Campbell R. Harvey, 
Fuqua School of Business, Duke University, Durham, NC
National Bureau of Economic Research, Cambridge, MA

Fall, 1995

Latest Revision: October 26, 1995.


The objective of this course is to provide a rigorous introduction to the fundamental principles of asset valuation and financing in competitive financial markets. The course is designed to provide the student with the tools that are necessary to analyze the financial issues presented in the elective courses.

The course materials are designed to be long-lasting. This year all course materials are available through my WWW site - there will be no course packet. The goal is to develop a set of lecture notes which are updated every year. Students and graduates will have access to these notes.

Problem Sets

The course material will be presented in lectures and problem sets. Four problem sets will be distributed during the semester. Most of the assignments will require computations. Knowledge of a spreadsheet package such as or EXCEL is very important. Problem sets are to be completed individually. All students must adhere to the honor code.

Grade Calculation

The grade for the course will be based on performance on the assignments and two exams. The course grade is determined by the following formula:

     Course Grade = A + Max[F, .4M + .6F]

                  A = Assignment Grade (Maximum 30)
                  F = Final Exam Grade (Maximum 70)
                  M = Midterm Grade (Maximum 70)
I realize that it is difficult to have a midterm after only two and a half weeks of lectures. This grading algorithm makes the midterm optional.

Office Hours

The best time to talk to me is directly after class. If you need to schedule an office visit, call my secretary Carol Bass at 660-7775 to arrange an appointment. I prefer to be reached by e-mail. My user name is charvey@mail.duke.edu. There will be problem sessions which will be announced in class. In addition, there will be a pool of tutors for the course. I will circulate their names and telephone numbers.

Supplementary Texts

Sharpe, William F., Gordon J. Alexander and Jeffery V. Bailey, Investments, Fifth edition, Prentice-Hall, 1995.

Brealey, Richard and Stewart Myers, Principles of Corporate Finance, Fourth edition, McGraw-Hill, 1995. [New edition]

Ross, Stephen, Randolph Westerfield and Jeffery Jaffe, Corporate Finance, Third edition, Richard D. Irwin, 1993.

Grading Policy

Outline and Reading Assignments

Note that you are not required to purchase a text. However, much of the material is reinforced by reading Sharpe, Alexander and Bailey (SAB) and either Brealey and Myers (BM) or Ross, Westerfield and Jaffe (RWJ). The relevant sections in SAB, BM, and RWJ are noted below along with the lecture dates. There will also be supplementary readings and handouts distributed during the semester. I realize that there is a considerable amount of reading assigned. Remember that for the two exams, the lecture notes and problem sets dominate both of the texts.

Prerequisite Preparation
0. October
Financial Instruments, Markets and Information.
*Review of Statistics.
Historical Behavior of Asset Returns.

Fixed Income Valuation
1. October 26
Bond Valuation.
Bond Valuation Practice Problems.
Bond Valuation Examples.

* October
Review Session:

2. October 30
Bond Valuation (continued).
Assignment 1 online.
*PV Mechanics and Equity Pricing.
SAB, chapters 1-4, 13-16.
BM, chapter 1-4.
RWJ, chapters 1, 4-5.
*Introduction to Derivatives.

Derivative Markets
3. November 2
Option Valuation.
Assignment 2 online.
Black-Scholes tables.
Bond and Option Review Questions.
Option Pricing Problems.

* November
Review Session:

4. November 6
Assignment 3 online.
=> Assignment 2a due.
=>Assignment 1 due.
Futures Hedging Problems.
SAB, chapter 18-19.
BM, chapters 20-21.
RWJ, chapter 21, 24.

5. November 9
Special Session: Derivatives in Risk Management.
Midterm review. Fall 1994 Midterm.
=> Assignment 3a due.

Midterm Examination
6. November 13
Midterm examination (2.5 hours, in class).

Portfolio Theory
7. November 16
Optimal Portfolio Control.
Review of Matrix Algebra.
SAB, chapters 6, 7.
BM, chapters 7, 8.
RWJ, chapter 9-11.

Asset Pricing Models
8. November 20
Optimal Portfolio Control (continued).
Asset Pricing and Risk Management.

9. November 27
Asset Pricing and Risk Management (continued).
=> Assignment 2b due.
Assignment 4 online.
SAB, chapters 7, 8, 15, 16, 24.
BM, chapter 9.
RWJ, chapter 10.

Performance Evaluation and Market Efficiency
10. November 30
Quantitative Performance Evaluation.
=> Assignment 3b due.
BM, chapter 13.
SAB, chapters 8, 23.&
Graham and Harvey (1995).

Corporate Policy and Control
11. December 4
Capital Structure and Payout Policies.
=> Assignment 4 due.
Jensen (1989, 1991).

12. December 7
Project Evaluation and International Finance
Review. Final Exam Fall 1994.

Final Examination
15. December 15
Final examination.

*not currently available

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