MGT6091: Issues in Finance

Session 1
Introduction

Dr. Abongeh Tunyi

Module Leader

Dr. Abongeh Tunyi (Tunyi)

 Room: B53
 Email: a.tunyi@sheffield.ac.uk
 Office hours: Wednesdays 12.00pm-2.00pm or by appointment

2
 Teaching on the course
• Lectures;
• 10 2-hour Sessions
• Session 1 - Introduction
• Sessions 2-10 - Content
• Tutorials;
• 9 1-hr tutorials
• Takes place in the computer lab
• Tutorials 9 and 10 – Revision & Coursework Feedback
• Drop-in Q&A sessions;
• 1-hr sessions (on demand)
• Online
• Attendance:
• Compulsory, Captures engagement
Requirements
• Teaching materials: On Blackboard
• Lecture slides
• Tutorial activities
• Articles to study
• Recorded lectures and tutorials from last year

• Students:
• Access to journal articles
• Access to WRDS: https://wrds-www.wharton.upenn.edu/
• Ms Excel: https://www.sheffield.ac.uk/it-services/software/office
• STATA software (free from the University): https://www.sheffield.ac.uk/it-services/software/stata
• Enthusiasm
 Assessment
• Formative assessment
• Group exercises with feedback during tutorials
• Draft coursework– feedback during office hours
• Empirical work– feedback during office hours, discussion board

• Summative assessment
• Group coursework (3,000 words, 3 students) – 30%
• Final Examination (2 hours, Essay Questions)– 70%

• How easy to get an A?

 Summary of results 2017/18

Coursework Final Examination Overall Mark

Mean 73.1 Mean 62.6 Mean 65.4

Median 63.0 Median 67.3
Median 78.0
Standard Deviation 15.3 Standard Deviation 13.1 Standard Deviation 10.9
Skewness -2.7 Skewness -0.6 Skewness -0.6
Range 63 Range 46.5
Range 62
Minimum 27 Minimum 39.8
Minimum 25
Maximum 90 Maximum 86.3
Maximum 87
Count 14 Count 51 Count 51

Greater than 70 = 10 70 and above = 19 70 and above = 17

groups students students
Between 50 and 70 = 3 Less than 50 = 6 Less than 50 = 4
groups students students
Less than 50 = 1 group Less than 40 =3 Less than 40 = 1
with 25% students student
 Summary of results 2018/19

Students Mean Std.Dev Min P25 Median P75 Max

Coursework 66 63 18 0 55 63 71 81
Examination 66 58 13 8 50 58 66 83
Overall 66 58 12 8 52 58 68 82

0 1-39 40-44 45-49 50-59 60-69 70-100

Coursework 4 1 0 3 15 27 17
Examination 1 4 2 6 22 19 13
Overall 0 5 2 6 23 22 8
 Summary of results 2019/20
Stats (78 students)

Mean Median Minimum Maximum

63 64 30 79

Number of students in each category

0 1-39 40-44 45-49 50-59 60-69 70-100

Overall 0 1 3 2 19 22 31
 Summary of results 2020/21
Stats (127 students)

Mean Median Minimum Maximum

63 64 40 85

Number of students in each category

0-39 40-49 50-59 60-69 70-100

Overall 0 6 22 71 28
 Summary of results 2021/22
Stats (29 students)

Mean Median Minimum Maximum

64 67 39 85

Number of students in each category

0-39 40-49 50-59 60-69 70-100

Overall 1 3 5 9 11
What do you hope to learn from
MGT6091?
•A survey!
 Scope of the course
• Assumes prior knowledge
• Corporate Finance MGT6097
• Empirical methods in Finance
• Analysing portfolio returns; CAPM, FF3F, Carhart
• Event study methods
• Event (M&A, bankruptcy) prediction, relevance
• Empirical research in Corporate Finance
• Research designs
• Applications of methods:
• CSR & CG value-relevance research
• Empirical results and link with theory:
• Investment efficiency, behavioural finance

• Essential preparation for dissertations in Finance

 Topics – Session (Lecture) 1 - 10
• Session 1: Introduction
• Session 2: Analysing portfolio returns: CAPM, FF3F, Carhart4F
• Session 3: Event Studies in Finance
• Session 4: M&A I: Introduction & Theory
• Session 5: M&A II: Impact & wealth effects
• Session 6: M&A and Bankruptcy prediction & applications
• Session 7: Social Responsible Investment and Firm value
• Session 8: Corporate governance & Firm value
• Session 9: Investment efficiency: Measures, drivers, consequences
• Session 10: Behavioural finance: Heuristics, Overconfidence, Emotions
Second Session (Lecture 2)
• Analysing portfolio returns:
• CAPM – The Capital Asset Pricing Model
• FF3F – The Fama & French Three Factor Model
• Carhart – The Carhart Four Factor Model
 Recap – Review of the basics
• Risk & Return and Portfolios
• Why do we invest in financial assets?
• What are “returns”? And how do we compute them?
• What is “risk”? How can it be calculated?
• What is the relationship between risk and return?
• What do you understand by “portfolio”?
• Why should we invest in a portfolio of assets, as opposed to
investing in a single asset?
Recap – Review of the basics

