Financial Evaluation and Strategy: Investments

Course Overview
In this module, you will become familiar with the course, your instructor, your classmates, and our learning environment. The orientation also helps you obtain the technical skills required for the course.

Module 1: Investments Toolkit and Portfolio Formation
In Module 1, we will build the fundamentals of portfolio formation. After providing a brief refresher of basic investment concepts (our toolkit), a summary of historical patterns of stock returns and government securities in the U.S. is provided. We then consider general examples of portfolio choice to highlight the tradeoffs between “risk” and return. We end the module with a discussion of dominated assets and efficient portfolio formation, emphasizing real-world examples and practice in Excel solving for the optimal portfolio given certain constraints (such as the amount of volatility we will accept in our portfolio).

Module 2: Motivating, Explaining, & Implementing the Capital Asset Pricing Model (CAPM)
In Module 2, we will develop the financial intuition that led to the Capital Asset Pricing Model (CAPM), starting with the Separation Theorem of Investments. We will understand that in a CAPM setting, only the market-wide risk of an asset is priced – securities with greater sensitivity to the market are required by investors to yield higher returns on average. We will also learn how to interpret regressions that provide us with both a benchmark to use for a security given its risk (determined by its beta), as well as a risk-adjusted measure of the security’s performance (measured by its alpha).

Module 3: Testing the CAPM, Multifactor Models, & Market Efficiency
In Module 3, we will discuss different asset-pricing models, the pros and cons of each, and market efficiency. In particular, we will test the effectiveness of the Capital Asset Pricing Model (CAPM) and examine survey data concerning its use by chief financial officers (CFOs) of firms. Predictable patterns in stock returns, such as the size and value effects, will also be examined and the Fama-French 3-Factor Model will be introduced. Market efficiency will be discussed in this module, as well as its implications for the asset-management industry and observed patterns in stock returns.

Module 4: Investment Finance and Corporate Finance: Firm Valuation
In Module 4, we will learn about the two key approaches to valuing a company or stock: market multiples and discounted cash flow. We will learn how to value perpetuities and will discuss how caution should be exercised in terms of projecting both the growth in long-term cash flows and the riskiness of those cash flows – two key components of the perpetuity formula. To gain experience with the market multiples approach, we will estimate a value of Google at the time of its initial public offering (IPO) back in 2004 using market data on Yahoo! as a comparable firm. Finally, the module closes with an assignment that will provide you with an opportunity to conduct a valuation of either Apple, Facebook, or Google.

Course Conclusion
In this module, we say goodbye to the Investments course as key takeaways from the course are reviewed. A tease is also provided to topics that will be covered in Professor Weisbenner's second course on Investments.