Investment Theory and Applications

In this course, students explore the relationship between investment risks and returns and gain financial tools that portfolio managers use to analyze data and make informed investment decisions. We begin with the investment environment, various asset classes and financial instruments, and the mechanism of securities trading and investment funds, including mutual fund, closed-end, and exchange-traded funds. We then analyze historical data of equities and US Treasurysecurities over several years to assess investment risks. The effect of diversification by allocating capital to assets carrying risky and risk-free assets is studied, optimal risky portfolios are constructed, and single index models are analyzed extensively. Last, we explain sources of stock returns with the Capital Asset Pricing Model (CAPM), examine market equilibrium, and introduce the efficient market hypothesis(EMH), technical analysis, and behavioral finance as alternatives to the EMH.