Quantitative Finance and Insurance

ASSET PRICING AND PORTFOLIO CHOICE

ASSET PRICING AND PORTFOLIO CHOICE

Academic year 2014/2015

Sommario del corso

• Course objectives
• Results of learning outcomes
• Learning assessment methods
• Program
• Suggested textbooks and readings
• Notes
• Teaching tools

Course objectives

This course teaches advanced  asset pricing models and the ensuing investment management techniques. The first part (Prof. Luciano, 21 hours) deals with the theory of asset pricing and its equilibrium consequences. The second part (Prof. Fugazza, 42 hours) deals with portfolio choice models that account for investors’ horizons, return predictability and estimation risk. It also presents asset pricing tests as well as portfolio strategies based on the cross-section of returns.

Results of learning outcomes

Based on the first part of the course, student should recognize the main drivers of individual rational pricing in both static and dynamic contexts and how this affect complete market equilibria.

Based on the second part of the course, students will be able to address the following issues:

1. Why should investors diversify across assets? Which are relevant characteristics of asset classes?

2. How can a worker smooth consumption during working years (given labor income risk) and during retirement? Is she saving enough for retirement? Should a worker reduce investment into stocks as retirement approaches? Which is the optimal asset allocation for a pension fund?

3. Is it possible to predict future asset returns? Are stock returns more predictable over a day, a month, a year, a decade? If markets are efficient, how can returns be predictable?

4. Do ex ante optimal portfolios perform better relative to simpler ones in ex post experiments? How large are gains from portfolio diversification across assets?

5. Are stocks safer in the long run? How large are gains from portfolio diversification over time? Are there gains from long-horizon investing?

6. Is it true that “alternative assets” increase the Sharpe ratio of portfolios? Are the returns on such assets similar to those of other assets?

Learning assessment methods

The exam  can be taken 3 times during the academic year, with no possibility to withdraw. A student is admitted to the exam only if he/she brings a valid "statino" and has signed up electronically.
The exam
° is written form.
° contains 3 questions or exercises.

Program

First part (Prof. Luciano)

The static portfolio problem under certainty and uncertainty (finite number of states)

-         Arrow Debreu prices

-         Kernels

-         Risk neutral Probabilities

-         Fundamental pricing Theorem

-         Absence of arbitrage and equilibrium

-         Valuation in complete and incomplete markets

- CAPM

- extension to multiperiod economies

- the binomial economy

- static and dynamic solutions for the Lucas economy

- extension to continuous time and dynamic programming

Second Part (Prof. Fugazza) - Portfolio Choice:

1. Mean Variance Approach

2. Human Capital

    2.1. Life Cycle Saving

    2.2. Life Cycle Saving and Investing

3. Return Predictability: Stylized Facts

4. Return Predictability and Portfolio Choice

5. Long Term Asset Allocation

    5.1 Classical and Bayesian Buy-and -Hold

    5.2 Rebalancing

6. Investing in Alternative Assets

Readings for the Second Part

Bodie Kane Marcus, Investments, Mc Graw Hill, International Edition

Fabozzi F.,  Focardi S, Financial Modelling of the Equity Market, Wiley, 2006

Cochrane J., Asset Pricing, Princeton University Press, 2001

Campbell J.Y and L. M. Viceira, Strategic Asset Allocation, Oxford Un. Press, 2002

In particular, readings with (*) have to be prepared for the exam:

1. *CV, ch.2
- *BKM, ch.5-8 (or FF ch. 2,)
- FF, Ch.3-6

2.* CV, Ch. 6, Introduction; Ch. 6.1.1; Ch. 7
- * Cocco J., Gomes F., Maenhout P. Consumption and Portfolio Choice Over the Life Cycle, Review. Financial Studies 2004
- * Bagliano F. et al. Pension Funds, Life Cycle Asset Allocation and Performance Evaluation, World Bank, 2009

3. * Campbell J.Y., A. Lo, McKinlay, The Econometrics of Financial Markets, Princeton University Press, 1997, ch.2.4 and 7.2
* Jegadeesh, N., and S.Titman, 1993, "Returns to Buying Winners and Selling Losers: Implications for Market Efficiency," Journal of Finance, 48, 65-91.
Campbell Shiller, Valuation Ratios and the Long Run Stock Market Outlook, NBER wp 8221
A. Goyal and I. Welch, 2008, “A Comprehensive Look at The Empirical Performance of Equity Premium Prediction”, Review of Financial Studies, 21(4),455-508

4. *Jorion P., International Portfolio Diversification with Estimation Risk, Journal of Business, 58(3), 1985, 259-277
Black, Fischer, and Robert Litterman, Global Asset Allocation With Equities, Bonds, and Currencies, Goldman Sachs, 1991
Garlappi Uppal, 1/N, The Review of Financial Studies, 2009
* Avramov D. and T. Chordia, Predicting Stock Returns, Journal of Financial Economics, 2006.
*Fabozzi, Ch. IX

5.* Barberis N., Investing For the Long Run when Returns Are Predictable, Journal of Finance, Feb 2000
*Campbell J.Y. and L. M. Viceira, The Term Structure of the Risk Return Trade Off, Financial Analyst Journal
*Fugazza C., Guidolin M. e G. Nicodano, Time and Risk Diversification in Real Estate Investments: The Ex Post Performance, Real Estate Economics, 2009
CV, Ch. 4

6. *Jondeau E., M. Rockinger, Optimal Portfolio Allocation under Higher
Moments, European Financial Management, 12(1), 2006, 29-55
*Fabozzi, Ch 5

Class schedule

Note

Il Corso di Studio in senso proprio è quello visualizzato all’atto dell’accesso su Campusnet. Nella videata dell’insegnamento, è indicato impropriamente come “Corso di Studio” il/i percorso/i del Corso di Laurea in cui l’insegnamento stesso è inserito.

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