5.1 (p. 112), 2.1 (p. 31)

Problem sets: BKM 5.1 (p 141), 18:2,3 (p.605)

Problem set 1 is due in class Wednesday February 20

Week 4:                                                                                                              February 20-25

             Measures of risk and return

Defines notions of return and risk for equity securities and for portfolios of securities. Compares the risk and return features of stocks and bonds, and shows how equity risk can be modified by considering a portfolio of stocks and bonds.

Readings: BKM Chapter 2.3,2.4,5.2,5.3,5.5,5.6

Concept Check: BKM 2.3 (p.37), 2.4 (p.41), 2.5 (p.42), 5.2 (p.117), 5.3 (p.121), 5.4 (p.127), 5.6 (p.132), 5.7 (p.134)

Problem sets: BKM 5:5:7 (p139), 7-11 (p.142-143)

Week 5:                                                                                                              February 27-March 4

            Diversification with two risky assets 

Examines the risk and return attributes of portfolios of securities, and identifies the correlation between security returns as a central component of portfolio risk.

Readings: BKM Chapter 6

Concept Check: BKM 6.1 (p.151), 6.2 (p.154), 6.3 (p.158), 6.4 (p.161), 6.6 (p.170)

Problem sets: BKM 6:1-3 (pp.182-183)

            Asset Allocation

Identifies the asset mix decision as the central policy problem of investment management, and shows how portfolio theory can be used to construct long term asset mix guidelines. Introduces the notion of asset liability matching

Readings: BKM Chapter 6.4

Concept Check: BKM 6.5 (p.166)

Problem sets: BKM 6:4-6 (pp183-184)

Week 6:                                                                                                             March 6-11

            Asset Allocation (Continued): Many risky asset case 

Readings: BKM Chapter 4 (skim)

Problem set 2 is due in class Monday March 11

            Capital Asset Pricing Models

The idea that there may be a finite (and small) number of nondiversifiable sources of risk leads to an Arbitrage Pricing Theory that defines the return investors expect from capital assets. We study the foundation of this model and the relationship to the related Capital Asset Pricing Model, and show how the model is applied in practical investment management

Readings: BKM Chapter 7

Concept Check: BKM 7.1 (p.192), 7.2 (p.193), 7.3 (p.195), 7.4 (p.196), 7.5 (p.209), 7.6 (p.218)

Problems: BKM 7: 1-14 (p.223-225)

Week 7                                                                                                              March 13-25

            Capital Asset Pricing Models (continued)

            Midterm Review

Midterm Examination March 27

Week 8:                                                                                                              April 1-3             

            Performance Measurement

 Past performance alone does not guarantee future performance. Sophisticated performance measurement tools examine the extent to which components of performance can be related to the conduct of the manager.

Readings: BKM Chapter 18.1, 18.5

Concept Check: BKM 18.1 (p.586), 18.2 (p.598)

Problems: BKM 1-5 (p.605-607), 7 (p. 604)

Problem set 3 is due in class Monday April 8

 Week 9:                                                                                                             April 8-10

            Fixed Income Analysis 

How do fixed income securities work and how are they valued? Why should bonds of different maturities offer different yields? The fact that longer term bonds usually offer higher yields, suggest that part of the difference is a premium for bearing interest rate risk, since exposure to this risk increases with time to maturity.

Readings: BKM Chapter 10

Concept Check: BKM 10.1 (p.290), 10.2 (p.295), 10.3 (p.301), 10.4 (p.302), 10.5 (p.305), 10.6 (p.306), 10.8 (p.308)

Problems: BKM 10:11:16,18-20,23-27,30-31,33-42 (pp.322-325)

Week 10:                                                                                                            April 15-17

            Managing Fixed Income Investments

Duration measures how long investors tie their money up in fixed income securities. It is also for this reason, a measure of the investor’s interest rate exposure. Immunization and related strategies attempt to minimize interest rate risk exposure by arranging the investment portfolio such that the duration of the assets matches the duration of the investor’s liabilities.

Readings: BKM Chapter 11.1-11.3

Concept Check: BKM 11.1 (p.334), 11.2 (p.335), 11.3 (p.336), 11.4 (p.338), 11.5 (p.343), 11.6 (p.345), 11.7 (p.345)

Problems: BKM 11: 1-17 (pp.352-354), 1,5,6,8,10,11 (pp.354-358)

Problem set 4 is due in class Monday April 22

Week 11:                                                                                                            April 22-24        

            Options: Characteristics and Payoffs

Options and futures contracts are examples of derivative securities, whose value depends on the value of some other traded security. For some investors, derivative securities offer the cheapest way to capitalize on information that the underlying security will rise (or fall) in value. For other investors, derivative securities provide an insurance function. To understand derivative securities, it is first necessary to understand how the value of the derivative varies with the value of the underlying security.

