Course Number 1490
Professor Malcolm P. Baker
Associate Professor Samuel G. Hanson
Spring; Q3Q4; 3 credits
This is a CORE course for students pursuing careers in finance. Thus, students interested in pursuing careers in mutual funds, hedge funds, pension funds, endowments, wealth management, financial consulting, marketing and client service, sales and trading, investment banking, private equity, venture capital, and corporate finance should enroll in the course. More broadly, many students have found that a thorough understanding of public capital markets and the business of investment management is valuable in a wider set of careers outside of finance and in managing their personal wealth.
There are two core courses in capital markets in the elective curriculum: Investment Management and Investment Strategies. The focus of Investment Management is on the money management industry. The course takes the perspective of both the managers of asset management firms and institutional investors like endowments and sovereign wealth funds. From these viewpoints, students consider issues of growth and profitability, product design and innovation, client engagement, organizational design, performance evaluation, asset allocation, and portfolio risk management. The focus of Investment Strategies is on financial markets, principally equity markets, taking the perspective of a portfolio manager and considering the efficacy of value investing, growth investing, arbitrage, macroeconomic investing, tactical asset allocation, and other active investment strategies.
The goal of this course is for you to develop an investment philosophy, a set of guiding principles that shape your approach to investing in public capital markets. While this philosophy is directly applicable to professional investment management, it is also relevant for corporate finance, investment banking, and personal finance. A cornerstone of any investment philosophy is a view on the efficiency of markets.
An efficient market is one where prices reflect true fundamental values. In an efficient market, there is little value in the selection of individual securities. Higher returns come only from bearing greater risk. Investing in efficient markets means minimizing transaction costs and choosing maximally diversified portfolios that deliver an optimal tradeoff between risk and return.
An inefficient market, by contrast, is one where prices differ - sometimes substantially - from fundamental values. Behavioral finance is a useful framework for understanding market inefficiencies. According to behavioral finance, the combination of investor biases and institutional constraints can lead prices to diverge from fundamental value. These deviations from fundamental value create opportunities and risks for sophisticated investors, in both security selection and asset allocation.
Content and Organization
The course is organized into two parts. The first part develops a conceptual framework for the functioning of markets, spread over three topics:
- Market Efficiency
- Applications: Relative Value Investing and Systematic Investing
The second part puts these ideas into practice, examining the selection of individual securities and the execution of broader investment strategies, divided into four topics:
- Value Investing
- Asset Value
- Earnings Value and Activism
- Growth Investing
The materials consist of cases, class polls, and two course textbooks. A number of classes are built around visits from successful and well-known money managers.