Through this course, students should gain an understanding of the overall investment process and of its key elements such as asset allocation and security selection. They should gain a basic knowledge of debt and equity and of the mechanisms determining asset returns and returns volatility. The course starts with the theory of choice under uncertainty. We then turn to the analysis of investors' behavior, both in the form of expected utility maximization and in the form of recent behavioral models, and to the tools for static portfolio choice, with particular regard to the theory and practice of the efficient frontier. The course attention is then shifted from portfolio choice to asset pricing, and we study models like the CAPM, multi-factor models, and the consumption CAPM. The hypothesis of market efficiency is analyzed and tested. Then, we turn to security evaluation – bond and stock pricing. Finally, we cover some topics of household finance, including a discussion of cross-country evidence of household portfolios, the stock-holding puzzle, the portfolios of the rich, portfolios over the life cycle, and financial literacy.
Basic calculus, financial mathematics and statistics (probability theory)
Choice under uncertainty; mean-variance approach; the efficient frontier and the two fund separation theorem; the CAPM; the APT; the CCAPM; the efficient market hypothesis; bond prices and yields; the term structure of interest rates; equity valuation models; topics in household finance.
Bailey (2005), The Economics of Financial Markets, Cambridge University Press;
Bodie, Kane & Markus, Investments, McGraw-Hill.
Reference for Household Finance: Guiso & Sodini (2012), Household Finance. An Emerging Field, in: Handbook of the Economics of Finance, vol. 2(B), pp. 1397-1532
Lecture notes, problem sets and class presentations of the material should be taken as a guidance for further study on the textbooks.