• Robin invested $20,000 in two stocks in 2014. She wishes to determine

the return on these two stocks. At the beginning of the year, Apple stock
traded for $411.23 per share, and Wal-Mart was valued at $60.33.
During the year, Apple paid dividends of $5.30, and Wal-Mart
shareholders received dividends of $1.59 per share. At the end of the
year, Apple stock was worth $532.17 and Wal-Mart sold for $68.23.
• Calculate the annual rate of return, r, for each stock.
• What is Robin’s total percentage return if she invested equally in the
two stocks?
• What is Robin’s closing balance if she invested 70% of her money in
Apple and the balance in Wal-Mart?
 Recap – Review of the basics
Start (January 2015) End (December 2015) Annual Dividend
Tesco PLC 183.62 208.73 0.00
HSBC 503.5 493.25 0.00
BP 381.35 508.99 20.00
Shell 1,707.29 1,400.26 70.00
BAE systems 443.9 498.23 25.00
AstraZeneca 4,156.00 3,703.28 120.00
The data above shows the performance of 6 stocks over the year (in pence).
• What is the return on each stock?
• If you had an investment capital of £6,000 and invested equally in each stock, what will be the value of your investment at the end
of the year?
• What will be the value of your investment if you invested 50% of your £6,000 capital in Tesco PLC, and spread the remaining 50%
equally over the other five stocks?
• What will be the value of your investment if you invested 20% in Tesco, 10% in HSBC, 10% in BP, 20% in Shell, 10% in BAE
systems and 30% in AstraZeneca?
• What will be the value of your investment if you invested 20% in Tesco, 10% in HSBC, 10% in BP, 20% in Shell, 10% in BAE
systems, 10% in AstraZeneca and retained 20% in cash?
Recap – Review of the basics

http://www.investorsfriend.com/stocksriskierthanbonds.htm
 Recap – Review of the basics
Average Return Standard deviation
Asset Class (1927-2007) (%) (%)
US large companies 12.3 20.0
US Small companies 17.1 32.6
Long-term corporate bonds 6.2 8.4
Long-term government bonds 5.8 9.2
US treasury bills (T Bills) 3.8 3.1

Inflation 3.1 4.2

• Notice that while small stocks have the highest average return, they also have the highest standard
deviation of returns.
• This implies, on average in each year, the return on small stocks is 32.6pp from the mean. If below, the
return is negative. Recall, the empirical rule (68-95-99.7)!
• T-bills have the smallest standard deviation. If below the mean, the return on T-bills is still positive.
• THE GREATER THE POTENTIAL REWARD, THE GREATER THE RISK
 Recap – Review of the basics
• We have measured volatility (risk) by looking at the “deviation of
actual returns from expected returns”:
• The larger the deviation, the higher the volatility.
• High volatility (SD or Var) means greater risk as:
• The actual return in the future is more likely to deviate significantly from the
expected return.
• Is the standard deviation of returns the best measure of an asset’s
risk?
• Why or why not?
• What are the alternatives? If any!
 Recap – Diversification
• Recall the principle of diversification:
• Volatility for a given level of return can be reduced by grouping assets into
portfolios.
• Spreading an investment across many assets will eliminate some of
the risk:
• (i.e., reduce the standard deviation of returns)
• Two types of risk:
• Systematic, non-diversifiable, market risk.
• Unsystematic, diversifiable, firm, unique, idiosyncratic risk.
• Illustrating diversification with the case of BP Plc.
 Recap – Diversification
• Illustrating diversification with the case of BP Plc.
• Assume that we are interested in investing in an oil company – BP
PLC
• BPs profits (our returns) are contingent, for example, on its ability to find new oil wells in
the North Sea
• If it fails to find new oil wells, its stock price will fall, and we will earn negative returns on
the stock
• It is unlikely that every Oil company will fail to find new oil wells – some will succeed

• A portfolio of all oil companies is likely to offer a much less volatile

return than a single oil company – i.e. Investing in the entire oil
sector.
 Recap – Diversification
• Investing in the sector eliminates firm-level risk
• What about sector level risk?
• taxation, oil prices, environmental policies & regulation
• How can we eliminate this sector level risk?
• Diversify further by adding other sectors to the portfolio
• Retail, transportation, pharmaceuticals, real estate, manufacturing,
financials, commodities etc
• Extreme end
• Invest in the market portfolio comprised of all assets
• (domestically or internationally?)
Recap - Diversification
 Recap – Beta Coefficient
• Investors are only compensated for taking on non-diversifiable risk
• Measured by Beta NOT Sigma.
• Recall: The most diversified portfolio has all assets in the market.
• This portfolio (known as the market portfolio) has a beta of 1.
• Beta: It tells us how much systematic risk an asset has relative to the
market portfolio.
• Beta of 0.5:
• Asset has half as much systematic risk as the market portfolio.
• Beta of 1.2
• Asset has 20% more systematic risk than the market portfolio.
Recap – Security Market Line (SML)
• The relationship between Expected return & Beta
 What is the slope of the SML?
• Measure of reward (return) to risk (beta)
• Treynor ratio OR Reward to Variability (Risk) ratio
• All firms are expected to have the same reward to risk
• Expected return per unit risk (beta)
• The basis for the Capital Asset Pricing Model (CAPM)
• How?
 Topics to read up on – “Google!”
• Market efficiency (MGT6097)
• Event studies
• Mergers and Acquisitions (M&A)
• Why firms get involved – motivations.
• How M&As impact on firms and their investors.
• Bankruptcies
• Why firms go bankrupt.
• Corporate social responsibility
• How do firms show that they are socially responsible?
• Is this relevant to stakeholders (investors, customers, governments etc.)?
• Corporate governance
• Behavioural finance