INVESTMENT PORTFOLIO MANAGEMENT
Course Outline
Faculty: Economics
Year: 2013/14
Course name: Investment Portfolio Management
Level: Bachelor, 4 year
Language of instruction: English
Period: Module 3
Workload: 32 hours
Credits: 3
Extended course name: Investment Portfolio Management Short name: IPM
Course Teacher and Contact Details:
Associate Prof. Elena Buyanova, ebuyanova@hse.ru; bujanova@mail.ru
Course Description
This course provides a rigorous introduction to the fundamentals of modern financial analysis
and applications to business challenges in valuation, risk analysis, and basic security analysis and
investment management. The three major sections of the course are:
(A) an introduction to the financial system, the financial challenges firms and households face;
(B) valuation of stocks, bonds;
(C) methods for incorporating risk analysis into valuation models, including portfolio theory,
mean-variance optimization, the Capital Asset Pricing Model and APT.
Course Objectives
After completing the course the student will understand and be able to:
-
Pricing stocks and bonds
Measuring risk
Managing risk
Build up portfolio investment
Teaching methods
The following methods and forms of study are used in the course:
- Lectures
- Classes
- Home reading
- Self-study
- Exam assignment
Reading Material
Main readings:
1. Brealey, Richard, Stewart Myers, and Franklin Allen. Principles of Corporate Finance.
9th ed. New York, NY: McGraw Hill, 2007. ISBN: 9780071266758.
Additional Readings (not required):
1. B. Malkiel, A Random Walk Down Wall Street, 2007. – This best-selling introduction to
investing is now in its 9th edition and as popular as ever because of its entertaining style
and sage advice. This is a great way to ease into financial markets, particularly for those
who are not financially inclined.
2. P. Bernstein, Capital Ideas, Free Press, 1993. – Bernstein is one of the most wellrespected and influential practitioners in the financial industry, and the founding editor of
the Journal of Portfolio Management. This is a lively and beautifully written account of
the most important ideas in academic finance, many of which were developed at MIT in
the 1960’s and 1970’s.
3. Wall Street Journal. – Often called the diary of financial markets, the Journal is still the
leading business publication in the world and familiarity with its various columns,
sections, and op-ed pieces is a must for any serious finance professional.
4. Z. Bodie, A. Kane, and A. Marcus, Investments, 7th edition, Irwin/McGraw Hill, 2008. –
BKM focus exclusively on capital markets. They provide a more rigorous and thorough
analysis of investments than Brealey, Myers, and Allen.
5. Bernstein, P., 1993, Capital Ideas. New York: Free Press.
6. Lo, A., 1999, “The Three P’s of Total Risk Management”, Financial Analysts Journal 55,
13–26.
7. Malkiel, B., 1996, A Random Walk Down Wall Street. New York: W. W. Norton and
Company.
8. Lefevre, E., 2006, Reminiscences of a Stock Operator. New York: John Wiley & Sons.
9. Malkiel, B., 1996, A Random Walk Down Wall Street: Including a Life-Cycle Guide to
Personal Investing. New York: W.W. Norton.
10. Brennan, M. and E. Schwartz, 1977, “Savings Bonds, Retractable Bonds and Callable
Bonds”, Journal of Financial Economics5, 67–88.
11. Brown, S. and P. Dybvig, 1986, “The Empirical Implications of the Cox, Ingersoll, Ross
Theory ofthe Term Structure of Interest Rates”, Journal of Finance41,617–632.
12. Campbell, J., 1986, “A Defense for the Traditional Hypotheses about the Term Structure
of Interest Rates”, Journal of Finance36, 769–800.
13. Cox, J., Ingersoll, J. and S. Ross, 1981, “A Re-examination of Traditional Hypotheses
About the Term Structure of Interest Rates”, Journal of Finance36, 769–799.
14. Cox, J., Ingersoll, J. and S. Ross, 1985, “A Theory of the Term Structure of Interest
Rates”, Econometrica53, 385-–407.
15. Heath, D., Jarrow, R., and A. Morton, 1992, “Bond Pricing and the Term Structure of
Interest Rates: A New Methodology for Contingent Claims Valuation”, Econometrica60,
77-–105.
16. Ho, T. and S. Lee, 1986, “Term Structure Movements and Pricing Interest Rate
Contingent Claims'', Journal of Finance41, 1011–1029.
17. Jegadeesh, N. and B. Tuckman, eds., 2000, Advanced Fixed-Income Valuation Tools.
New York: John Wiley & Sons.
18. McCulloch, H., 1990, “U.S. Government Term Structure Data”, Appendix to R. Shiller,
“The Term Structure of Interest Rates”, in Benjamin M. Friedman and Frank H. Hahn
eds. Handbook of Monetary Economics. Amsterdam: North-Holland.
