Portfolio Practicum Courses: About the Courses and How to Apply for the Fall 2021 Semester

Overview:

Baylor has two student-managed investment funds: A large-cap stock fund currently valued at approximately $11.6 million, and a small-cap stock fund currently valued at approximately $1 million. Students in the Portfolio Practicum courses are directly responsible for managing the portfolios, while learning the techniques used by professionals to analyze and select individual stocks. Each student will also learn how to use Bloomberg, FactSet, Thomson Eikon and other resources commonly used in the investment management industry.

The Classes:

Small-Cap: Mondays, 2:30-5:00pm, for a total of 16 weeks spread across both the Fall and Spring semesters
Large-Cap: Mondays, 5:00-7:30pm, for the Fall Semester only
Location: Hodges Financial Markets Center and/or online, depending on the COVID-19 requirements
Structure: Designed after the format of a funds management firm and built around student participation.

Designed to cover two-semesters, the Small-Cap Practicum gives students experience researching, analyzing, and managing a portfolio of small capitalization (small-cap) stocks. The Fall course introduces equity research methods, including valuation, modeling, fundamental analysis, and cultivating resources. Student analysts, in teams, complete an initiation-of-coverage research report on a firm. Their research may require the team to talk to company management and to utilize various information sources including financial documents, trade associations, and competitors, customers, and suppliers of the firm. In the Spring, one team will compete in the CFA Investment Research Challenge, while other student teams will continue to research and present new opportunities for the portfolio.

The Large Cap Practicum is a one-semester course. The class structure is designed after the operational format of a funds management firm and is built around student participation. Specifically, two-person teams are assigned to cover each sector of the S&P 500. Although there are course readings, the course primarily consists of teams preparing and presenting to the class detailed reports on stocks in their sector. Every class member is involved in a discussion of each stock. Following the presentation and discussion, the team makes a recommendation on each stock. The class votes and the recommendations of the class are implemented.

For a better understanding of either course, you are welcome to attend all or part of a Zoom class session this semester! To get the Zoom link, please email Professor Brandon Troegle at brandon_troegle and let him know which class or classes you want to attend. Both classes are on Monday. The Small-Cap class begins this semester at 3:45 and the Large-Cap class begins at 5:00. The available Mondays this semester are March 15, 22, and 29.

Professors:

  • Brandon Troegle, CFA®, CAIA® is a Managing Director and portfolio manager with Hillcrest Asset Management, focusing on the firm’s securities selection and portfolio construction across various strategies. Before joining Hillcrest, Brandon held analyst roles at Morningstar and Bank of America.
  • David Morehead, CFA®, currently serves as Baylor’s Co-Chief Investment Officer. Previously, he spent nearly 20 years investing across a wide range of securities including bank loans and high yield/distressed investments, equity and equity-linked products, commodities, and derivatives. He has both sell-side and buy-side experience from his time at Highview Capital, Ritchie Capital, William Blair, Bank of America, and First Trust Advisors.

How to Apply:

Complete the online application at https://www.baylor.edu/business/financialmarkets/apply. The application will be open beginning at 8am on Thursday, March 11.

In addition to the usual grades, contact, and background information you will need to provide:

  1. Statements of why you wish to take the course and your career plans/goals
  2. Description(s) of any investment and/or finance-related experience
  3. Uploaded copies of your current resume and current unofficial transcript

The deadline for submission is Midnight, Wednesday, March 31.

Enrollment for each course is limited to 15 graduate and undergraduate business students with a minimum 3.2 GPA, a strong academic record and an interest in investments*. Applicants will be evaluated by a Finance faculty committee.

For More Information go to: http://www.baylor.edu/business/financial_markets,

Problem Set 6, problem 1 Q&A

Here is a Q&A I just had with a Finance 4366 student about Problem Set 6, problem 1:

Student: Dr. Garven, I am a little confused about problem 1 for PS6. Do you want us to write out a huge binomial tree table with 10 steps and have that over the 6-month period of the call? Or do just want us to use an equation to get the price of the call?  Thanks, Student

Dr. Garven: With the Cox-Ross-Rubinstein (CRR) model, there is no point in writing out the entire binomial tree for a large number of timesteps involving either a European call option or a European put option. Since European options cannot be exercised prior to expiration, CRR provides a simplified framework for determining the complete set of terminal nodes at which the option expires in-the-money (see p. 34 of the Binomial Trees lecture note). Once you can identify all terminal in-the-money nodes, then calculate the payoff at each of these nodes using the appropriate equation (which is Max(0, S-K) for calls and Max(0, K-S) for puts). Once you know all of the payoffs, then multiply each payoff by the risk-neutral probability of the node at which the payoff occurs. Add all of these probability-adjusted payoffs together to determine the certainty-equivalent, or risk-neutral expected value of the option at expiration, and then the arbitrage-free price of the option corresponds to the present value of the certainty-equivalent.

For call options, the solution procedure that I describe here is captured by the CRR call option pricing equation which appears on p. 33 of the Binomial Trees lecture note; the version of the equation that appears on p. 35 is algebraically equivalent and shown in order to reinforce the concept that prices determined under the CRR model converge to Black-Scholes-Merton (BSM) model prices (see p. 36 for the BSM call option pricing equation).

Of course, once you know the CRR price for the call option, you can either use the CRR put pricing equation shown on page 37 of the Binomial Trees lecture note or simply apply the appropriate version of the put-call parity equation; for purposes of this problem set, the latter approach is much simpler and will suffice.

