PORTFOLIO CHOICES IN FINANCIAL MARKETS
The course aims at teaching the principles of finance and its learning objectives are as follows:
Knowledge and understanding:
Students learn about a wide range of investment and risk management tools, the main models for choosing and evaluating financial investment portfolios, and the concepts of financial market efficiency and stability.
Applying knowledge and understanding:
At the end of the course, the student will be able to price and appraise the risk-return profile of individual securities and of investment portfolios.
Students develop critical reading skills of financial theories and facts.
Students learn how to discuss financial issues precisely and clearly both with economists and laymen.
Students learn the skills needed to deepen specific topics and to acquire new competences in advanced finance courses.
Standard knowledge of math (functions, differential calculus, optimization), math for finance (interest rate, time value of money, internal rate of return) and probability theory (random variables).
· Choice under uncertainty
· Stochastic dominance, mean-variance dominance, the expected utility theory, risk aversion, risk premia and certainty equivalent, portfolio choice, the participation principle.
· The modern portfolio theory
· Risk diversification, the efficient portfolio frontier, the two-fund separation theorem.
· The CAPM
· Hypotheses, derivation, the market portfolio, idiosyncratic and systematic risk, the security market line and the capital market line, empirical evidence, Roll’s critique.
· The APT
· Factor models, the no arbitrage hypothesis, Fama-French factors, empirical evidence.
· The efficient market hypothesis
· Rational expectations and the random walk hypothesis, technical and fundamental analysis, the Grossman and Stiglitz paradox, weak, semi-strong and strong efficiency, empirical evidence and anomalies, information and rational bubbles.
· Bond and interest rates
· Bonds classification, bonds’ risk and returns, spot and forward rates, the term structure of returns, term structure expectations hypothesis, liquidity preference theory, the preferred-habitat model, credit risk and ratings.
· Stocks’ valuation
· Stocks’ classification, the dividend discount model.
The course covers the following topics:
Choice under uncertainty (9 hrs)
The modern portfolio theory: Mean-variance utility, the efficient frontier e the two-fund separation theorem (9 hrs)
Asset pricing models: the CAPM and the APT (9 hrs)
The efficient market hypothesis, asset price anomalies and bubbles (9 hrs)
Bond pricing (6 hrs)
Stock pricing (6 hrs)
Lectures, tutorials and home assignments.
Cuthbertson and D. Nitzsche, Economia finanziaria quantitativa, Il Mulino, Bologna.
Slides and additional reading are available on the e-learning portal.
Written final exam where the students are asked to solve portfolio choice problems and security valuation exercises. Problems similar to those included in the final exam are reviewed during the tutorials. The exam also includes multiple choice questions (or true/false questions) to assess students’ learning of theory.