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Lecture

Investments: Portfolio Selection and Asset Pricing

In course

FIN-405: Investments

The course covers a wide range of topics in investment analysis ...

Description

This lecture covers a wide range of topics in investments, including portfolio selection, equilibrium asset pricing, arbitrage pricing theory, market efficiency, and behavioral finance. It also discusses tests of asset pricing models and hedge fund strategies in equity, fixed income, foreign exchange, and commodity markets. The course emphasizes the importance of risk management, optimal mean-variance portfolio choice, and the efficient frontier with multiple risky assets. Students will learn about estimating moments from time-series data, historical performance of asset classes, and the mathematical characterization of the general case.

Instructor

Pierre Collin-Dufresne

Official source

Ontological neighbourhood

Economics

Microeconomics: Financial economics

Statistics

Statistical inference: Mathematical statistics

Related concepts (32)

Modern portfolio theory

Modern portfolio theory (MPT), or mean-variance analysis, is a mathematical framework for assembling a portfolio of assets such that the expected return is maximized for a given level of risk. It is a formalization and extension of diversification in investing, the idea that owning different kinds of financial assets is less risky than owning only one type. Its key insight is that an asset's risk and return should not be assessed by itself, but by how it contributes to a portfolio's overall risk and return.

Portfolio optimization

Portfolio optimization is the process of selecting the best portfolio (asset distribution), out of the set of all portfolios being considered, according to some objective. The objective typically maximizes factors such as expected return, and minimizes costs like financial risk. Factors being considered may range from tangible (such as assets, liabilities, earnings or other fundamentals) to intangible (such as selective divestment). Modern portfolio theory was introduced in a 1952 doctoral thesis by Harry Markowitz; see Markowitz model.

Portfolio (finance)

In finance, a portfolio is a collection of investments. The term “portfolio” refers to any combination of financial assets such as stocks, bonds and cash. Portfolios may be held by individual investors or managed by financial professionals, hedge funds, banks and other financial institutions. It is a generally accepted principle that a portfolio is designed according to the investor's risk tolerance, time frame and investment objectives. The monetary value of each asset may influence the risk/reward ratio of the portfolio.

Arbitrage pricing theory

In finance, arbitrage pricing theory (APT) is a multi-factor model for asset pricing which relates various macro-economic (systematic) risk variables to the pricing of financial assets. Proposed by economist Stephen Ross in 1976, it is widely believed to be an improved alternative to its predecessor, the Capital Asset Pricing Model (CAPM). APT is founded upon the law of one price, which suggests that within an equilibrium market, rational investors will implement arbitrage such that the equilibrium price is eventually realised.

Asset pricing

In financial economics, asset pricing refers to a formal treatment and development of two main pricing principles, outlined below, together with the resultant models. There have been many models developed for different situations, but correspondingly, these stem from either general equilibrium asset pricing or rational asset pricing, the latter corresponding to risk neutral pricing.

Related lectures (32)

Portfolio Theory: Risk Parity Strategy

Explores Portfolio Theory with a focus on the Risk Parity Strategy, discussing asset allocation proportional to the inverse of volatility and comparing different diversified portfolios.

Mean-Variance Portfolio Theory

Explores mean-variance efficient portfolios, factor models, and market efficiency in investment management.

Factor Models in Finance

Explores factor models in finance, covering mean-variance portfolios, size and value anomalies, and momentum strategies.

Equilibrium State Prices Determination

Explains the determination of equilibrium state prices in asset pricing through consumption market clearing and budget constraints.

Factor Models and CAPM