Readings: BKM Chapter 15.1-15.2

Concept Check: BKM 15.1 (p.478), 15.2 (p.482), 15.3 (p.491), 15.4 (p.492)

Problems: BKM 15: 9-16, 20-23 (pp.502-503). 1-2 (p.504)

Week 12:                                                                                                            April 29-May 1    

            Option Valuation 

An analysis of the relationship between the value of the derivative and the value of the underlying security suggests a simple approach to valuing the derivative. We illustrate this in the context of option pricing, and introduce the notion of hedging.     

Readings: BKM Chapter 16

Concept Check: BKM 16.1 (p.511), 16.2 (p.512), 16.3 (p.515), 16.4 (p.516), 16.5 (p.518), 16.6 (p.520)

Problems: BKM 16:5,6,8,9 (pp.535-536)

Problem set 5 is due in class Monday May 6                                                                                      

Week 13:                                                                                                            May 6-8

            Futures Contracts  

Futures contracts are a special case of a derivative security. The special features of these contracts are best understood by reference to related forward contracts and to the history of futures contracts trading in the United States. In investment management, they are chiefly used to hedge security risk (“short positions”) or to provide an inexpensive way to invest in the markets (“long positions”).

Readings: BKM Chapter 17

Concept Check: BKM 17.1 (p.547), 17.2 (p.551), 17.3 (p.555), 17.4 (p.556), 17.5 (p.558)

Problems: BKM 17:1-6 (pp.573-574)

Week 14:                                                                                                             May 13

             Final review                                                          

A summary of the material covered in this course and final examination review


Required Course Materials

The textbook for this course is Bodie, Kane and Marcus Essentials of Investments  (McGraw-Hill, Eighth Edition) (BKM), a special edition comprising Chapters 4, 5 and 8 of Ross, Westerfield and Jordan Essentials of Corporate Finance (RWJ) and a Solutions Manual for Essentials of Investments (SM) available in a package from the bookstore. We will mainly use BKM. If you have an earlier edition of BKM (seventh or sixth), you are fine. There are only minor changes between recent editions. However, page and chapter numbers may vary. If you use an older edition, it is your responsibility to find out the differences with the latest edition. The textbooks are your source to review the material. BKM is often very good and tightly linked to the material we will cover, but at other times that link is weaker. That said, it is currently the best book on the market for our purposes, and you will need it to prepare before class and to go over the material after class. The Solutions Manual will come in handy when doing practice problems.  If you did not buy your course material through the bookstore, you can purchase RWJ separately on the publisher's web site (Go to https://create.mcgraw-hill.com/shop/#/catalog/details/?isbn=9780390169501. The booklet can be found under Prof. Stijn van Nieuwerburgh's name. Item [3]: ISBN: 9780390169501, price: $14.63.).

All students will need to have a calculator in this class. While only the simplest scientific calculator is strictly required (one that has +,-,×,÷, xy (x to power y) and memory functions) we strongly urge students to consider purchasing a financial calculator as this will be required in later classes. Standard financial calculators include the HP 12C, the HP 10B-II and the TI BA-II Plus. You are expected to learn how to operate the calculator on your own.In addition, every student of Stern is expected to be comfortable with EXCEL tools. In particular any Finance area major is expected on graduation to have a knowledge of these tools that extends beyond familiarity to an individual awareness of the uses and limitations of this technology. Please note that graphing calculators, PDA’s, or any electronic devices with a QWERTY keyboard are not permitted in the examination room. Cell phones, laptops or other electronic devices may not be used at any time in any class or examination room.


Assessment Components

There will be a midterm and a final examination. The final exam will cover all of the material in the course, and the midterm will count towards the final grade only when the grade on the midterm is higher than the grade on the final. The examinations (midterm and final) will contribute 80 percent to the final grade and class participation will count towards 5 percent. Satisfactory and timely completion of all homework assignments will contribute 15 percent.



At NYU Stern we seek to teach challenging courses that allow students to demonstrate their mastery of the subject matter.  In general,

The grade distribution for this course and your own grade will depend upon how well you actually perform.



The process of assigning grades is intended to be one of unbiased evaluation. Students are encouraged to respect the integrity and authority of the professor’s grading system and are discouraged from pursuing arbitrary challenges to it.

If you believe an inadvertent error has been made in the grading of an individual assignment or in assessing an overall course grade, a request to have the grade re-evaluated may be submitted. You must submit such requests in writing to me within 7 days of receiving the grade, including a brief written statement of why you believe that an error in grading has been made.


