This course aims at developing key concepts in investment theory from the perspective of a portfolio manager rather than an individual investor. The goal of this class is to provide students with a structure for thinking about investment theory and show how to address practical investment problems in a systematic manner. Instead of focusing on pure theoretical models, the emphasis is given on the empirical facts observed in asset prices in worldwide capital markets, understanding whether they manifest new dimension of systematic risk, and how to design smart portfolios to take advantage of multiple sources of systematic risk.

Topics Include:

- Capital allocation and optimal portfolio selection
- Diversification, risk, and various models linking risks with returns (such as: the CAPM, the Fama-French 3-Factor Model ("value" and "size" investing), "momentum investing" and the Carhart's 4-Factor Model, and Ross' multifactor APT to account for multiple sources of systematic risk)
- Risk-adjusted returns, measures of fund performance, and various trading strategies used by Hedge Funds
- Market efficiency (including empirical anomalies and behavioral finance)

Other Topics (Time Permitting):

- Impact of borrowing constraint and transaction costs and illiquidity
- Risk management issues (such as portfolio insurance)
- Bond valuation and the term structure of interest rates
- The Black-Scholes/Merton option pricing model

Students interested in this course are expected to have sound knowledge of Statistics and Regression Analysis. This is a quantitative course in which we discuss many cases, but case studies will require ability to do statistical analysis similar to what might be applied in practice. The course develops an applied analytical framework of financial investments.