19. Sundaresan, S., 1997, Fixed Income Markets and Their Derivatives. Cincinnati, OH:
South-Western College Publishing.
20. Tuckman, B., 1995, Fixed Income Securities: Tools for Today's Markets. New York:
John Wiley & Sons.
21. Vasicek, O., 1977, “An Equilibrium Characterization of the Term Structure”, Journal of
Financial Economics 5, 177–188.
22. Harris, L., 2002, Trading and Exchanges: Market Microstructure for Practitioners. New
York: Oxford University Press.
23. Lefevre, E., 2006, Reminiscences of a Stock Operator. New York: John Wiley & Sons.
24. Malkiel, B., 1996, A Random Walk Down Wall Street: Including a Life-Cycle Guide to
Personal Investing. New York: W.W. Norton.
Grading
ACTIVITIES
Class participation
Midterm exam
Final exam
PERCENTAGES
15%
30%
55%
Course Outline
Class 1. Introduction
a. Fundamental Challenges of Finance
b. The Framework of Financial Analysis
c. Time and Risk
d. Six Fundamental Principles of Finance
Main readings:
Brealey, Myers, and Allen Chapters 1–2
Supplementary readings:
1. Bernstein, P., 1993, Capital Ideas. New York: Free Press.
2. Lo, A., 1999, “The Three P’s of Total Risk Management”, Financial Analysts Journal 55,
13–26.
3. Malkiel, B., 1996, A Random Walk Down Wall Street. New York: W. W. Norton and
Company
Class 2. Fixed-Income Securities.
a. Valuation
b. Valuation of Discount Bonds
c. Valuation of Coupon Bonds
d. Measures of Interest-Rate Risk
e. Corporate Bonds and Default Risk
f. The Sub-Prime Crisis
Main readings:
Brealey, Myers, and Allen Chapters 23–25
Supplementary readings:

1. Brennan, M. and E. Schwartz, 1977, “Savings Bonds, Retractable Bonds and Callable
Bonds”, Journal of Financial Economics5, 67–88.
2. Brown, S. and P. Dybvig, 1986, “The Empirical Implications of the Cox, Ingersoll, Ross
Theory ofthe Term Structure of Interest Rates”, Journal of Finance41,617–632.
3. Campbell, J., 1986, “A Defense for the Traditional Hypotheses about the Term Structure
of Interest Rates”, Journal of Finance36, 769–800.
4. Cox, J., Ingersoll, J. and S. Ross, 1981, “A Re-examination of Traditional Hypotheses
About the Term Structure of Interest Rates”, Journal of Finance36, 769–799.
5. Cox, J., Ingersoll, J. and S. Ross, 1985, “A Theory of the Term Structure of Interest
Rates”, Econometrica53, 385-–407.
6. Heath, D., Jarrow, R., and A. Morton, 1992, “Bond Pricing and the Term Structure of
Interest Rates: A New Methodology for Contingent Claims Valuation”, Econometrica60,
77-–105.
7. Ho, T. and S. Lee, 1986, “Term Structure Movements and Pricing Interest Rate
Contingent Claims'', Journal of Finance41, 1011–1029.
8. Jegadeesh, N. and B. Tuckman, eds., 2000, Advanced Fixed-Income Valuation Tools.
New York: John Wiley & Sons.
9. McCulloch, H., 1990, “U.S. Government Term Structure Data”, Appendix to R. Shiller,
“The Term Structure of Interest Rates”, in Benjamin M. Friedman and Frank H. Hahn
eds. Handbook of Monetary Economics. Amsterdam: North-Holland.
10. Sundaresan, S., 1997, Fixed Income Markets and Their Derivatives. Cincinnati, OH:
South-Western College Publishing.
11. Tuckman, B., 1995, Fixed Income Securities: Tools for Today's Markets. New York:
John Wiley & Sons.
12. Vasicek, O., 1977, “An Equilibrium Characterization of the Term Structure”, Journal of
Financial Economics 5, 177–188.
Class 3. Equities
a. The Dividend Discount Model
b. DDM with Multiple-Stage Growth
c. EPS and P/E
d. Growth Opportunities and Growth Stocks
Main readings:
Brealey, Myers and Allen, Chapter 4
Supplementary readings:

1. Harris, L., 2002, Trading and Exchanges: Market Microstructure for Practitioners. New
York: Oxford University Press.
2. Lefevre, E., 2006, Reminiscences of a Stock Operator. New York: John Wiley & Sons.
3. Malkiel, B., 1996, A Random Walk Down Wall Street: Including a Life-Cycle Guide to
Personal Investing. New York: W.W. Norton.
