INVESTMENT THEORY

Professor: Alexei Goriaev
E-mail: agoriaev@nes.ru

TA: Andrei Rachinsky, arachins@nes.ru

Summary

This course covers modern theories of investment and financial risk management. We start with portfolio management (in particular, mean-variance analysis) and asset pricing models (e.g., CAPM and APT). We discuss the concepts of arbitrage, market completeness, and the fundamental theorem of mathematical finance. Subsequently, we turn to the models of the term structure of interest rates and derivative pricing.

There will be several problem sets and a written exam, which accounts for 70% of the grade.

General references

Lecture materials will be essential for this course. The main textbooks are [1], [2], and [3]. They contain the basic analysis of the course topics, but sometimes are not deep enough. [4] is an advanced reading for those not satisfied with the previous references. [5] and [6] are the main readings for the option pricing theory and for the market microstructure theory, respectively. Note that various handouts including the copies of selected articles and book chapters will be provided as well. The course materials will be available at the website http://www.nes.ru/~agoriaev/.

 

1. Haugen, Robert A., Prentice Hall, 2001, Modern Investment Theory (fifth edition).
2. Elton, Edwin J., and Martin J. Gruber, John Wiley and Sons, 2002, Modern Portfolio Theory and Investment Analysis (sixth edition).
3. Grinblatt, Mark, and Sheridan Titman, McGraw-Hill, 1998, Financial Markets and Corporate Strategy.
4. Huang, Chi-fu, and Robert H. Litzenberger, North Holland, 1988, Foundations for Financial Economics.
5. Hull, John C., Prentice-Hall, 2000, Options, Futures, and Other Derivatives (fourth edition).
6. O’Hara, Maureen, Blackwell Publishers, 1997, Market Microstructure Theory.

 

 

Syllabus: lectures and references

 

1. Introduction to risk and return

q       1, ch. 1-3

q       2, ch. 1-3

q       corresponding chapters in the books on corporate finance, such as Brealey and Myers “Principles of Corporate Finance”

 

2-3. Portfolios and mean-variance analysis

q       1, ch. 4-5

q       2, ch. 4-6

q       3, ch. 4

q       4, ch. 3

 

4-5. Equilibrium pricing: Capital Asset Pricing Model (CAPM) and its extensions

q       1, ch. 8

q       2, ch. 13-14

q       3, ch. 5

q       4, ch. 7

 

6-7. Arbitrage pricing: Arbitrage-Pricing Theory (APT) and factor models

q       1, ch. 10

q       2, ch. 16

q       3, ch. 6

q       4, ch. 8

 

8-9. Market microstructure

q       6, ch. 1, 3

q       4, ch. 9

 

10-11. Term structure of interest rates

q       1, ch. 13-14

q       2, ch. 20-21

q       3, ch. 22

 

12-13. Derivative pricing

q       1, ch. 17-18

q       2, ch. 22-23

q       3, ch. 7-8

q       5, ch. 1, 6-8, 11

 

14. Performance evaluation

q       1, ch. 11-12

q       2, ch. 24