Ivey Publishing

Modern Investment Theory

Haugen, R.A.,5/e (United States, Pearson, 2001)
Prepared By Daisy Yun Li, Ph.D. Student (Finance)
Chapter and Title Chapter Matches: Case Information
Chapter 2:
Securities and Markets

Robert W. White, Stephen Dembroski

Product Number: 9A90B027
Publication Date: 1/1/1990
Revision Date: 3/19/2002
Length: 38 pages

This note describes the recent phenomenon of internationalization and globalization of the financial markets. At one level, it is a glossary that defines such financial products as note issuance facilities (NIFs), Euro-zeros, Samurai Bonds, Yankee Bonds, and so forth. On another level it discusses the causes of change, presents a chronology of events, discusses the various markets, presents the general preparation required to enter the global market place, and so forth.

Issues: European Market; Money Markets; International Finance; Bonds
Difficulty: 4 - Undergraduate/MBA

Chapter 4:
Combining Individual Securities into Portfolio
Chapter 5:
Finding the Efficient Set

Peter C. Bell, You Qin

Product Number: 9B01E010
Publication Date: 4/24/2001
Revision Date: 12/18/2009
Length: 3 pages

A professor decides to build an equity portfolio made up of shares from five Chinese companies, and needs to decide what fraction of the portfolio should be devoted to each of the five issues. In this exercise, the difficulty in using optimization for portfolio selection and coping with the covariance between the potential assets is examined. Simulation can be used to avoid the need for statistical estimation in measuring portfolio risk. Excel files are available, products 7B01E010A and 7B01E010B.

Teaching Note: 8B01E10 (4 pages)
Issues: Risk Analysis; Simulation; Investment Analysis; Planning
Difficulty: 4 - Undergraduate/MBA

Chapter 6:
Factor Models

Stephen R. Foerster

Product Number: 9A96B055
Publication Date: 10/24/1996
Revision Date: 2/9/2010
Length: 20 pages

A pension fund manager was examining Bank of Montreal's recent financial performance in comparison with other large Canadian bank stocks, and large U.S. bank stocks as well, to determine what factors appeared to be driving the stock's performance. He then needed to consider whether to change the fund's investment in the stock. This case examines the usefulness of financial performance measures and examines what drives stock values.

Teaching Note: 8A96B55 (8 pages)
Industry: Finance and Insurance
Issues: Valuation; Financial Analysis; Financial Institutions
Difficulty: 4 - Undergraduate/MBA

Chapter 7:
Asset Allocation

Stephen R. Foerster, Dean Tzembelicos

Product Number: 9A97N003
Publication Date: 1/29/1997
Revision Date: 2/5/2010
Length: 13 pages

In 1994, William Booth, a member of the management team of the Ontario Teachers' Pension Plan Board, was asked to re-examine the diversification strategy that the $30 billion fund had been pursuing since its inception and to determine an optimal long-term asset allocation policy for the fund. After inheriting a portfolio that consisted entirely of fixed-income securities in 1990, by the end of 1993, the allocation to equity was only 20% short of a 1995 interim policy target of 66%. Booth's primary task was to determine whether the shift in asset mix should stop at 66% equity in 1995, which was above the allocation to equities for the average pension plan, or whether it should continue to some higher amount (an independent consultant recommended an 80% allocation to equity). Booth knew that a higher allocation to equities would likely increase total returns over the long-term, thereby reducing the cost of funding the plan. However, equities exhibited greater volatility than bonds and a higher allocation to equities therefore created some risk that future funding costs might rise above current levels.

