NYU Stern School of Business

Undergraduate College


Spring 2011

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 Lavi


Wednesday 12:30-1:30

Ernst and Young Learning Center


Course Meetings

MW, 3:30pm to 4:45pm

Tisch T-200


Midterm Exam: Wednesday March 9, 3:30-4:45PM

Final Exam: Wednesday May 11, 4:00-5:50PM

Please note that the times for the final examination differ from normal class hours. Due to University regulations as confirmed through the Dean’s office, students must take the final examination with their assigned Section. Unfortunately, the Professor has no discretion in this matter. Any requests for incomplete grades must be submitted to the instructor via a formal written request prior to May 11.

On the course page for this class can be found a detailed reading guide, problem sets, on-line homework submission form, and much else. We only use the Discussion Board component of BlackBoard. Please bookmark this page located at http://pages.stern.nyu.edu/~sbrown/foundations/


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 (Investment Principles C15.0041, Corporate Finance C15.0007) 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 24-26

            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.      

Week 2:                                                                                                  January 29-February 2

            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.

Week 3:                                                                                                                  February 7-9

            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.

Week 4:                                                                                                              February 14-16

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.

Week 5:                                                                                                              February 22-28

            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.

            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

Week 6:                                                                                                                      March 2-7

            Asset Allocation (Continued): Many risky asset case 

            International Diversification

        Does international diversification increase portfolio risk or decrease it? The answer to this question depends on the extent to which the components of international risk, equity risk, currency risk, and political risk are diversifiable in the investor’s portfolio

Midterm Examination March 9

Week 7:                                                                                                                      March 21-23

            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.

Week 8:                                                                                                                      March 28-30                                                                                                                                             

            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.

 Week 9:                                                                                                                         April 4-6

            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.

Week 10:                                                                                                                  April 11-13

            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.

Week 11:                                                                                                                  April 18-20          

            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.

Week 12:                                                                                                                  April 25-27      

            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.                                                                                                         

Week 13:                                                                                                                       May 2-4       

            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”).

Week 14:                                                                                                                           May 9

             Portfolio Insurance                                                           

An analysis of this case provides a useful summary of the material covered in this course.


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 Student Problem 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.). 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.

All students will need to have a calculator in this class. Only the simplest scientific calculator is required (one that has +,-,×,÷, xy (x to power y) and memory functions). Finance majors may consider purchasing a financial calculator. 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 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 15 percent. Satisfactory and timely completion of all homework assignments will contribute 5 percent.



At NYU Stern we seek to teach challenging courses that allow students to demonstrate their mastery of the subject matter.  In general, students in undergraduate core courses can expect a grading distribution where: 

Note that while the School uses these ranges as a guide, the actual distribution for this course and your own grade will depend upon how well you actually perform in this course.



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, weekly homework assignments submitted on line, Concept Checks and problem sets listed in the syllabus. 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, but they are an important component of the course. While these homework assignments are not graded, the instructor may take some of the closed book midterm and final examination questions from the Concept Checks and mini cases that appear in the Syllabus, and from homework assignments that are completed on a weekly basis through the Semester. For this reason, failure to complete these assignments in a timely way may lead to an unsatisfactory grade in the course

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 iven 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 evaluated instead by grading your participation on the class discussion board on BlackBoard. Your participation on BlackBoard substitutes 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. Your responsibility is to provide 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.

Each and every discussion board posting will be graded, and it is important to note that the grade will depend solely on the quality rather than the quantity of your participation. Specifically, this grade will depend upon:

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
Students may work together on weekly assigned homeworks and are indeed encouraged to do so. 


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.


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