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ASSET PRICING AND PORTFOLIO CHOICE
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ASSET PRICING AND PORTFOLIO CHOICE
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Academic year 2017/2018
- Course ID
- ECO0262
- Teacher
- Giovanna Nicodano (Lecturer)
- Degree course
- Finance
Insurance and Statistics - Year
- 1st year
- Type
- Distinctive
- Credits/Recognition
- 9
- Course disciplinary sector (SSD)
- SECS-P/01 - economia politica
- Delivery
- Formal authority
- Language
- English
- Attendance
- Obligatory
- Type of examination
- Written
- Prerequisites
-
Fundamentals of calculus, statistics, econometrics, finance are prerequisites.
Essential background material is found in the following textbook:Bodie Z., Kane A., Marcus A.J., Investments and Portfolio Managment, McGraw Hill, IX Edition, Global Edition, senza scheda S&P. cap. 5-11,13,21,24
or Bodie Kane Marcus, Investments, X Editon, 5-11,13,24,27 - Oggetto:
Sommario del corso
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Course objectives
This course focuses on asset pricing and quantitative investment management methods.The first part deals with asset pricing theory.
The second part addresses quantitative portfolio choice methods and their ex-post performance. Such methods account for investors' horizons, return predictability and estimation risk.
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Results of learning outcomes
1. Knowledge and understanding abilityKnowledge of market institutions , such as types of assets (stocks, treasuries, corporate bonds, options) and types of market intermediaries (mutual funds, hedge funds, pension funds..) is taken for granted.
A quick review ensures that students are familiar with basic concepts and industry practices, such as the role of portfolio diversification, the construction of mean-variance optimal portfolios, multifactor models, payoff replication, the Efficient Market Hypothesis , the distinction nbetween active and passive portfolio management and performance evaluation.
The first part of the course allows to recognize risk-based drivers of pricing in a static contexts.
It will also show the drivers of return predictability in a multiperiod set-up.
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. When should a worker reduce investment into stocks as retirement approaches? Which is the optimal asset allocation for a pension fund, that caters to a specific pool of workers?
3. Is it possible to reliably predict the return on one asset? On a portfolio of assets? On the relative return of two assets?... Are stock returns more predictable over a day, a month, a year, a decade?
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?
6. Why do "alternative assets" increase the Sharpe ratio of portfolios? Are the returns on such assets similar to those of other assets?
2) Capability to apply knowledge and understanding
The course enables to choose from a set of tools to cope with practical problems of risk assessment, portfolio management and asset pricing. For instance:
1. How to measure expected returns on different stocks on the basis of a small set of determinants. How to use existing assets to price redundant assets. How to identify arbitrage opportunities.
2. How to use asset pricing models to design long-short strategies? And portfolios with desired risk exposures. How to replicate a stock index? How to use asset pricing models to evaluate ex post performance of mutual funds?
3. 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?
4. Which techniques can a portfolio manager use to improve on ex- post performance?
5. How can we exploit predictability while optimizing the risk/return trade-off?
6. Can we use standard portfolio optimization tools to invest in alternatives? And what about ex-post performance measures: should we modify them to evaluate portfolios that include alternatives?
3) Capability to approach the subject in a critical manner
This is a key challenge.
The asset and risk management industry acts upon an evolving body of knowledge, so that the portfolio manager must be able to critically cope with new concepts and techniques. So as to train to this, we will present some unsettled issues - such as the possibility to exploit return predictability for improving portfolio performance -and the different actions to take depending on one's own critical assessment of the matter.
We will also emphasize the difficulty in choosing to reduce risk taking when the asset manager's incentives are tilted towards maximizing short term returns.4) Communication abilities
Students are divided in 6 teams during the third lecture, once registration is over. Three problem sets will be handed over. One team will present the solution to a problem set and another team will discuss it. Other teams may provide support when needed.
5) Learning ability
The reading list includes a variety of materials, from beginners' textbooks to technical hadbooks and scientific papers.
This ought to teach how to refer to different sources, when necessary. Lecture notes ease the approach to complex sources.- Oggetto:
Course delivery
The course is based on both formal lectures and at least as many hours of at‐home
reading and solving exercises.IMPORTANT NOTICE: you are strongly advised to read in the Fall the intermediate-level textbook by Bodie Kane Marcus. Selected chapters will be quickly reviewed during the first two weeks of the course, so as to homogenize the background of the classroom and prepare for advanced material.
Two presentations by industry professionals, possibly previous students, enliven the course.
Interested students are invited two attend (finance) research seminars and conferences at Collegio Carlo Alberto.
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Learning assessment methods
EXAMS: it tests basic knowledge and advanced knowledge
Basics: multiple choice questions drawn from Bodie Kane and Marcus. If more than half of the answers are wrong, the advanced part will not be corrected.
IMPORTANT NOTICE: I will offer a test of the basics during the fifth lecture. Those who pass it will not have to retake it.
Advanced Material: there will be two to three composite questions or exercises, each on a different topic, with limited space for the answer.
Each composite question will be worth 15 (if 2) or 10 (if 3) points.
See sample tests and exams on Moodle.
CLASSWORK: I may attribute some extra points to outstanding classwork.
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Support activities
Weekly office hours during the course. You find office hours online typing "ricevimento nicodano" on your browser.- Oggetto:
Program
2-Week Review Optimal portfolios and diversification
CAPM
The (Fama French Carhart) Multifactor model and payoff replication
The EMH
Performance evaluation
Basics again 1. Mean Variance Optimization with N risky asset
2. Equilibrium Pricing and Arbitrage Pricing
Risk-based Asset Pricing: A Unifying Theory
3. Pricing with the Stochastic Discount Factor
4. Generalized Efficient Frontier and CCAPM
5. Return Predictability, Market Efficiency and the EMH
6. Contingent Claim Pricing
7. Risk Neutral Probabilities
8. Equilibrium pricing in complete marketsPortfolio Choice
9. Human Capital, Life Cycle Saving and Investing
10. Return Predictability: Stylized Facts
11. Estimation risk and ex post performance of optimal portfolios.
12. Return Predictability and long term asset allocation13. Investing in Alternative Assets
Topics for informal discussion
Survivorship Bias
Pricing votes and ownership structure
Pricing information (news, insider trading, Merton's investor base)
Tax arbitrage
Liquidity and liquidity risk
The costs and benefits of securities regulation
Changes will be communicated at the beginning of the course.
Suggested readings and bibliography
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- The complete reading list wil be available on Moodle at the beginning of the course. It will comprise both book chapters and scientific papers.
Review: Bodie Kane and Marcus ch. 5-11, 13, 24
Students should be familiar also with asset classes and investment companies (ch. 1-4, Bodie Kane Marcus)
Parts 3-8: Cochrane J., Asset Pricing, Princeton University Press, 1999, Ch.1,2, 4.1,4.2,4.3, 5.1, 5.2,5.3
Parts 9-12: Campbell J.Y and L. M. Viceira, Strategic Asset Allocation, Oxford Un. Press, 2002 , Ch. 6, Introduction; Ch. 6.1.1; Ch. 7
**A new textbook covers Parts 1-11: Campbell J.Y. Financial Decisions and Markets, Princeton University Press, 2018**
We also study a few research papers during lectures.
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Note
REGISTER ONLINE by the second lecture of the course, on Moodle, adding a picture of yourself.
Ensure you select the academic year 2017-2018.
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