F71PT Portfolio Theory/F71AH Financial Economics 1

Dr Jing Yao

Course co-ordinator(s): Dr Jing Yao (Edinburgh).

Aims:

To introduce asset pricing and portfolio selection models. (This course also covers the first half of the material in Subject CT8 of the Institute/Faculty of Actuaries examinations.)

Detailed Information

Course Description: Link to Official Course Descriptor.

Pre-requisites: none.

Location: Edinburgh.

Semester: 2.

Syllabus:

  • Utility theory
  • Stochastic dominance
  • Measures of investment risk
  • Mean-variance portfolio theory
  • Single-period models of asset returns
  • Capital asset pricing model
  • Efficient market hypothesis and Behavioural Finance

Learning Outcomes: Subject Mastery

At the end of studying this course, students should be able to:

  • Derive the properties of a utility function. Calculate an investor’s expected utility of an investment.
  • State the conditions for absolute dominance, first and second order stochastic dominance. Show how first and second order stochastic dominance are related to utility theory.
  • Calculate the following measures of risk: variance, semi-variance, shortfall probability, mean shortfall and Value at Risk.
  • Calculate the mean and variance of return on a portfolio of assets. Describe the purpose and calculation of the following: opportunity set, efficient frontier, indifference curves, Lagrangian function and separation theorem.
  • Describe the properties of single factor and multi factor models. Show how to fit a single index model using historic data.
  • Discuss the assumptions and uses of the Capital Asset Pricing Model. Derive the capital market line and security market line.
  • State the weak, semi-strong and strong forms of the efficient market hypotheses. Understand topics in prospect theory.

Learning Outcomes: Personal Abilities

  • Demonstrate the ability to learn independently
  • Manage time, work to deadlines and prioritise workloads
  • Present results in a way which demonstrates that they have understood the technical and broader issues of asset pricing.
  • Communicate findings effectively in the financial services industry.

Reading list:

  • Joshi & Paterson
    Introduction to Mathematical Portfolio Theory, 1st edition.
    Cambridge University Press.
  • Elton, E., Gruber, M., Brown, S. & Goetzmann, W.
    Modern Portfolio Theory and Investment Analysis, 9th edition.
    Wiley, New Jersey. (older versions are adequate)

Assessment Methods:

Examination will be at least 60% and no more than 80%.
Coursework will be at least 20% and no more than 40%.
Re-assessment in the next academic year

SCQF Level: 11.

Credits: 15.

Other Information

Help: If you have any problems or questions regarding the course, you are encouraged to contact the lecturer

VISION: further information and course materials are available on VISION