Teaching Note: 8A97N03 (11 pages)
Industry: Finance and Insurance
Issues: Portfolio Management; Assets; Investment Analysis; Pensions
Difficulty: 4 - Undergraduate/MBA

Chapter 8, 9:
Ch. 8 - The Capital Asset Pricing Model Ch. 9 - Empirical Tests of the Capital Asset Pricing Model
Chapter 10:
The Arbitrage Pricing Theory

Stephen R. Foerster, Nisha Asdhir, Hilary Jacob

Product Number: 9A97N009
Publication Date: 10/15/1997
Revision Date: 2/5/2010
Length: 20 pages

A mutual fund portfolio manager was reviewing the growth fund's assets and examining the outlook for the upcoming year. He needed to decide on the allocation between cash and equity and to determine which sectors to overweight or underweight. In particular, he needs to understand the relationship between macroeconomic variables and capital markets, and to identify the position of the economy in the business cycle.

Teaching Note: 8A97N09 (8 pages)
Industry: Finance and Insurance
Issues: Economic Conditions; Investment Analysis; Investments; Economic Analysis
Difficulty: 4 - Undergraduate/MBA

Chapter 11, 1:
Ch. 11 - Measuring Portfolio Performance with Asset Pricing Models Ch. 12 - Measuring Portfolio Performance without Asset Pricing Models

Stephen R. Foerster, Scott Murray, Kevin Pollock

Product Number: 9A96B057
Publication Date: 12/4/1996
Revision Date: 11/29/2002
Length: 21 pages

The managing director of a pension fund benchmarking firm was preparing a presentation to the management of a large corporate pension fund. He needed to evaluate the value added of the fund performance as well as measure the cost effectiveness of the fund. This case examines the importance of performance benchmarking to determine the value added through security selection and tactical asset allocation. The key message is the importance of asset class selection to the overall portfolio performance.

Teaching Note: 8A96B57 (8 pages)
Industry: Finance and Insurance
Issues: Investments; Investment Funds; Performance Evaluation; Pensions
Difficulty: 4 - Undergraduate/MBA

Stephen R. Foerster, Scott Belton, Karen Lipnowski

Product Number: 9B03N008
Publication Date: 5/1/2003
Revision Date: 10/22/2009
Length: 14 pages

The Western Investment Club was one of the largest student clubs at the University of Western Ontario. The club's portfolio had incurred a substantial loss over the previous year. Because of this loss, an analyst and member of the club felt a more in-depth analysis regarding the overall strategy of the portfolio was necessary. There were two strategic issues the analyst wanted to address. First she felt it was difficult to interpret the performance of the portfolio as no previous benchmark of comparison had been used. Second, she examined the composition of the portfolio over the past six years and noticed a divergence in the allocation to asset classes on an annual basis. She must determine how the allocation of assets affects the performance on the portfolio and whether or not the lack of an asset allocation strategy impedes the educational experience of the Western Investment Club members.

Teaching Note: 8B03N08 (9 pages)
Industry: Social Advocacy Organizations
Issues: Portfolio Management; Financial Analysis; Investments
Difficulty: 4 - Undergraduate/MBA

Chapter 13:
The Level of Interest Rates

Ron G. Wirick

Product Number: 9A98N015
Publication Date: 8/16/1999
Revision Date: 2/2/2010
Length: 8 pages

This note provides a brief overview of the relationship between the macro behaviour of the economy and the resulting impact on investment returns. It is designed to be used within a course on investments or portfolio management. The note starts by establishing a framework for estimating the long-run expected returns of the two major categories of financial assets - equities and (long-term) bonds - on the basis of the fundamental valuation theorem, which states that value comes from expected future discounted cash flows. The note demonstrates that this theorem implies that the long-run expected real returns on equities depend on the dividend growth rate and the expected average growth rate in dividends, which in turn depends on long-run macroeconomic growth. Expected long-term real returns on bonds depend on the yield to maturity and the long-run inflation rate. The note then goes on to establish the long-run behaviour of four key macroeconomic variables: output, inflation, interest rates, and exchange rates. An overview of how to identify business cycle positions is an important component of this analysis. Also, the analysis focuses on methods for identifying disequilibrium situations for interest rates. Finally, the note concludes by discussing some short-run influences on macroeconomic variables and the key role of monetary policy.

