Financial Portfolio Theory

Learning Outcomes

Knowledge and Understanding

Having successfully completed this module, you will be able to demonstrate knowledge and understanding of:

• Understanding various ways in generalizing the basic portfolio optimization models to more complex situations.
• Demonstrate knowledge and understanding of basic principals in optimal portfolio construction.
• Demonstrate knowledge and understanding of some of the most common models in constructing optimal portfolio and how they can be solved, including closed-form solutions and iterative algorithms.

Subject Specific Intellectual and Research Skills

Having successfully completed this module you will be able to:

• Develop general portfolio construction for a range of practical (and small) problems.
• Appreciate the power of using mathematical optimization and analytical skills relevant to financial portfolio construction.

• Investment in shares from the point of view of private investors, speculators and large investment companies.
• The role of investment in pension funds.
• Definitions of mean and variance.
• The mean and variance for sums of variables.
• How shares move relative to each other: covariance and correlation co-efficients.
• The advantages of portfolio diversification.
• The differences between negative, zero and positive correlation and examples of shares that display these properties.
• Risk and reward for shares, definition of the risk/reward diagram.
• Drawing risk/reward diagrams for portfolios with a small number of assets.
• Particular two-asset cases.
• Generalisation to portfolios with N assets.
• The effect of short selling in risk/reward diagrams. Including riskless assets in the analysis.
• Generation of portfolio possibilities region.
• Analysis of a combination of risky and riskless assets: arbitrage.
• The general Markowitz portfolio problem.
• Finding the CML, MPOR and optimal portfolio.
• (If time permits) asset risk and reward in the presence of uncertainty, strong and weak efficient market hypotheses

Teaching and learning methods

Two 4-hour lectures

Two 2-hour computer sessions

Two 2-hour lectures

Resources & Reading list

Textbooks

Blake D. Financial Market Analysis. McGraw-Hill.

Elton EJ & Gruber MJ. Modern Portfolio Theory and Investment Analysis. Wiley.

Merton RC. Continuous Time Finance. Blackwell.

Summative

This is how we’ll formally assess what you have learned in this module.

Referral

This is how we’ll assess you if you don’t meet the criteria to pass this module.

Repeat

An internal repeat is where you take all of your modules again, including any you passed. An external repeat is where you only re-take the modules you failed.

Repeat Information

Repeat type: Internal & External