Last Update: November 29, 2000
This finance elective course deals with the questions: how does an investor manage an investment portfolio?
Institutional investors generally address this question in two steps.
The first step is to limit the risk of the investment portfolio. In a well-diversified portfolio, the risk is the portfolio's exposure to common risk factors, not to any "idiosyncratic" risk specific to any single investment. The standard approach is to group securities with common risk factors together. These groups are called asset classes. The investor then makes an asset allocation decisions -- on how much to invest in each asset class.
The second step is to hire managers to select securities within each asset class to put into the portfolio. This necessarily involves the evaluation of managers.
Beyond discussing how to implement these two major steps, the course deals with a few additional issues. For example, when active managers are hired, it is important to understand how their execution and transaction costs can affect the net returns on their portfolio. This involves understanding the trading process.
Furthermore, institutional investors are always looking for ways to
diversify their portfolios. These include international investments,
portfolio insurance, inflation hedges, private equity, and hedge
1) Identifying the major risk factors and asset classes
2) Building an efficient frontier using these asset classes
3) Selecting the optimal portfolio from the efficient frontier
4) Performing manager selection and performance evaluation
5) Trading and execution issues
6) Do international investments provide diversification?
7) Risk management – puts and collars
8) Inflation protection – Commodities and inflation-indexed bonds
9) Hedge funds and dynamic trading strategies
10) Private equity
The text book is Bodie, Kane, and Marcus: Investments. Irwin McGraw-Hill. Fourth Edition.
Four case writeups and a final exam.
Please report any problems with this web site to Professor
David A. Hsieh.