Financial Markets

• Financial Markets

Financial Markets Core Courses

Overview

This is a core class that offers the basic concepts and tools necessary to understand how financial markets work, and how financial instruments are used for sound investment decisions. This knowledge is especially important in the present environment - in the aftermath of the Financial Crisis of 2007-2009 - and during the ongoing debt crisis in Europe. Topics covered include the following: models of risk and return; time value of money and net present value; market efficiency, anomalies, and behavioral finance; asset allocation and modern portfolio theory; bonds and interest rates, forwards and futures, options; the structure and performance of the money management industry: pension funds, mutual funds, hedge funds. Effort will be made to relate the course material to current financial issues and problems relevant to practitioners.

Learning outcomes

When you complete this course, you should be able to understand:

• The basic tradeoff between risk and (expected) return, and how it applies to various types of financial instruments: stocks, bonds, futures, options.
• The time value of money (TVM) and net present value (NPV), and their connection to the discount rate (cost of capital), and the risk premium of a financial asset.
• The two main models of asset pricing: the Capital Asset Pricing Model (CAPM) and Arbitrage Pricing Theory (APT). How do we compute the cost of capital/risk premium?
• Market efficiency and arbitrage. Are markets efficient, or are they dominated by irrational investors? Are prices predictable?
• Diversification: how to select a portfolio of securities that maximizes return while minimizing risk. How does diversification work in practice?
• Financial instruments: bonds, stocks, currencies, and derivatives (futures, options, swaps). How are these related to interest rates, risk hedging, speculation, or volatility?
• The money management industry and its key players: pension funds, mutual funds, and hedge funds. Do they have any superior investment skills?