Investments I: Fundamentals of Performance Evaluation

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About this course: In this course, we will discuss fundamental principles of trading off risk and return, portfolio optimization, and security pricing. We will study and use risk-return models such as the Capital Asset Pricing Model (CAPM) and multi-factor models to evaluate the performance of various securities and portfolios. Specifically, we will learn how to interpret and estimate regressions that provide us with both a benchmark to use for a security given its risk (determined by its beta), as well as a risk-adjusted measure of the security’s performance (measured by its alpha). Building upon this framework, market efficiency and its implications for patterns in stock returns and t…

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When you enroll for courses through Coursera you get to choose for a paid plan or for a free plan

  • Free plan: No certicification and/or audit only. You will have access to all course materials except graded items.
  • Paid plan: Commit to earning a Certificate—it's a trusted, shareable way to showcase your new skills.

About this course: In this course, we will discuss fundamental principles of trading off risk and return, portfolio optimization, and security pricing. We will study and use risk-return models such as the Capital Asset Pricing Model (CAPM) and multi-factor models to evaluate the performance of various securities and portfolios. Specifically, we will learn how to interpret and estimate regressions that provide us with both a benchmark to use for a security given its risk (determined by its beta), as well as a risk-adjusted measure of the security’s performance (measured by its alpha). Building upon this framework, market efficiency and its implications for patterns in stock returns and the asset-management industry will be discussed. Finally, the course will conclude by connecting investment finance with corporate finance by examining firm valuation techniques such as the use of market multiples and discounted cash flow analysis. The course emphasizes real-world examples and applications in Excel throughout. This course is the first of two on Investments that I am offering online (“Investments II: Lessons and Applications for Investors” is the second course). The over-arching goals of this course are to build an understanding of the fundamentals of investment finance and provide an ability to implement key asset-pricing models and firm-valuation techniques in real-world situations. Specifically, upon successful completion of this course, you will be able to: • Explain the tradeoffs between risk and return • Form a portfolio of securities and calculate the expected return and standard deviation of that portfolio • Understand the real-world implications of the Separation Theorem of investments • Use the Capital Asset Pricing Model (CAPM) and 3-Factor Model to evaluate the performance of an asset (like stocks) through regression analysis • Estimate and interpret the ALPHA (α) and BETA (β) of a security, two statistics commonly reported on financial websites • Describe what is meant by market efficiency and what it implies for patterns in stock returns and for the asset-management industry • Understand market multiples and income approaches to valuing a firm and its stock, as well as the sensitivity of each approach to assumptions made • Conduct specific examples of a market multiples valuation and a discounted cash flow valuation This course was previously entitled “Financial Evaluation and Strategy: Investments” and was part of a previous specialization entitled "Improving Business and Finances Operations", which is now closed to new learner enrollment. “Financial Evaluation and Strategy: Investments” received an average rating of 4.8 out of 5 based on 199 reviews over the period August 2015 through August 2016. You can view a detailed summary of the ratings and reviews for this course in the Course Overview section. This course is part of the iMBA offered by the University of Illinois, a flexible, fully-accredited online MBA at an incredibly competitive price. For more information, please see the Resource page in this course and onlinemba.illinois.edu.

Created by:  University of Illinois at Urbana-Champaign
  • Taught by:  Scott Weisbenner, William G. Karnes Professor of Finance

    Department of Finance, College of Business
Basic Info Course 3 of 7 in the Financial Management Specialization Commitment 4 weeks of study, 6-8 hours/week Language English How To Pass Pass all graded assignments to complete the course. User Ratings 4.7 stars Average User Rating 4.7See what learners said Complete this course to work toward: Financial Management Specialization This course is part of the 7-course Financial Management Specialization from University of Illinois at Urbana-Champaign Learn More Master of Business Administration (iMBA) This course is part of the fully-online 18 courses plus three capstone projects degree program Learn More Coursework

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University of Illinois at Urbana-Champaign The University of Illinois at Urbana-Champaign is a world leader in research, teaching and public engagement, distinguished by the breadth of its programs, broad academic excellence, and internationally renowned faculty and alumni. Illinois serves the world by creating knowledge, preparing students for lives of impact, and finding solutions to critical societal needs.

Syllabus


WEEK 1


Course Overview
In this module, you will become familiar with the course, your instructor, your classmates, and our learning environment. The orientation also helps you obtain the technical skills required for the course.


