SIM 313: Investment Management

Learning Outcomes

Upon completion of this course the Student should be able to:

1. demonstrate understanding of important historical trends in the investment management;
2. apply techniques of trading in financial instruments, return and risk of bond and equity markets; and
3. appreciate the importance of microstructure, drivers of diversification as an investment strategy for investors and immunization strategies used as risk management techniques.

Course Contents

History of financial markets – historical and recent financial innovation. Historical equity and bond market returns, equity premium puzzle. Fund management and investment – historical mutual fund performance, market efficiency and behavioral finance, return based trading strategies, hedge funds. Market microstructure – types of markets, bid-ask bounce – the Roll model, Glosten-Milgrom model, Kyle model, discrete version of the Kyle model, limit order markets, statistical arbitrage (algorithmic trading, program trading), why market microstructure matters. Diversification – expected portfolio return and variance, definition of risk premium, asset allocation – two assets: mean-variance preferences, optimal asset allocation with a risk-free asset, portfolio frontier, estimation issues, diversification – the single index model, factor models. Portfolio immunization – bond math, term structure, duration, immunization of bond portfolios, convexity and immunization, immunization of equity portfolios. Risk and performance management – identify and discuss types of risk, risk decomposition, hedge ratios, Value-at-Risk, Sharpe ratio, Treynor’s ratio, portfolio performance measures, portfolios with changing risk, market timing, non-linear payoffs, extreme risk.