Professional Documents
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Heading 1
Greg Vaughan
Course Coordinators
Greg Vaughan
Sessional Lecturer for the course
Email: gregory.vaughan@unsw.edu.au
Consultation hours: by appointment (Mondays 5-6pm)
Course Aims
1.
2.
3.
4.
To provide students with coverage of the Institute of Actuaries of Australia part II professional
syllabus.
To provide an understanding of the main features of investors, investment markets, investment
classes and investment theories.
To develop an understanding of asset liability models, their application to asset allocation
decisions and the investment management process.
To be able to assess asset liability models along with relevant applications to different types of
liabilities.
The course builds on prior courses in the actuarial program, in particular ACTL3004 Financial
Economics for Insurance and Superannuation for undergraduate students and ACTL5109
Financial Economics for Insurance and Superannuation for postgraduate students.
It is one of three UNSW courses that cover the Actuaries Institute Part II syllabus, with this course
covering the Part IIB Investment and Asset Modelling syllabus.
An exemption from the Institute of Actuaries of Australia Part II course is based on obtaining an
average of 75% in ACTL4001, ACTL4002 and ACTL4303 or ACTL5100, ACTL5200 and
ACTL5303.
Learning Outcomes
Describe and critically discuss the characteristics and behavior of different Investment types under
different economic conditions, understanding the relationship between risk and return and
recognizing risk factors which include issuer default, counterparty failure, systemic liquidity, the
collapse of speculative bubbles, shocks to the economic system and cyclical/structural changes.
Demonstrate an understanding of the methods used for valuation of the common forms of debt, equity,
property and derivative securities. In particular students should be aware of: the valuation
methods and principles, data requirements and sources, the implicit assumptions and limitations
of these models
Demonstrate an understanding of the application and limitations of the major economic and financial
theories relevant to investment, and be able to critically evaluate these theories including: the
efficient market hypothesis, the capital asset pricing model, multi-factor pricing models, theories
from behavioral finance
Construct, critically evaluate and apply asset models of a stochastic nature that are appropriate to the
management of liabilities, and be able to: define appropriate investment objectives based on the
liability profile of a fund, specify appropriate investment constraints, based on the liability profile of
a fund, identify the characteristics of different types of asset models.
Critically evaluate the appropriateness of an asset model for a given context.
Derive consistent asset assumptions for asset models, taking into account historical date, prevailing
industry expectations, contemporary investment literature, and other practical considerations such
as tax.
Apply asset assumptions, and the linkages contained within asset models, to real world situations.
Describe and critically evaluate different approaches to asset allocation.
Textbooks
The prescribed textbook for this course is:
Investments. Zvi Bodie, Alex Kane, and Alan Marcus
McGraw Hill, 2014 ISBN13: 978-0-07-786167-4
Many concepts in this text will have been covered by students in previous courses. The
text is used to emphasise the practical aspects of the topics in the context of the
Course Outcomes.
Required Readings
Required Readings (to be provided on Course web site):
APRA Prudential Practice Guide (2013) Investment Governance
Scowcroft, A., and J. Sefton (2005), Understanding Momentum, Financial Analysts Journal, Vol 61
No. 2 pp 64-82
Phalippou, L (2008), Where is the Value Premium?, Financial Analysts Journal, Vol 64, No.2 pp 41-48
Baker, M., B. Bradley and R. Taliaferro, (2014) The Low Risk Anomaly: Decomposition into Micro and
Macro Effects, Financial Analysts Journal, Vol 70, No 2 pp 43-58
Clarke R, de Silva H & Thorley S (2002). Portfolio Constraints and the Fundamental Law of Active
Management Sep-Oct pp48-66
Sargen, N (2014) Facing the Reality of Bubble Risk, CFA Institute Magazine, July-August 2014 pp
22-24
Wilcox, S. (2012) Equity Valuation and Inflation: A review , The Research Foundation of CFA Institute
Gootkind, C.L. (2012) Fundamentals of Credit Analysis (from Petii, B.S., J.E.Pinto and W.L.Pirie,),
Fixed Income Analysis, CFA Institute)
Berekelar A, Kobor A, Tsumagari M (2006). The Sense and Nonsense of Risk Budgeting, Financial
Analysts Journal Sep-Oct pp63-75
Heffernan, M.J., (2013) Real Property In Australia, Ch 6 & 7.6
Required Readings
Required Readings (continued)
Grinold, R.C., K.F.Kroner and L.B.Siegel (2011) A Supply Model of the Equity Premium, The Research
Foundation of the CFA Institute
Dimson, E (2013) Rethinking the Equity Risk Premium (a summary), The Research Foundation of
CFA Institute
Maginn, J et al, Managing Investment Portfolios, Chapter 5
Perold, A., & Sharpe, W. (1988). Dynamic Strategies for Asset Allocation, Financial Analysts Journal,
Jan Feb pp 16-27.