1 video, 8 readings, 1 practice quiz expand


  1. Video: Course Introduction
  2. Reading: About this Course: Ratings and Reviews
  3. Reading: Syllabus
  4. Reading: Scott's Advice on How to View and Take This Course
  5. Reading: Excel Instructions for Mac Users
  6. Reading: Options for Completing Assignments without Excel
  7. Reading: About the Discussion Forums
  8. Reading: Social Media
  9. Reading: Getting to Know Your Classmates
  10. Practice Quiz: Orientation Quiz


Module 1: Investments Toolkit and Portfolio Formation



In Module 1, we will build the fundamentals of portfolio formation. After providing a brief refresher of basic investment concepts (our toolkit), a summary of historical patterns of stock returns and government securities in the U.S. is provided. We then consider general examples of portfolio choice to highlight the tradeoffs between “risk” and return. We end the module with a discussion of dominated assets and efficient portfolio formation, emphasizing real-world examples and practice in Excel solving for the optimal portfolio given certain constraints (such as the amount of volatility we will accept in our portfolio).


25 videos, 3 readings expand


  1. Reading: Module 1 Overview
  2. Reading: Module 1 Readings
  3. Reading: Module 1 Spreadsheets and Other Resources
  4. Video: Objectives and Overview
  5. Video: Objectives and Assumptions of Classical Finance
  6. Video: Why Discount?
  7. Video: Different Return Measures
  8. Video: Firm Characteristics Relevant for Investments
  9. Video: Zero-Cost Portfolio
  10. Video: Statistical Techniques & Excel
  11. Video: What We've Learned
  12. Video: Historical Returns in the U.S.
  13. Video: Return and Risk: Intro to Portfolios
  14. Video: Objectives and Source of Data for Examples
  15. Video: Asset Allocation with One Risky and One Risk-Free Asset
  16. Video: Asset Allocation with Two Risky Assets
  17. Video: Real-World Example of a Dominated Asset
  18. Video: What We've Learned
  19. Video: Objectives
  20. Video: Example 1: Calculating Efficient Portfolios of Risky Assets
  21. Video: Example 2: Calculating Efficient Portfolios of Risky Assets
  22. Video: What We've Learned
  23. Video: Module 1 Review
  24. Video: ASSIGNMENT 1 (Lesson 1-6): Portfolio Choice When Change Correlations
  25. Video: DISCUSSION OF ASSIGNMENT 1 (Lesson 1-6): Portfolio Choice When Change Correlations
  26. Video: ASSIGNMENT 2 (Lesson 1-8): Calculating Efficient Portfolios
  27. Video: DISCUSSION OF ASSIGNMENT 2 (Lesson 1-8): Calculating Efficient Portfolios
  28. Video: Like this course? Learn more with the iMBA! (optional)

Graded: Module 1 Quiz
Graded: Assignment 1
Graded: Assignment 2

WEEK 2


Module 2: Motivating, Explaining, & Implementing the Capital Asset Pricing Model (CAPM)



In Module 2, we will develop the financial intuition that led to the Capital Asset Pricing Model (CAPM), starting with the Separation Theorem of Investments. We will understand that in a CAPM setting, only the market-wide risk of an asset is priced – securities with greater sensitivity to the market are required by investors to yield higher returns on average. We will also learn how to interpret regressions that provide us with both a benchmark to use for a security given its risk (determined by its beta), as well as a risk-adjusted measure of the security’s performance (measured by its alpha).


21 videos, 3 readings expand


  1. Reading: Module 2 Overview
  2. Reading: Module 2 Readings
  3. Reading: Module 2 Spreadsheets and Other Resources
  4. Video: Objectives and Overview
  5. Video: Objectives
  6. Video: Final General Portfolio Example and Tangency Portfolio
  7. Video: Two-Fund Separation Theorem and Applications
  8. Video: What We've Learned
  9. Video: Examples of Reducing Portfolio Risk
  10. Video: Objectives
  11. Video: Development of the CAPM
  12. Video: The CAPM and BETA
  13. Video: The CAPM and ALPHA
  14. Video: What We've Learned
  15. Video: Objectives
  16. Video: Practice Problem & Introduction to Interpreting CAPM Regressions
  17. Video: CAPM Example 1: Coca Cola
  18. Video: CAPM Example 2: Balanced Fund
  19. Video: How to Estimate CAPM and What We've Learned
  20. Video: PREPARING for Evaluation of the Small-Value Stock Investment Strategy, 1927-2014
  21. Video: RESULTS from Evaluation of the Small-Value Stock Investment Strategy, 1927-2014
  22. Video: Module 2 Review
  23. Video: ASSIGNMENT 3 (Lesson 2-7): Analyzing & Identifying Three Mystery Securities
  24. Video: DISCUSSION OF ASSIGNMENT 3 (Lesson 2-7): Analyzing & Identifying Three Mystery Securities

Graded: Module 2 Quiz
Graded: Assignment 3

WEEK 3


Module 3: Testing the CAPM, Multifactor Models, & Market Efficiency



In Module 3, we will discuss different asset-pricing models, the pros and cons of each, and market efficiency. In particular, we will test the effectiveness of the Capital Asset Pricing Model (CAPM) and examine survey data concerning its use by chief financial officers (CFOs) of firms. Predictable patterns in stock returns, such as the size and value effects, will also be examined and the Fama-French 3-Factor Model will be introduced. Market efficiency will be discussed in this module, as well as its implications for the asset-management industry and observed patterns in stock returns.