Important updates to the Finance 4366 Schedule

Next week looks to be a busy week in Finance 4366.  Problem Set 6 is due at the beginning of class on Tuesday, March 16, and Problem Set 7 is due at the beginning of class on Thursday, March 18.

Also, here’s the list of readings for next week:

March 16

Early Exercise of American Call and Put Options on Non-Dividend Paying Stocks, by James R. Garven

March 18

1. Hull Chapter 14 (“Wiener Processes and Ito’s Lemma”)
2. Applying Ito’s Lemma to determine the parameters of the probability distribution for the continuously compounded rate of return, by James R. Garven
3. Geometric Brownian Motion Simulations, by James R. Garven

There won’t be a quiz on the reading due on Tuesday, March 16, but there will be a quiz (Quiz 8) for the readings due on Thursday, March 18.

Extra Credit Opportunity: Why Did the Texas Electricity System Fail?

This evening (Tuesday, March 9th), starting at 5:;30 pm CST, the Baugh Center Free Enterprise Forum will feature a panel discussion on the topic of “Why Did the Texas Electricity System Fail?” Dr. Peter Klein will moderate a panel discussion featuring Lynne Kiesling, Director of the Institute for Regulatory Law and Economics at Carnegie Mellon University, and Craig Pirrong, Professor of Finance and Energy Markets and Director of the Global Energy Management Institute at the University of Houston.

Professors Kiesling and Pirrong are experts in the economic, legal, and regulatory aspects of energy markets, with a special focus on electricity. You can find more information at their websites here and here. They will offer their perspectives on the remarkable and tragic events of February 2021. Why did so many Texans lose power? Is the culprit bad regulation or deregulation, management mistakes by ERCOT, the lack of interconnection to the Eastern and Western US grids, overreliance on renewables, or simply a once-in-a-generation weather event? What can be done to prevent such problems in the future? There will be ample time for questions and answers from the audience.

Registration is required at http://bit.ly/FEF_Electricity. After registering, you will receive a link to the Zoom webinar.

Since this panel discussion has the makings of an extra-credit opportunity for Finance 4335, let’s have it! You can earn extra credit by attending this Zoom webinar and reporting on what you learn. If you decide to take advantage of this extra-credit opportunity, I will use the grade you earn on your report to replace your lowest quiz grade in Finance 4335 (assuming that your grade on the extra credit is higher than your lowest quiz grade). Submit your report as a (PDF formatted) 1-2 page executive summary. In order to receive credit, the report must be uploaded to the Assignments section of the Course Canvas page by no later than 5 pm CST on Friday, March 12 (Click on the Assignment entitled “Why Did the Texas Electricity System Fail? – Tuesday, March 9 webinar”).

Midterm 1 and Current Course Grades in Finance 4366

I just uploaded the midterm 1 grades, along with attendance, quiz, problem set, and current Finance 4366 course grades to Canvas.

As stated in the course syllabus, final numeric course grades will be determined according to the following equation:

Final Course Numeric Grade =.10(Attendance and Participation) +.10(Quizzes) +.20(Problem Sets) + Max{.20(Midterm Exam 1) +.20(Midterm Exam 2) +.20(Final Exam),.20(Midterm Exam 1) +.40(Final Exam),.20(Midterm Exam 2) +.40(Final Exam)}

As I noted in my February 1st blog posting entitled “Finance 4366 Grades on Canvas”, as the spring semester progresses and I continue to collect grades in the attendance, quiz, problem set, and exam categories, then the course grade listed on Canvas will dynamically incorporate that information on a timely basis for each student; now that we have Midterm 1 Exam grades, the equation that I am now using (until Midterm 2) is as follows:

Course Numeric Grade after Midterm 1 = (.10(Attendance and Participation) +.10(Quizzes) +.20(Problem Sets) +.20(Midterm 1))/.6

There are n = 26 students enrolled in Finance 4366. Here are the current grade statistics:As you can see from this table, over 50% of students have the mean or higher in each category (since in all cases, the median is higher than the mean). I base the GPA calculation on comparing each student’s current course grade to the course letter grade schedule that also appears on the syllabus:

The overall performance of pretty much the entire class has been remarkable; keep up the great work!

Important announcement: Asynchronous delivery of the Binomial Trees lecture scheduled for tomorrow

Finance 4366 will not meet synchronously tomorrow, March 9, on Zoom. Furthermore, I have rescheduled tomorrow’s 3:30-4:30 pm CT office hour for 3:30-4:30 pm today (Monday, March 8). We will resume meeting synchronously on Thursday, March 11.

I have posted a pre-recorded version of my second lecture on the binomial option pricing model in the Media Gallery on Canvas.  This lecture is labeled “Binomial Lecture – Risk Neutral Valuation, Multiple Time-Steps, and Binomial to Black-Scholes Convergence”, and it is based on pp. 18-41 of the Binomial Trees Lecture note located at http://fin4366.garven.com/spring2021/lecture9.pdf. Although we will not meet synchronously for class tomorrow, attendance credit will be assessed on the basis of whether students view this lecture in its entirety at any time prior to 11:59 pm CT on Wednesday, March 10.

I will look forward to seeing everyone in the class this coming Thursday at the regularly scheduled (11 am-12:15 pm CT) time on Zoom, at which time we will continue to delve even further into the topic of option pricing.