Will Goetzmann
223 56 Hill House Avenue
Office Hours T-TH 4-5
telephone 432-5950
Secretary: Elaine Okawa
MPPM 540b
Financial Management 1
Spring 1995
Outline: MODULE 2
This module introduces portfolio theory and the tradeoff between risk and return. It presents
two asset pricing models, the Capital Asset Pricing Model and the Arbitrage Pricing Theory,
and applies them to the calculation of the firm's cost of capital. Finally, it considers the
logical basis for the efficient market hypothesis as the rationale for observed market prices.
Examinations and grading policy
There will be a closed book midterm at the end of the
module, on Thursday, March 30
from 6:00 to 9:00 PM. Your performance on this exam counts for 90 per cent of your grade
for the first module. The remainder of the grade (10 per cent) is based on a Lotus assignment
due on Monday March 27 at 4 p.m. (no exceptions). The grade for
the second module will
be combined with the grades for the first and third module into a final grade for the course
(each module counting for one third). Homework does not count towards your grade (but may
play a role in borderline pass/fail cases). However, experience shows that participation in the
homework assignments is strongly positively correlated with the final grade.
TA Sessions
There will be weekly review sessions to discuss homework problems:
Time
Section 1: 6 p.m.-7:30 p.m.
A-53 Monday
Section 2: 6 p.m.-7:30 p.m.
A-53 Tuesday
Section 3: 6 p.m.-7:30 p.m.
A-53 Wednesday
Your homework has to be handed in to the TA's that are assigned to your
section, not the
TA's of the review session you choose to attend, before regular class.
(Please put the homework in their mailboxes)
The required textbook for the course is:
S.A. Ross, R.W. Westerfield, and J.F. Jaffe (1993), Corporate Finance, 3rd edition, Irwin,
Homewood, IL 60430
PPM 540b Financial Management 2:
Tentative Course Outline and Reading List (MODULE 1)
2/13 1 Capital Markets: Investment Performance Over History
Reading Ross/Westerfield/Jaffe chapter 9
2/15 2 Basics of Return and Risk: The Geography of the Efficient Frontier
Reading: Ross/Westerfield/Jaffe section 10.4
2/20 3 Preferences and Investor Choice
2/22 4 CAPM: The Portfolio Approach to Risk
Reading: RWJ chapter 10
Homework due: RWJ chapter 9 & 10 problems 9.1,9.6, 9.13,
10.7,10.16
2/27 5 Understanding the Security Market Line
Reading: RWJ chapter 10
3/1 6 The Arbitrage Pricing Theory
Reading: RWJ chapter 11
Homework due: RWJ chapter 11, 11.1,11.3,11.7, 11.8
3/20 7 Where Do Betas Come From? Leverage and the Discount Rate
Reading: RWJ chapter 12
3/22 8 Information and the Efficiency of the Capital Markets
Reading: RWJ chapter 13
Homework due: RWJ chapter 12 & 13 problems 12.2, 12.9, 12.10,
13.3, 13.6, 13.10.
3/27 9 Overview of the Instruments of Long-Term Financing, and Module II Review
Reading: RWJ chapter 14
3/27 Homework due: Lotus assignment: Acquira Co.
3/30 (Thursday) 6pm-9pm Midterm Examination Module II