18 videos, 3 readings expand


  1. Reading: Module 3 Overview
  2. Reading: Module 3 Readings
  3. Reading: Module 3 Spreadsheets and Other Resources
  4. Video: Objectives and Overview
  5. Video: Objectives and Uses of CAPM
  6. Video: Testing the CAPM
  7. Video: Defending the CAPM
  8. Video: Market Anomalies: Small-Firm and Value Effects
  9. Video: Interpretation of Market Anomalies
  10. Video: Investigating "Long Value Short Growth" Strategy
  11. Video: What We've Learned
  12. Video: Objectives
  13. Video: Multi-Factor Models
  14. Video: Matching
  15. Video: What We've Learned
  16. Video: Use Domestic or Global Factors?
  17. Video: Return-Risk Model Used by Chief Financial Officers (CFOs)
  18. Video: Market Efficiency
  19. Video: Module 3 Review
  20. Video: ASSIGNMENT 4 (Lesson 3-7): Analysis and Recommendation of 50 Balanced Funds, 1995-2014
  21. Video: DISCUSSION OF ASSIGNMENT 4 (Lesson 3-7): Analysis and Recommendation of 50 Balanced Funds, 1995-2014

Graded: Module 3 Quiz
Graded: Assignment 4

WEEK 4


Module 4: Investment Finance and Corporate Finance: Firm Valuation



In Module 4, we will learn about the two key approaches to valuing a company or stock: market multiples and discounted cash flow. We will learn how to value perpetuities and will discuss how caution should be exercised in terms of projecting both the growth in long-term cash flows and the riskiness of those cash flows – two key components of the perpetuity formula. To gain experience with the market multiples approach, we will estimate a value of Google at the time of its initial public offering (IPO) back in 2004 using market data on Yahoo! as a comparable firm. Finally, the module closes with an assignment that will provide you with an opportunity to conduct a valuation of either Apple, Facebook, or Google.


29 videos, 2 readings expand


  1. Reading: Module 4 Overview
  2. Reading: Module 4 Readings
  3. Video: Objectives and Overview
  4. Video: Objectives
  5. Video: Formula for Valuing a Perpetuity
  6. Video: Real-World Examples and Perpetuity Problems
  7. Video: What We've Learned
  8. Video: Objectives
  9. Video: Market Multiples Approach to Valuation
  10. Video: Income Approach to Valuation: Introduction
  11. Video: Income Approach to Valuation: Discount Rate
  12. Video: Income Approach to Valuation: Cash Flows
  13. Video: Income Approach to Valuation: Terminal Value, Price-to-Earnings Ratio, & Discounting of Cash Flows
  14. Video: Fudge Factors to Valuation and What We've Learned
  15. Video: Objectives
  16. Video: Microsoft Example
  17. Video: Betas of Small & Large Firms and Betas Across Industries
  18. Video: What We've Learned
  19. Video: Caution in Projecting Firm Growth Rates
  20. Video: Objectives
  21. Video: Defined-Benefit (DB) Pension Plan Liabilities and Their Valuation
  22. Video: Valuing a Stream of Fixed Liabilities
  23. Video: Investment Policy of Pension Benefit Guaranty Corporation (PBGC)
  24. Video: What We've Learned
  25. Video: Objectives
  26. Video: Valuation of Google at Its Initial Public Offering (IPO): First Attempt
  27. Video: Valuation of Google at Its Initial Public Offering (IPO): Digging Deeper
  28. Video: What We've Learned
  29. Video: Description of Assignment 5 (OPTIONAL and UNGRADED)
  30. Video: Microsoft Example and What We've Learned
  31. Peer Review: Assignment 5 (OPTIONAL and UNGRADED)
  32. Video: Module 4 Review

Graded: Module 4 Quiz

Course Conclusion
In this module, we say goodbye to the Investments course as key takeaways from the course are reviewed. A tease is also provided to topics that will be covered in Professor Weisbenner's second course on Investments.


1 video expand


  1. Video: Course Conclusion
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