Class 4. Introduction to Risk and Return
a. Statistical Background
b. Empirical Properties of Stock Returns
c. Anomalies
Main readings:
Brealey, Myers, and Allen Chapters 7, 24.1, 24.4
Supplementary reading:

1. Lefevre, E., 2006, Reminiscences of a Stock Operator. New York: John Wiley & Sons.
2. Malkiel, B., 1996, A Random Walk Down Wall Street: Including a Life-Cycle Guide to
Personal Investing. New York: W.W. Norton.
Class 5-7. Risk Analytics and Portfolio Theory
a. Measuring Risk and Reward
b. Mean-Variance Analysis
c. The Efficient Frontier
d. The Tangency Portfolio
Main readings:
Brealey, Myers, and Allen Chapters 7 and 8.1
Supplementary readings:
1. Bernstein, 1992, Capital Ideas. New York: Free Press.�Bodie, Z., Kane, A. and A.
Marcus, 2005, Investments, 6th edition. New York: McGraw-Hill.
2. Brennan, T., Lo, A. and T. Nguyen, 2007, Portfolio Theory: A Review, to appear in
Foundations of Finance.
3. Campbell, J., Lo, A. and C. MacKinlay, 1997, The Econometrics of Financial Markets.
Princeton, NJ: Princeton University Press.
4. Grinold, R. and R. Kahn, 2000, Active Portfolio Management. New York: McGraw-Hill.
Class 8-9. The CAPM and APT
a. Review of Portfolio Theory
b. The Capital Asset Pricing Model
c. The Arbitrage Pricing Theory
d. Implementing the CAPM
Main readings:
Brealey and Myers and Allen, Chapter 8.2 –8.3
Supplementary readings:
1. Bernstein, 1992, Capital Ideas. New York: Free Press.
2. Bodie, Z., Kane, A. and A. Marcus, 2005, Investments, 6th edition. New York: McGrawHill.
3. Brennan, T., Lo, A. and T. Nguyen, 2007, Portfolio Theory: A Review, to appear in
Foundations of Finance.
4. Campbell, J., Lo, A. and C. MacKinlay, 1997, The Econometrics of Financial Markets.
Princeton, NJ: Princeton University Press.
5. Chordia, T., Roll, R. and A. Subrahmanyam, 2000, “Commonality in Liquidity”, Journal
of Financial Economics56, 3–28.
6. Fama, Eugene F., and Kenneth French, 1992, The cross section of expected stock
returns", Journal of Finance47, 427–465.
7. Grinold, R. and R. Kahn, 2000, Active Portfolio Management. New York: McGraw-Hill.
8. Lo, A. and J. Wang, 2006, “Trading Volume: Implications of an Intertemporal Capital
Asset Pricing Model”, Journal of Finance61, 2805–2840.
Class 10. Efficient Markets
a. Powers of Observation
b. Behavioral vs. Rational
c. The Triune Model of the Brain
d. The Adaptive Markets Hypothesis
Main readings:
Brealey Myers and Allen, Chapter 14
Supplementary readings:
1. Lo, A., 1999, “The Three P’s of Total Risk Management”, Financial Analysts Journal 55,
13–26.
2. Lo, A., 2001, “Risk Management for Hedge Funds: Introduction and Overview”,
Financial Analysts Journal 57, 16–33.
3. Lo, A., 2002, “Bubble, Rubble, Finance In Trouble?”, Journal of Psychology and
Financial Markets3, 76–86.
4. Lo, A., 2004, “The Adaptive Markets Hypothesis: Market Efficiency from an
Evolutionary Perspective”, Journal of Portfolio Management30, 15–29.
5. Lo, A. 2005, “Reconciling Efficient Markets with Behavioral Finance: The Adaptive
Markets Hypothesis”, Journal of Investment Consulting7, 21–44.
6. Lo, A. and C. MacKinlay, 1999, A Non-Random Walk Down Wall Street. Princeton, NJ:
Princeton University Press.
7. Lo, A. and D. Repin, 2002, “The Psychophysiology of Real-Time Financial Risk
Processing”, Journal of Cognitive Neuroscience14, 323–339.
8. Maloney, M. and H. Mulherin, 2003, “The Complexity of Price Discovery in an Efficient
Market: The Stock Market Reaction to the Challenger Crash”, Journal of Corporate
Finance9, 453–479.
9. Farmer, D. and A. Lo, 1999, “Frontiers of Finance: Evolution and Efficient Markets”,
Proceedings of the National Academy of Sciences96, 9991–9992.
Time allocation
Topic
Class 1. Introduction
Contact hours Self-study
Lectures Seminars
2
0
4
Class 2. Fixed-Income Securities
Class 3. Equities
2
2
2
2
8
8
Class 4. Introduction to Risk and Return
Class 5-7. Risk Analytics and Portfolio Theory
2
6
2
4
8
20
Class 8-9. The CAPM and APT
4
2
12
Class 10. Efficient Markets
2
0
4
Totally
20
16
64