Risks, Values and Prices in Finance, Lecture Notes by S. Zhang.
Investment Science, by D.G.
Luenberger, Oxford University Press (recommended only)
General information
The course aims to familiarize students with basic quantitative tools
used in modern finance. The student
intending to take the course should have a background in optimization
at the level
of IE303
and elementary probability as well as familiarity with engineering
economics concepts. There will be homework
assignments
requiring use of XPRESS-MP and/or GAMS and/or MATLAB packages.
There is
no textbook. The instructor will provide hand-outs in class and in MOODLE.
Topics
1.
Expected Utility and Risk Aversion, Risk Premia and Portfolio Choice (1 week)
2. Mean-Variance Analysis,
Mathematics of the Efficient Frontier, Portfolio separation, Efficient Frontier
with a Riskless Asset (3 weeks)
3. The CAPM Model,
Arbitrage, Market Equilibrium, Linear Factor Models. (1 week)
4. Market Completeness,
Arbitrage and State Pricing, Risk-Neutral Probabilities.
(2 weeks) Midterm examination
5. Basics of derivative pricing (2
weeks) (chapter
2 of Zhang)
6. Option pricing models, Binomial Model, American Options,
(2 weeks)(chapter
4 of Zhang)
7. Risk
measures VaR and CVaR (2 weeks, reference: relevant parts of
Tutuncu and Cornuejols' notes above)
8. Bond Portfolios, Duration and Convexity.
(1 week, reference: Nielsen's notes above)
Homeworks
will be assigned in MOODLE.
Grading
Homeworks:
30 %
Midterm
examination (TBA, in class, closed notes):