#FIN 363: Portfolio Theory & Investment Analysis

In this course, we discuss the basic principles underlying rational portfolio choice and what this means for prices determined in the marketplace. We confine our attention to financial assets, through much of the analysis, we develop is equally applicable to real assets.  An investor is faced with a choice from among enormous number of assets. When one considers the number of possible assets and the various possible proportions in which each can be held, the decision process seems to be overwhelming. In the first part of this course, we analyse how decisions makers can structure their problem so that they are left with a manageable number of alternatives. Later chapter of the course deals with rational choice among the alternatives, methods for implementing and controlling the decision process, and the equilibrium conditions in the capital markets to which the previous analysis leads. The course is divided into four parts. The first part provides the background material on securities and financial markets. The second part deals with the subject of portfolio analysis. More precisely, we develop the ‘Mean-Variance Portfolio Theory’. We are concerned with determining of properties of combinations (portfolios) of risky assets given the properties of individual assets (Security Market Line, Capital Market Line, the Market Model …). The third part is concerned with the selection of that one portfolio that best meets the needs of an investor. We discuss the models of equilibrium prices and returns in the capital markets. We analyse mainly the standard Capital Asset Pricing Model (CAPM) as well as the Arbitrage Pricing Theory (Multi-factor Models). A detailed analysis of earnings is provided in the final part of this course. Specifically, we consider methods of forecasting inputs and valuation models. This if followed by an analysis of macroeconomic behaviour and the impact of this behaviour of security dynamics over time (informational efficiency).