Course syllabus - Portfolio Theory II

Objectives

The course is a continuation of Portfolio Theory I. The Capital Asset Pricing Model (CAPM), and Arbitrage Pricing Theory (APT) will be surveyed in more detail during the semester. In addition, the students will study the valuation of assets; the inputs needed for construction of ex-ante optimal financial portfolios. Asset valuation will focus on equity instruments, using various techniques. Performance measurement and attribution will be examined through risk-adjusted methods. Market timing and style investing will be discussed. Other topics surrounding portfolio allocation will include: Passive versus active management, market efficiency, value vs. growth, Roll's criticism, performance persistency, alternative investments, benchmarks, impact of transactions costs and peer groups. Risk management will be addressed via Value-at-Risk. There will be a project during the course.

Learning outcomes

At the end of the course the student is expected to be able to
- evaluate portfolio choices and conduct performance attribution.
- account for and explain various structured fixed-income products and how they fit into portfolios.
- elaborate on alternative asset´s role in portfolios (Private equity and hedging strategies).
- explain the residual income valuation model (RIV).
- explain the discounted cash flow model (DCF).
- use Treynor/Mazuy and Henriksson/Merton models in performance attribution.
- use the Black-Litterman Model to calculate optimal portfolios.
- manage an advanced project where the above mentioned abilities are used and make a well written report on the project.

Course content

Based on a mathematical and statistical setting; the course will explore the mechanics of portfolio theory. Regression analysis will be discussed (single and multifactor). Valuation (forecasting) will addressed via the discounted cash flow model (DCF), the dividend discount model (DDM), and the residual income valuation model (RIV). Evaluation of the investment management process and decomposition of portfolio performance will be studied via the Sharpe ratio, Jensen's alpha, the Treynor measure, Tracking-error, the Sortino ratio, and the information ratio. Market timing will be reviewed via the Treynor/Mazuy and Henriksson/Merton models. For portfolio construction and for calculation of covariance and correlation matrices the emphasis is on matrix algebra and linear equations. At the end of the course students will approach current research in the field of finance; to see how predictability and the Black-Litterman model comes into play in portfolio construction. The course uses Excel for the valuation project.

Tuition

Lectures combined with exercises, two external lecturers and a valuation project.

Specific requirements

At least 120 credits in the technical, natural sciences, business administration or economics areas where Portofolio Theory I 7,5 credits or equivalent is included and a TOEFL test result, minimum score 173 (CBT), 500 (PBT) or 61 (iBT) or an IELTS test result with an overall band score of minimum 5,0 and no band score below 4,5. The English test is COMPULSORY for all applicants except citizens of Australia, Canada, Ireland, New Zealand, United Kingdom and USA.

Examination

Seminar (SEM1), 1.5 credits, marks Pass (G) or Pass with distinction (VG)
Final examination (TEN2), 6 credits, marks Pass (G) or Pass with distinction (VG)

A student who has a certificate from MDU regarding a disability has the opportunity to submit a request for supportive measures during written examinations or other forms of examination, in accordance with the Rules and Regulations for Examinations at First-cycle and Second-cycle Level at Mälardalen University (2020/1655). It is the examiner who takes decisions on any supportive measures, based on what kind of certificate is issued, and in that case which measures are to be applied.

Suspicions of attempting to deceive in examinations (cheating) are reported to the Vice-Chancellor, in accordance with the Higher Education Ordinance, and are examined by the University’s Disciplinary Board. If the Disciplinary Board considers the student to be guilty of a disciplinary offence, the Board will take a decision on disciplinary action, which will be a warning or suspension.

Grade

Pass with distinction, Pass, Fail