Professional Responsibilities For This Course

Class Expectations  

This course is challenging and cumulative in nature. For this reason, it is important not to fall behind, as it is difficult to catch up. Students are responsible for material covered in lectures and five required assignments submitted in class (see schedule above).  Concept Checks and problem sets listed in the syllabus are helpful learning tools for this material. Concept Checks are problems that are interspersed in the text. A worked answer for each of these problems appears at the end of the chapter in which the concept check appears. For example, the Concept Check 22.1 that pertains to the first lecture can be found on page 703 of the BKM text, and an answer is provided on page 715. Problem sets are optional problems provided in the BKM Student Problem Manual for which answers are also provided. The Concept checks and problem sets are not to be handed in.

You are expected to read the business media on a daily basis and be prepared to discuss stories that appear there as they relate to material covered in that week's classes. This conversation will take place on the discussion board component of BlackBoard.




Class participation is a significant part of your grade and an important part of our shared learning experience. Your active participation helps me to evaluate your overall performance. In-class participation is highly valued, but unfortunately, given the size of the lecture sections it is difficult if not impossible to assign credit in an equitable fashion. The class participation credit  will be determined on the basis of satisfactory participation on the Discussion Board and class attendance. Failure to participate in the Discussion Board or more than two unexcused absenses will lead to loss of participation credit for this class. Note that participation on BlackBoard should be thought of as a substitute for a written assignment requirement in this class. The ability to communicate your ideas is an essential component of success in any area of Finance. Every week we will cover material that is the subject of articles that appear in the Wall Street Journal and other business media. You should be comfortable providing a critical commentary on these articles based on what you have learned in class. In addition, we welcome any questions or comments on the class material covered that week as well as any questions on the required weekly problem assignments.

I consider participation in the Discussion Board an important component of the class. While we will not grade each and every posting you should bear in mind that the value of this experience will depend on:

Please note that disrespectful language and comments of a personal nature will be removed from the discussion board and may entail a loss of participation credit.



Class Norms

Classroom Norms


Stern Policies

General Behavior
The School expects that students will conduct themselves with respect and professionalism toward faculty, students, and others present in class and will follow the rules laid down by the instructor for classroom behavior.  Students who fail to do so may be asked to leave the classroom. 


Collaboration on Graded Assignments
You may collaborate with your classmates in preparing the solutions to graded assignments, but each student must hand in a separate assignment. If you do receive help or work with another student on the assignment, you must note this fact at the beginning of your solutions. 


Course Evaluations
Course evaluations are important to us and to students who come after you.  Please complete them thoughtfully.


Academic Integrity

Integrity is critical to the learning process and to all that we do here at NYU Stern. As members of our community, all students agree to abide by the NYU Stern Student Code of Conduct, which includes a commitment to:

The entire Stern Student Code of Conduct applies to all students enrolled in Stern courses and can be found here:

Undergraduate College: http://www.stern.nyu.edu/uc/codeofconduct
Graduate Programs: http://w4.stern.nyu.edu/studentactivities/involved.cfm?doc_id=102505

To help ensure the integrity of our learning community, prose assignments you submit to Blackboard will be submitted to Turnitin.  Turnitin will compare your submission to a database of prior submissions to Turnitin, current and archived Web pages, periodicals, journals, and publications.  Additionally, your document will become part of the Turnitin database.


Recording of Classes

Your class may be recorded for educational purposes


Students with Disabilities

If you have a qualified disability and will require academic accommodation of any kind during this course, you must notify me at the beginning of the course and provide a letter from the Moses Center for Students with Disabilities (CSD, 998-4980, www.nyu.edu/csd) verifying your registration and outlining the accommodations they recommend.  If you will need to take an exam at the CSD, you must submit a completed Exam Accommodations Form to them at least one week prior to the scheduled exam time to be guaranteed accommodation.


Group Projects

Guidelines for Group Projects

Business activities involve group effort. Consequently, learning how to work effectively in a group is a critical part of your business education.

Every member is expected to carry an equal share of the group’s workload. As such, it is in your interest to be involved in all aspects of the project. Even if you divide the work rather than work on each piece together, you are still responsible for each part. The group project will be graded as a whole:   its different components will not be graded separately. Your exams may contain questions that are based on aspects of your group projects.

It is recommended that each group establish ground rules early in the process to facilitate your joint work including a problem-solving process for handling conflicts. In the infrequent case where you believe that a group member is not carrying out his or her fair share of work, you are urged not to permit problems to develop to a point where they become serious. If you cannot resolve conflicts internally after your best efforts, they should be brought to my attention and I will work with you to find a resolution.

You will be asked to complete a peer evaluation form to evaluate the contribution of each of your group members (including your own contribution) at the conclusion of each project. If there is consensus that a group member did not contribute a fair share of work to the project, I will consider this feedback during grading.


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