Course objectives:

The course aims at students interested in investment decisions, portfolio theory and risk management while delving into both theoretical and empirical aspects of the topics. Topics covered include portfolio and diversification theory, equilibrium capital markets and its implications, portfolio performance measures, fixed income instruments, value-at-risk, and credit risk.

Textbooks:

The course closely follows two textbooks:

• • Bodie, Z., Kane, A. & Marcus, A.J. (2014): Investments (10th Ed.), McGraw-Hill (BKM)

  • Hull, J.C. (2015): Risk Management and Financial Institutions (4th Ed.), John Wiley & Sons (H)

Assessment:

Timing of the assignments and midterm respects the time schedule detailed in the following section:

• HA #1: assigned during Week #5

• HA #2: assigned during Week #11

• Midterm: during Week #8

Time Schedule:

WEEK #1 INTRODUCTION

• Introduction & Course information

• Investment Environment

• Asset Classes and Financial Instruments o Risk, Return, and Historical Record

• BKM 1,2,5

WEEK #2 - #3 PORTFOLIO THEORY AND PRACTICE

• Capital Allocation to Risky Assets

• Optimal Risky Portfolios

• Index Models

• BKM 6-8

WEEK #4 - #5 EQUILIBRIUM CAPITAL MARKETS I

• Capital Asset Pricing Model

• Arbitrage Pricing Theory

• BKM 9, 10, 13.3

HOME ASSIGNMENT #1 (DURING WEEK #5)

WEEK #6 - #7 EQUILIBRIUM CAPITAL MARKETS II

• Efficient Market Hypothesis

• Behavioral Finance and Technical Analysis

• BKM 11,12

MIDTERM TEST (DURING WEEK #8)

WEEK #8 FIXED-INCOME SECURITIES

• Managing Bond Portfolios

• Bond Prices & Yields

• BKM 14,16

WEEK #9 APPLIED PORTFOLIO MANAGEMENT

• Portfolio Performance Evaluation

• BKM 24

WEEK #10 - #11 VALUE-AT-RISK

• Risk Management

• Value-at-Risk

• Expected Shortfall

• Coherent Risk Measures of Extreme Value Theory

• Back-Testing

• H 12-13

HOME ASSIGNMENT #2 (DURING WEEK #11)

WEEK #12 - #13

• Credit Ratings

• Estimating Default Probabilities

• Ratings Transition Matrices

• Vasicek’s Model

• CreditRisk Plus

• Creditmetrics

• H 19, 21