Issues: Valuation; Investments; Interest Rates; Exchange Rates
Difficulty: 4 - Undergraduate/MBA

Chapter 14:
The Term-Structure of Interest Rates

Robert W. White, Ed Giacomelli

Product Number: 9A90B045
Publication Date: 1/1/1990
Revision Date: 3/20/2002
Length: 17 pages

The focus of the case is on the financial strategy of Lawson Mardon Group following an leveraged buyout. The immediate decision involves exploring the Euro-Commercial Paper Market and the Sterling Commercial Paper Market as possible alternatives to its current banking facility, a multi-option facility. The case is an ideal vehicle for initiating a discussion of interest rates, the term structure of interest rates, bond ratings and money market instruments. Three follow-up cases of the same name outlined subsequent events.

Teaching Note: 8A90B45 (21 pages)
Industry: Manufacturing
Difficulty: 4 - Undergraduate/MBA

Chapter 15:
Bond Portfolio Management

Ron G. Wirick, Jon Witmer

Product Number: 9A98N020
Publication Date: 10/5/1998
Revision Date: 2/2/2010
Length: 13 pages

An independent insurance broker is considering investing in high yield bonds to improve his portfolio's performance. He does not think that the returns he has received on his current equity and fixed income investments will continue into the future. He considers using historical data to construct efficient frontiers which suggest that high yield bonds improve the risk/return trade-off. A key issue is to what extent this historical improvement can be extrapolated into the future.

Issues: Mutual Funds; Portfolio Management; Investments; Bonds
Difficulty: 5 - MBA/Postgraduate

Chapter 16:
Interest Immunization

Stephen R. Foerster

Product Number: 9A98N022
Publication Date: 11/19/1998
Revision Date: 2/2/2010
Length: 17 pages

A bond portfolio manager is re-evaluating the funds position in government bonds. His team had attempted to take advantage of a mis-priced bond and was now in the process of re-examining the recent move in interest rates, the current shape of the yield curve, and the forecast for interest rate changes. This case introduces students to fundamental bond valuation and price change issues, including duration and convexity, as well as bond management styles.

Teaching Note: 8A98N22 (10 pages)
Industry: Finance and Insurance
Issues: Investment Analysis; Bonds; Investment Funds; Portfolio Management
Difficulty: 4 - Undergraduate/MBA

Chapter 17:
European Option Pricing

Walid Busaba, Zeigham Khokher, Elliott Weinstein

Product Number: 9B05N011
Publication Date: 8/12/2005
Revision Date: 10/4/2009
Length: 6 pages

A first year business school student has obtained a summer job as an analyst at a top investment bank in Los Angeles, California. His first assignment was the pricing of MicroComp's junk-bonds in the market place. Looking at the market value balance sheets, it was very clear that MicroComp was in financial distress. MicroComp's dept totaled $150 million, while the market value of its assets were $80 million. If MicroComp was required to repay its debt immediately, it would be forced into bankruptcy. Clearly, MicroComp was in effective default, why did its market capitalization remain at $5 million? Why had it not fallen to zero? Students will use option theory to answer these questions.

Teaching Note: 8B05N11 (3 pages)
Industry: Finance and Insurance
Issues: Bond Valuation; Put Call Parity; Options Pricing; Volatility
Difficulty: 4 - Undergraduate/MBA

Chapter 18:
American Option Pricing

James E. Hatch, Chris K. Anderson, Soren Milo Christensen, Christen Hagelund

Product Number: 9B04N004
Publication Date: 3/4/2004
Revision Date: 8/8/2005
Length: 12 pages

CNS is a small biotech company. The founder of the company is deciding if it's worth applying for phase I approval that will allow the company to continue its research. He must determine the value of the research. Using the traditional DCF valuation method, he is not sure if this captures all of the value of the research and must decide if either the Black-Scholes or binomial model would more accurately determine the value.

