MS&E 242
Investment Science
Professor: Kay Giesecke, giesecke@stanford.edu
Course Assistant: Dmitry Smelov, dsmelov@stanford.edu
Synopsis: We live in an uncertain world. Every day, we need to make decisions about alternatives
whose consequences cannot be predicted with certainty. Here are a few examples:
•
•
•
You have saved 2,000 dollars from your summer internship. Should you put it under your
mattress, buy a Certificate of Deposit, Apple stock or an S&P 500 index fund?
You manage a mutual fund specializing in technology stocks. Which proportion of the
fund's total assets should you invest in each of the stocks recommended by your analysts?
You work for a venture capital firm that wants to exit an investment. How can you
compute the fair value the firm's share in the venture?
In each of these situations, you need to commit resources (time, money, effort, etc.) in the face of
uncertainty about the future. This course develops concepts and tools to address these types of
situations. The focus is on basic principles and how they are applied in practice. No prior
knowledge of finance required. A basic preparation in mathematics (probability, statistics, and
optimization) is desirable; however many technical concepts and tools will be reviewed in the
course. The course is appropriate for engineering or science students wishing to apply their
quantitative skills to develop a basic understanding of financial modeling and markets.
The following topics will be covered:
1.
2.
3.
4.
5.
6.
7.
Time is money: understand basic interest rates
Evaluating investments: present value and internal rate of return
Fixed-income markets: bonds, yield, duration, portfolio immunization
Term structure of interest rates
Measuring risk: volatility and value at risk
Designing optimal security portfolios
The capital asset pricing model
This 8-week hybrid course will employ both virtual and in-person dimensions for which students
are responsible, and is only open to students who will be on-campus this summer (residential or
commuting students). Course requirements include:
•
•
•
Attending a virtual lecture per week. A lecture (which comes in several sections) lasts for
approximately 1.5 hours. Lectures for each week will be available for viewing at the
VentureLab platform (http://venture-lab.org/MSandE242/) on Monday and must be
viewed by Wednesday 10am.
Weekly Review Sessions with instructor, Wednesday 10 to 11am (Room TBA). During
this session, the instructor will review key concepts and answer questions related to the
material covered in the weekly lecture.
Two course projects involving 3-4 students.
•
•
•
•
Required weekly readings (see course text information below).
Required weekly homework assignments.
Weekly CA section (Duration: 1hr 30min; Fridays, Room TBA). During this section,
students will be able to discuss the assignments and team projects with the CA.
Final Exam.
Required Course Text: The lecture material will heavily draw from Investment Science by David
G. Luenberger, Oxford University Press, 1998. It is recommended that students buy this book.
Prerequisites: MS&E 120, ENGR 60, Math 51. Calculus, Probability, and Optimization.
Students should be well versed in multivariable differential and integral calculus, including
Lagrange multipliers and the theory of constrained optimization. Students should also know
probability with a single and multiple random variables. Familiarity with Excel, Matlab or
Mathematica etc. is helpful.
Homework: Students may use financial calculators, spreadsheets, or other computational tools to
solve homework problems. However, all answers must be clearly justified.
Questions regarding homework grading must be written down and submitted along with the entire
homework assignment. Any resubmission of the homework will result in the entire homework
assignment being regraded. This means that your score after regrading can be above or below
your original score. Regrading requests will only be accepted within one week of the date of
return of the graded assignment.
Project: There will be two course projects involving teams of 3-4 students. Students arrange
their own teams. Project details will be handed out during the quarter.
Final Exam: There will be a final in-class exam. Calculators are allowed in the exam, but
spreadsheet programs are not. Regrading requests will only be accepted within one week of the
date of return of the exam and must be written down. The entire exam will be regraded, hence
your score after regrading may be above or below your original score.
Grading: The weights for grading are Homework 30%, Projects 40%, Final 30%.
Honor Code: We expect the students to create an environment in which honor code violation is
not to be tolerated. For the exam, this means all work must be done individually. For homework,
students may consult with the CA and with other students, but must write up solutions
independently based on their own understanding.
Students with documented disabilities: Students who have a physical or mental impairment that
may necessitate an academic accommodation or the use of auxiliary aids and services in a class
must initiate the request with the Disability Resource Center (DRC). The DRC will evaluate the
request along with the required documentation, recommend appropriate accommodations, and
prepare a verification letter dated in the current academic term in which the request is being
made. Please contact the DRC as soon as possible; timely notice is needed to arrange for
appropriate accommodations. The DRC is located at 123 Meyer Library (phone 723-1066 Voice;
725-1067 TTY).