IE444 Operations Research in Finance Fall 2010

Instructor: M. C. Pinar
Room: 305
Office Hours:  TBA.
Reference Material:
          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.


          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)