**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