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Semester 1 - Dual-Delivery
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This subject teaches principles of advanced portfolio choice and asset pricing. The subject emphasizes the close link between theory and empirical analysis in this important area of finance. At the theoretical level, the subject introduces optimal portfolios for households and institutional investors like insurance companies and pension funds. While households are assumed to receive utility from terminal wealth or intermediate consumption, institutional investors consider their liabilities when forming an optimal asset allocation. The subject derives the asset pricing implications of portfolio choice. At the practical level, emphasis is placed on how to implement and evaluate optimal portfolio choice strategies and empirical tests of asset pricing models. The important role of asset return predictability for long-term investors is discussed and critically evaluated. The subject highlights typical biases that may prevent market participants from behaving optimally. The subject lays the foundation for a successful research essay in the fields of portfolio choice and asset pricing.
Intended learning outcomes
On successful completion of this subject students should be able to:
- Put into practice commonly used techniques of static and dynamic portfolio choice;
- Critically evaluate the performance of investment managers
- Understand the implications of return predictability for long-term investors;
- Question the empirical evidence on return predictability;
- Understand the asset pricing implications of portfolio choice models;
- Test whether observed asset prices are consistent with asset pricing theory;
- Recognize and avoid common behavioural biases in the context of investments.
High level of development: written communication; interpretation and analysis; critical thinking.
Moderate level of development: collaborative learning; problem solving; team work; application of theory to practice; accessing data and other information from a range of sources.
Some level of development: oral communication; statistical reasoning; synthesis of data and other information; evaluation of data and other information; use of computer software.
Last updated: 11 February 2021