This course will introduce students to major issues currently of concern to all investors by linking theory and practice. In particular, this course will provide students with a solid and thorough understanding of the theoretical principles of financial markets. At the same time, attention will be given to the empirical observations and practical relevance of the theories introduced. The course will study the links between investment and returns and will also investigate consumption and investment choices under uncertainty. It is organised around several important themes; however, the central theme is Portfolio Management and Optimisation. This includes optimal securities and weights selection, construction of the efficient portfolio frontier, deriving the Tangency and GMVP portfolios, examine various portfolio strategies and finally analyse the benefits of diversification. The second and equally important theme of this course is related to models and theories of asset pricing. This includes an analytical derivation of CAPM and an introduction to APT and Multifactor Models. In this framework, EMH and its different versions will be explained, while its effects on financial markets will be discussed. The last theme of this course introduces students to pricing of Fixed Income Securities. This includes and analysis of bond pricing and yields, the role of default risk on bond pricing, and finally a discussion of the term structure of interest rates and some related theories.

A 2-hour weekly lecture for 10 weeks

three 1-hour Bloomberg sessions

two 1-hour computer labs.

One 2-hour revision lecture outside of normal scheduled teaching time.

None

The course provides students with a deep understanding of the functioning of financial markets, combining theoretical foundations with empirical evidence. Students will investigate economic behaviour under uncertainty, such as investment, savings and consumption decisions, with and without financial markets. They will also be able to understand and analyse current approaches used by financial analysts to calculate the fair value of assets and identify lucrative trading opportunities based on the foundations of the Capital Asset Pricing Model (CAPM) and other Multifactor Models. The important question, whether it is possible to "beat the market" or not, will be addressed through a review of the theoretical arguments and the empirical evidence concerning the Efficient Market Hypothesis (EMH).

Furthermore, the underlying principles and functioning of different asset pricing models will be studied, also considering many financial stylized facts such as calendar anomalies, momentum and liquidity effects. Finally, the course aims to investigate how fixed income securities are priced, the quantification of credit/default risk and the management of Bond Portfolios.

By the end of the course, students should be able to:

1. Understand the important link between investment risk and expected return, as well as their determinants.

2. Understand and compute excess returns, risk premiums, average returns, the Sharpe Ratio, deviations from normality and various other risk measures.

3. Explain consumption and investment choices under uncertainty the role of risk aversion and utility in this framework.

4. Analyse capital allocation across risky and risk-free portfolios and manage portfolios of many assets.

5. Solve utility maximization problems and analyse risk tolerance and asset allocation.

6. Explain the concept of diversification and portfolio risk. Implement various portfolio strategies and illustrate the benefits from portfolio diversification.

7. Explain the Markowitz Portfolio Optimization Model and the consequent security selection. Construct the Efficient Portfolio Set.

8. Explain the concepts of risk pooling, risk sharing, and the risk of long-term investments.

9. Derive and analyse the Capital Asset Pricing Model (CAPM). Identify challenges and extensions to the CAPM.

10. Understand Arbitrage Pricing Theory and Multifactor Models of Risk and Return.

11. Analyse the Efficient Market Hypothesis and its implications on the stock market. Discuss the resulting efficient/inefficient resource allocation.

12. Analyse Fixed Income Securities and the Term Structure of Interest Rates.

Students must submit at least 75% by weight of the components (including examinations) of the course's summative assessment.