The course assumes good knowledge of basic economic concepts such as prices, returns, demand and supply. Also, one needs to be familiar with the mathematical concept of maximization/minimization of a function. Some knowledge of statistics is required too. In particular, you will need to know about mean, variance, covariance, and correlation of random variables. Also, we will refer extensively to the normal probability distribution. All the necessary statistical concepts will be reviewed during the practical sessions.
Institutions and Economic Models of Financial Markets
Description / Program
The course is an introduction to the institutions and economic functioning of financial markets. First, the course provides a general description of the basic features of these markets: the asset classes, the trading mechanisms, and the main actors. Then, it deals with individual portfolio choice. Next, individual portfolios are aggregated to derive the main concepts of equilibrium in equity markets (CAPM, APT). These concepts are used to introduce the notion of market efficiency. The empirical evidence on market efficiency is discussed and analyzed from the point of view of classical and alternative theories of capital markets, such as Behavioral Finance. The course then examines the tools that financial analysts use to make investment decisions (equity analysis). Using these notions, the students will be introduced to the concept of active portfolio management. As a final chapter, the course deals with fixed income securities (prices, yields, the term structure, and bond portfolios management).
Learning Method / Style of Lessons
Lectures and Problem Sets.
Written mid-term exam, written final exam at the end of the course. The mid-term exam and the final exam will each represent 50% of the final grade. Both exams are closed book. It will be allowed to bring to the exam a sheet with formulas. Students have the option to only take the final exam (with a longer set of questions) for 100% of the final grade, but it is strongly encouraged to take the mid-term exam.
The textbook for the course is: Bodie Z., Kane A., and Marcus A.J., “investments”, McGraw Hill. The relevant chapters will be announced in class and on the course website. Occasional additional readings will be posted on the course website.