Course co-ordinator(s): Prof Andrew Cairns (Edinburgh), Prof Gavin Gibson (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
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:
This course is assessed by a 2-hour examination in May.
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