Ahlgrim, K.C., S.P.DArcy and R.W.Gorvett, Modelling Financial Scenarios: A Framework for the
Actuarial Profession
Moodle
Course uses Moodle
Material for course:
Course outline
Lecture slides
Assignment
Academic Research Papers of interest
Websites of interest
Discussion forum
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Assessment
Assessment Task
Weighting
Length
Due Date
Mid-Session Exam
15%
1 hour
Monday 8 September
Report
15%
4000 words
As in schedule
Final Exam
70%
2 hours
Total
100%
11
Course Structure
Date
Topic
Capital markets
28 July
4 August
11 August
18 August
25 August
1 September
8 September
15 September
22 September
10
6 October
11
13 October
12
20 October
13
27 October
No Lecture
Investment
management process
12
13
If an alarm sounds:
-
14
Chapter
1
Overview
Role
of
nancial
assets
in
the
economy:
Real
vs.
nancial
assets
Riskreturn
trade-o
and
the
ecient
pricing
Financial
crisis
2008
ConnecCons
between
the
nancial
system
and
the
real
side
of
the
economy
Lessons
learned
for
evaluaCng
systemic
risk
1-15
Financial Assets
Determine
the
Claims
on
real
assets,
producCve
capacity
and
do
not
contribute
net
income
of
the
directly
to
the
economy
producCve
capacity
of
the
economy.
Examples:
Land,
buildings,
machines,
Examples:
Stocks,
bonds
knowledge
used
to
produce
goods
and
services
1-16
16
Commercial Banking
Underwrite
new
Take
deposits
and
make
securiCes
issues
loans
Sell
newly
issued
securiCes
to
public
in
the
primary
market
Investors
trade
previously
issued
securiCes
among
themselves
in
the
secondary
markets
1-17
17
ConsumpCon Timing
AllocaCon of Risk
1-18
18
19
Corporate Governance
The framework of rules, relationships, systems and
processes within and by which authority is exercised
and controlled in corporations. - ASX
Bad investment decisions by companies can be made
within clean corporate governance structures.
20
21
22
23
24
25
27
Australias aggregate debt level is not high but our household debt is
31
32
33
34
Chapter
2
Overview
Asset
alloca6on
Asset
classes
Money
markets
vs.
capital
markets
Types
of
money
market
instruments
Capital
market
securiCes:
Bonds
Equity
DerivaCves
1-35
36
37
S&P/ASX 200 Market Cap is $1.45t (July 2015). MSCI ACWI Market Cap is US$38t.
38
Other Topics
39
40
Primary Market
Primary Market
Initial Public Offerings
Seasoned New Issues
Types of Primary Market
Public Offering
Private Placement
41
Private Placements
Private placement: sale to a limited number of sophisticated
investors not requiring the protection of registration
Dominated by institutions
For sophisticated and professional investors
Professional investor as per Financial Corporation Act 1974
(Commonwealth)
42
Secondary Market
Secondary
Existing owner sells to another party
Issuing firm doesnt receive proceeds and is not
directly involved
Liquidity Centre
Base for movement of indices
Action and activity oriented
43
44
45
46
Takeovers
Three approaches:
On market bid (rare). Cash only, unconditional so can get
stuck half way.
Off market. May be hostile, cash and scrip combination,
usually conditional on certain level of acceptance, can be
increased if contested by interloper.
Scheme of arrangement. Typically friendly, requires
shareholder (75% by value, 50%) by number and court
approval, cash and scrip combination, usually conditional
and may include corporate restructure.
The Takeovers Panel regulates takeover activity to ensure
takeover rules are observed
47
49
50
51
52
53
54
Australian superannuation
Assets of $2.05t at March 2015
55
56
Australian superannuation
Average Asset Allocation of MySuper Products March 2015
57
58
Next week
Risk, return and portfolio theory
Bodie Chapter 5
Nominal and real rates of return
Risk premiums (spreadsheet example in 5.4)
Return distributions, risk measures and time horizon
Forecasting with arithmetic and geometric means
Study 5.7 carefully - Deviations from Normality and Risk
Measures
61
Next week
Risk, return and portfolio theory
Bodie Chapter 6
Risk, speculation versus fair game
Risk aversion and utility values
The capital allocation line and leverage
Study Section 6.5 Carefully Risk Tolerance and Asset
Allocation
Study Appendix A
62
Next week
Risk, return and portfolio theory
Bodie Chapter 7
Mathematics of diversification
Markowitz Portfolio Optimisation
Capital Allocation and the Separation Property
Study Appendix A
63
Next week
Risk, return and portfolio theory
Bodie Chapter 8
Single index model
Security Characteristic Line
Study 8.4 carefully
64
65