Teaching Note: 8B04N04 (6 pages)
Industry: Manufacturing
Issues: Real Options; Valuation; Data Analysis
Difficulty: 4 - Undergraduate/MBA

Chapter 19:
Additional Issues in Option Pricing

Walid Busaba, Zeigham Khokher, Elliott Weinstein

Product Number: 9B05N012
Publication Date: 8/12/2005
Revision Date: 10/21/2019
Length: 5 pages

The manager of a billion dollar hedge fund had just been approached by a syndicate of funds to gauge her interest in a bid to purchase RamSync Incorporated, a Silicon-Valley manufacturer of memory chips. Using a traditional discounted cash flow analysis (the APV method), the manager quickly determines that at a purchase price of $900 million, RamSync has a negative NPV of $33 million. However, purchasing RamSync, which currently produces SDRAM, would allow the owner to enter the much-anticipated MRAM market at a future period in time. The manager is now forced to reconsider how to value RamSync considering the hidden call option it has on the MRAM market.

Teaching Note: 8B05N12 (4 pages)
Industry: Finance and Insurance
Issues: Options; Options Pricing; Growth Option
Difficulty: 4 - Undergraduate/MBA

Chapter 20:
Financial Forward and Futures Contract

Walid Busaba, Zeigham Khokher, Jaclyn Grimshaw

Product Number: 9B05N013
Publication Date: 8/12/2005
Revision Date: 10/4/2009
Length: 11 pages

A derivative is a financial instrument that's value, as its name suggests, is derived from the value of an underlying asset or security. There are many different derivative securities available, including: forwards, futures, options, rights, warrants, convertibles and swaps. This note introduces some of the key concepts, terminology and strategies associated with these derivatives.

Issues: Derivatives; Options; Forwards; Futures
Difficulty: 4 - Undergraduate/MBA

Robert W. White, Peter Grosskopf, Linda Atkinson

Product Number: 9A90B050
Publication Date: 1/1/1990
Revision Date: 3/25/2002
Length: 28 pages

The focus of the case is on techniques for hedging gold production. The primary strategy is min/max strategy using over-the-counter gold option contracts. The recent gold price increase from a low of $360 within the year, to a current price of over $394 was making the roll-over decision that much more difficult than if prices had remained stable. The hedging decision involves the quantity of hedges to initiate, the timing of the moves, and the medium through which Barrick could most efficiently make the adjustment. The case permits a discussion of option contracts, forwards and gold loans.

Industry: Mining, Quarrying, and Oil and Gas Extraction
Issues: Financial Strategy; Derivatives; Risk Management; Hedging
Difficulty: 4 - Undergraduate/MBA

Chapter 21:
The Effect of Taxes on Investment Strategies and Securities Prices

Stephen R. Foerster, Mark Griffiths

Product Number: 9A89B030
Publication Date: 1/1/1989
Revision Date: 3/17/2003
Length: 11 pages

Jess Walton decided the time was right for a sizeable investment in bonds. She faced two immediate considerations: determining which bond or bonds represented attractive buying opportunities and deciding whether or not she should borrow all or part of her anticipated $50,000 investment. She realized she would have to choose between government versus corporate bonds, high versus low coupon bonds, and short-term versus long-term bonds.

Teaching Note: 8A89B30 (9 pages)
Industry: Finance and Insurance
Difficulty: 4 - Undergraduate/MBA

Chapter 22:
Stock Valuation

Larry Wynant, Stephen R. Foerster, Peter Yuan

Product Number: 9B00N013
Publication Date: 8/10/2000
Revision Date: 1/12/2010
Length: 18 pages

AWARD WINNING CASE - This case was one of the winning cases in the 2000 Regional Asia-Pacific Case Writing Competition. The Internet investment craze was starting to catch on in Hong Kong. Tom.com Limited, a Hong Kong based Internet company, was planning an initial public offering at the Hong Kong Stock Exchange. A portfolio manager for EuroGlobal Funds was to provide his professional opinion on the value of this investment and its appropriateness for different investors. He was aware of the difficulties in valuing Internet companies and the debate over the choice of valuation methods. Among these, one approach was to analyze the implied hyper-growth rate that Internet companies had to achieve in the next five years in order to justify their current valuations. He decided to apply this approach to Tom.com. Students will have the opportunity to discuss the different valuation methods and the development of Internet and e-commerce companies, especially topics such as business models and expected growth.

