This course will provide an overview of the challenges and opportunities provided in the European and the US financial markets. There will be a review of interest rate theory, the pricing of bonds and derivatives and their use in selecting optimal portfolios. Examples of financial instruments used in portfolio management and financial market efficiency will be discussed as part of the course. Use of the capital asset pricing model (CAPM) in both the standard and non-standard forms for pricing stocks will be demonstrated and multi-factor models including the arbitrage pricing model will be presented. The practical use of derivatives, such as, options, futures, and swaps will be described. Practical applications of over-the-counter products, such as, credit derivatives are demonstrated. Evaluation of portfolio performance will be described by use of simple Sharpe, Treynor, and Jensen indices and more advanced asset allocation and evaluation tools.

Upon completion of the course the student should be able to:
compute portfolio mean returns, variances and covariances with and without the use of linear algebra
estimate mean, variance, covariance, beta and multi-factor betas based on historical returns
understand alternative risk measures
characterize the efficient frontier under restrictions on short sale and borrowing
work with measures of risk aversion, portfolio choice and other decisions within the framework of expected utility
understand and work with models of expected returns
define, compute, work with and understand the limitations of performance measures
decompose performance
understand the different tests of the main asset pricing models
understand limit-to-arbitrage problems and related trading strategies
explain the major findings regarding investor behavior and related trading strategies
set up central problems in Excel, including numerical optimization and linear regression
interpret optimization and regression results from Excel
explain institutional setup of the financial markets
characterize the relevant features of stocks, bonds and derivatives
define and work with bond yields and with duration and convexity
understand and work with the term structure of interest rates and forward rates
understand the structure, usage and valuation of derivatives

Contents
The topics we will explore include the following:
the basics of risk and return
the investment process and the importance of asset allocation
how markets operate
portfolio theory and how to form optimal portfolios
equilibrium models of security prices
security price anomalies such as the size, book-to-market, and momentum effects in stock returns
the behavioral approach to finance and its role in understanding price anomalies
performance evaluation of mutual funds and hedge funds
the role of fixed income securities in the portfolio
the term structure of interest rates
the use and valuation of derivatives

Course status
This constitutes a basic course in capital market theory and instruments and forms the basis for second semester courses in risk management and applied corporate finance.

Bodie, Kane and Marcus: Investments and Portfolio Management. McGraw Hill. 9th edition.