BA 239 - Investment Strategies and Risk Management
Mr. Hakansson
Course Outline -- Spring 1999 (Revised 4/21/99)
Prerequisite: BA 233 or 234
Overview
This seminar provides a forum for examining alternative investment strategies and styles, primarily those practiced by leading money managers. It will also study the risk management techniques employed by financial institutions and industrial companies and/or advocated by consulting firms. Warren Buffett’s particular approach to risk management will also receive attention.
Format
Numerous guest speakers; some lectures, student presentations
Grading
The Paper/Project Report
The project is an opportunity for you to delve into an area in some depth, raise questions, and attempt to provide some answers. The topic of the paper is essentially unconstrained except that it should address some issue related to the course (investment strategy and risk management). Examples of possible topics:
Texts
Jorion, Phillippe. Value at Risk: The New Benchmark for Controlling Market Risk, Irwin Professional Publishing, 1996.
Hagstrom, Robert G., Jr. The Warren Buffett Way, John Wiley & Sons, 1994.
Class Reader
References
Caouette, John B., Edward I. Altman, and Paul Narayanan. Managing Credit Risk, John Wiley & Sons, Inc., 1998.
J.P. Morgan’s RiskMetrics—Technical Document specifies the RiskMetrics VaR methodology. Introduction to RiskMetrics and the quarterly RiskMetrics Monitor are also available. All publications are available free of charge on J.P. Morgan’s Internet web site: http://www.jpmorgan.com/RiskManagement/RiskMetrics.html
The following magazines regularly publish articles on VaR:
RiskA compilation of VaR article reprints published in Risk is available in VaR: Understanding and Applying Value at Risk, published by Risk Publications.
Barry Schachter’s extensive VaR bibliography is found at:
http://pw2.netcom.com/~bschacht/varbiblio.html
Reading Material
Students are expected to keep abreast of current developments in the financial markets and to be prepared to discuss them in terms of the concepts of the course. This is facilitated by regular reading of The Wall Street Journal; Financial Times, The Economist, The New York Times, Business Week, Barron's, Fortune, Far Eastern Economic Review, and Forbes often address relevant topics as well. The resources of the library and the Internet should not be overlooked.
Reader/Teaching Assistant: Lionel Martellini (Office Hours: Wednesday 2:00-4:00 pm in Room F633)
Office Hours
Room F692, Tuesday 4:15-5:15 pm, Friday 2:30-3:30 pm
Note: The papers marked with an asterisk [*] are in the Texts or the Reader.
I. Introduction and Overview
II. Strictly Quantitative Investment StrategiesJanuary 27 guest speaker: Bill Ricks, Rosenberg-AXA Investment Management
* Rosenberg, Barr, Kenneth Reid, and Ronald Lanstein. "Persuasive Evidence of Market Inefficiency," The Journal of Portfolio Management, Spring 1985.
* Ou, Jane A. and Stephen H. Penman. "Financial Statement Analysis and the Prediction of Stock Returns," Journal of Accounting and Economics, 1989.
* Hube, Karen. "’Market-Neutral’ Mutual Funds Are Attracting Some Small Investors Wanting to Minimize Risk," The Wall Street Journal, May 13, 1998.
February 3 guest speaker: Russell Fuller, RJF Asset Management
* Huberts, Lex C. and Russell J. Fuller. "Predictability Bias in the U.S. Equity Market," Financial Analysts Journal, March-April 1995.
IV-VI. Dynamic Asset Allocation Strategies (3 weeks--February 10, 17, March 31, April 21)
* Ambachtsheer, Keith P. "How Should Pension Funds Manage Risk?," Journal of Applied Corporate Finance, Summer 1998.
* Clements, Jonathan. "The Truth Investors Don’t Want to Hear On Index Funds and Market Soothsayers," The Wall Street Journal, May 12, 1998.
* McGough, Robert and Pui-Wing Tam. "Turmoil Claims Robertson Fund As Another Gets a Change," The Wall Street Journal, September 24, 1998.
* Grauer, Robert R. and Nils H. Hakansson. "Gains from Diversifying Into Real Grauer Estate: Three Decades of Portfolio Returns Based on the Dynamic Investment Model," Real Estate Economics, Summer 1995.
* Grauer, Robert R. and Nils H. Hakansson. "Stein and CAPM Estimators of the Means In Asset Allocation," International Review of Financial Analysis, Vol. 4, No. 1, 1995.
VII.-XIV. Risk Management: Approaches and Issues (7 weeks)
March 3 speaker: Mark Garman, Financial Engineering Associates
* Jorion, Ch. 1, 2
* Garman, Mark B. "Making VaR Proactive," Financial Engineering Associates, October 8, 1998.
* Garman, Mark. "Managing the Risk of Fixed Assets," Derivatives Strategy, July 1998.
March 10 speaker: David Modest, Long Term Capital Management
* The Risk Business," The Economist, October 17, 1998.
* Clow, Robert. "Risk Rediscovered," Institutional Investor, October 1998.
* Leahy, Richard F. "Dream Team," Business Week, August 29, 1994.
* Siconolfi, Michael, Anita Raghavan and Mitchell Pacelle. "How the Salesmanship and Brainpower Failed At Long-Term Capital," The Wall Street Journal, November 16, 1998.
March 17 speaker: G. Thompson Hutton, RMS
* Grant, Jeremy. "Fears Over Banks Prompt Surge in Credit Derivatives," Financial Times, October 8, 1998.
(March 31: Dynamic Asset Allocation)
April 7 speaker: Aamir Sheikh, BARRA
*Jorion, Chs. 8, 14
April 14 speaker: Stephen Kealhofer, KMV Corporation
*Jorion, Ch. 13
(April 21: Dynamic Asset Allocation)
April 28 speaker: Jack Caouette, MBIA Insurance Corporation
*Jorion, Ch. 15
XV. Warren Buffett’s Approach to Risk Management
* "How Buffett Views Risk," Fortune, April 4, 1994.
* Pacelle, Mitchell, Leslie Scism and Steven Lipin. "How Buffett, AIG and Goldman Sought Long-Term Capital, but Were Rejected," The Wall Street Journal, September 30, 1998.
* "A Passion for Value," Marakon Commentary, Vol. IV, No. 3.
Chew, Donald H. "Why Buffett is Different from the Rest," Journal of Applied Corporate Finance, Spring 1995.
Berkshire Hathaway Inc. Annual Report, 1997.
+Berkshire Hathaway Inc. Annual Report, 1998.
* Hagstrom, Robert G., Jr. The Warren Buffett Way, John Wiley & Sons, 1994.
Lowenstein, Roger. Buffett, Main Street Books-Doubleday, 1995.
Barboza, David. "Following the Buffett Formula," The New York Times, April 29, 1997.
Buffett, Mary and David Clark. Buffettology, Rawson Associates, 1997.
Lowe, Janet. Warren Buffett Speaks, John Wiley & Sons, Inc., 1997.
Cunningham, Lawrence A. The Essays of Warren Buffett: Lessons for Corporate America, Cardozo Law Review, 1997.
Buffett, Warren. Berkshire Hathaway Inc.—An Owner’s Manual, 1996.
+Schroeder, Alice and Gregory Lapin, Berkshire Hathaway: The Ultimate Conglomerate Discount, Paine Webber Equity Research, January 1999.
+Handout
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