Teaching Note: 8B00N13 (16 pages)
Industry: Administrative, Support, Waste Management and Remediation Services
Issues: China; International Finance; Internet; Valuation; Investment Analysis
Difficulty: 4 - Undergraduate/MBA

Chapter 23:
Issues in Estimating Future Earnings and Dividends

David C. Shaw, David Porter

Product Number: 9A84B014
Publication Date: 1/1/1984
Revision Date: 7/8/2003
Length: 8 pages

A minority shareholder in a new operation has been offered a sum of money by the majority shareholder to buy up his shares. The question is whether or not the price offered is fair, in light of the fact that the market for these new golf clubs is highly unpredictable and the production costs are not truly representative of the actual amounts that will be required.

Teaching Note: 8A84B14 (6 pages)
Industry: Manufacturing
Issues: Valuation; Earnings Per Share
Difficulty: 4 - Undergraduate/MBA

David C. Shaw, David Porter

Product Number: 9A84B013
Publication Date: 1/1/1984
Revision Date: 5/20/2003
Length: 16 pages

President and CEO of Finning Tractor, has seen the earnings of the company drop below profitable levels because of a deep recession. Several restraint measures were instigated with little apparent impact. The case takes place at the point where a decision is impending on dividend policy with issues ranging from effect on stock price to the fact that the two majority shareholders may be adverse to taking a cut in the over $1.5 million in dividend income they were receiving annually.

Teaching Note: 8A84B13 (4 pages)
Industry: Construction
Issues: Dividend Policy
Difficulty: 4 - Undergraduate/MBA

Chapter 24:
Market Efficiency: The Concept

Stephen R. Foerster

Product Number: 9A98N030
Publication Date: 1/29/1999
Revision Date: 2/2/2010
Length: 3 pages

An investment adviser for National Securities Inc. was meeting with a new client. Since the client had not been an active investor in equities, she had many questions for the advisor, particularly related to the notion of market efficiency. In addition, she wanted to understand the importance of different investment styles, such as growth versus value. This case is the second in a series of three cases that focus on a variety of investment decisions. (See also 9A98N029 and 9A98N031.)

Teaching Note: 8A98N30 (5 pages)
Industry: Finance and Insurance
Issues: Investment Analysis; Investments; Investment Funds; Portfolio Management
Difficulty: 4 - Undergraduate/MBA

Chapter 25:
Market Efficiency: The Evidence

Ron G. Wirick, Steve Dent

Product Number: 9A98N025
Publication Date: 11/25/1998
Revision Date: 2/2/2010
Length: 10 pages

An analyst with Alpha Investments is examining the possibility of recommending that shares in the closed end mutual fund, Growth Investment, be included in the portfolio holdings of managed funds run by Alpha. Growth Investment was a dual-purpose fund with both preferred shares and common shares. The common shares were selling at a discount of over 20 per cent to their underlying net asset value. This seemed to represent a significant investment opportunity for Alpha, especially because Growth Investment had a wind-up date in approximately three years at which time the common shares would be redeemed at full net asset value (less any wind-up costs). Before making the recommendation to buy, however, the analyst wanted to be sure that she understood all the risks as well as the opportunities of the investment.

Industry: Finance and Insurance
Issues: Investments; Mutual Funds; Efficient Market; Human Behaviour
Difficulty: 5 - MBA/Postgraduate