This course introduces into the theoretical foundations of modern portfolio management and their applications. It covers expected utility theory, measures of risk and return, the theory of portfolio selection, asset pricing models and their empirical test, the efficient markets hypothesis, and issues in stock portfolio management.
The course provides students with an understanding of the theoretical and conceptual foundations of modern quantitative portfolio management. Students learn to understand investment strategies, and to interpret and evaluate them against the background of capital market theory and the efficient markets paradigm.
Basic knowledge in mathematics (optimization, elementary matrix algebra) and statistics (expected value, variances, covariances, correlation, t-tests). Successful attendance of Finanzwirtschaft I & II in the Mannheim Bachelor's program or similar courses.
|Forms of teaching and learning||Contact hours||Independent study time|
|Lecture||2 SWS||8 SWS|
|Exercise class||1 SWS||6 SWS|
|Form of assessment||Written exam (closed book, 60 min.)|
Prof. Dr. Erik Theissen
Prof. Dr. Erik Theissen
|Frequency of offering||Fall semester|
|Duration of module||1 semester|
|Range of application||M.Sc. MMM, M.Sc. Bus. Edu., M.Sc. Econ., M.Sc. Bus. Inf., M.Sc. Bus. Math., MAKUWI|
|Preliminary course work||–|
|Literature||Bodie, Z., A. Kane and A. Marcus (2014): Investments, 11th International Edition, McGraw Hill|
Elton, E., M. Gruber, S. Brown and W. Goetzmann (2014): Modern Portfolio Theory and Investment Analysis, 9th Edition, Wiley
|Course outline||Choice under Uncertainty|
The first chapter covers key concepts from utility theory such as mu-sigma preferences and risk aversion.
Measures of Risk and Return
In the second chapter, we discuss how to measure and risk. In addition, we introduce performance measures and cover downside risk measures.
The Theory of Portfolio Selection
In the third chapter, we analyze how investors should construct their portfolios in order to maximize expected utility. We introduce key concepts such as mean-variance efficiency and two-fund separation.
Capital Market Equilibrium
In this chapter, we introduce the Capital Asset Pricing Model (CAPM) and the Arbitrage Pricing Theory (APT), and how they relate to each other.
Empirical Tests of Equilibrium Models
This chapter introduces various empirical methods (and their implementation) used to test asset pricing models.
The Efficient Markets Hypothesis
The sixth chapter deals with market efficiency. In particular, the three types of market efficiency of Fama (1970) are evaluated in light of empirical evidence.
The Theory of Active Management
This chapter answers questions such as: How do we evaluate investment decisions? How do we measure excess performance? We further introduce several performance measures and have a look at some investment strategies.