1 ATHENS UNIVERSITY OF ECONOMICS AND BUSINESS Masters in Business Administration (MBA) Offered by the Departments of: Business Administration & Marketing and Communication PORTFOLIO ANALYSIS AND MANAGEMENT (ΑΝΑΛΥΣΗ ΚΑΙ ΙΑΧΕΙΡΙΣΗ ΧΑΡΤΟΦΥΛΑΚΙΟΥ) Lecturer: Office: Tel: Professor Manolis G. Kavussanos 5 th floor, Antoniadou Wing, Patission 76, Athens , EDUCATIONAL AIM The course aims to provide a good understanding of the principles of portfolio theory and investment management. Both theoretical and practical aspects of risk and return measurement for portfolios and individual securities are examined. In the process, the concepts of diversification, portfolio selection, construction and evaluation are analysed. Various equilibrium models of asset prices, against which market prices of securities are compared, are put forward. Portfolio performance evaluation is part of the course. EDUCATIONAL OBJECTIVES Introduce students to the nature and role of portfolio theory in investment analysis. Familiarize students with the portfolio selection and management process. Examine recent developments in the theory and practice of portfolio management. The course will make it possible for participants: To acquire a clear understanding of portfolio risk and return characteristics, use of diversification for risk reduction, determination of efficient and optimal portfolios with and without short-selling restriction, evaluation of portfolio performance and role of asset pricing models for pricing securities. To be able to seek positions in the asset management, research or equity (fixed income) analysis departments of large financial institutions. LEARNING OUTCOMES On completing the course participants will: Have an understanding of the investment process, starting from risk and return characteristics of individual assets and portfolios through to optimal portfolio selection and performance evaluation. Understand the determinants of asset prices, asset pricing models and implications of their assumptions on contemporary investment management process.
2 Be able to address and tackle issues such as: * Estimation of return, systematic and non-systematic risk of a portfolio * Identification of efficient portfolios * Assessing risk/return preferences of investors and identification of optimal portfolios through the use of utility theory * Application of portfolio performance measures in portfolio evaluation process. * Forming and developing diversification strategies to hedge market risk and reduce company specific risk of a portfolio. * Pricing assets by using asset pricing models Be able to contribute to the shaping, implementation and evaluation of a portfolio management strategy. THEMATIC AREAS Thematic area 1 Introduction to investments Utility function. Portfolio risk and return Thematic area 2 Financial Markets Financial Institutions The Investment Environment Thematic area 3 Market Efficiency Thematic area 4 Markowitz: The concept of diversification and the efficient frontier Thematic area 5 Markowitz: Riskless lending and borrowing and the efficient set Thematic area 6 Capital Asset Pricing Model (CAPM) Thematic area 7 Single Index Model (SIM) Thematic area 8 Arbitrage Pricing Theory (APT) Thematic area 9 Portfolio performance evaluation Thematic area 10 International diversification BRIEF DESCRIPTION OF THEMATIC AREAS Introduction to investments Reasons for investing, Time value of money, Compounding, Discounting, Capital budgeting techniques, NPV, IRR, Examples of NPV and IRR, Investment Environment, Financial assets, Money markets vs. capital markets, Defining risk and return, Risk and return trade-off, Stock market indices, Financial Markets and their characteristics Utility function. Portfolio risk and return Defining the utility function, Diminishing marginal utility, Diminishing marginal substitutability, Expected utility model under uncertainty, Risk aversion, risk
3 seeking and risk neutrality, Indifference curves, Quadratic utility function, Absolute and relative risk aversion, Mean-variance (Markowitz) approach for evaluation of risky securities, Calculation of the expected return of a portfolio, Calculation of the standard deviation of a portfolio, Covariance, Correlation coefficient, Variance-Covariance matrix Concept of diversification and efficient frontier Diversification and correlation between two assets, Risk reduction through portfolio formation, Diversification and number of assets in the portfolio, Unique risk diversification vs. market risk averaging, Efficient set theorem, Minimum variance set, Minimum variance set vs. efficient set, Reasons for concave shape of the efficient frontier, Selection of the optimal portfolio Riskless lending and borrowing and the efficient set Definition of the risk-free asset, Assumption of the same risk-free borrowing and lending rate, Investing in a risk-free asset and risky asset, Investing in a risk-free asset and a risky portfolio, Determining the efficient frontier when risk-free lending is allowed, Identifying optimal portfolio when risk-free lending is allowed, Introduction of risk-free borrowing, Determining the efficient set and selection of the optimal portfolio in the presence of risk free lending and borrowing, Efficient set under different borrowing and lending rates Capital Asset Pricing Model (CAPM) Assumptions of the CAPM, Implications of the assumptions, Defining the market portfolio and problems associated with it, Definition and derivation of Capital Market Line (CML), Definition and derivation of Security Market Line (SML), CAPM equation, Identification of overvalued and undervalued securities, Practical issues in CAPM: estimation of the SML, estimation of beta, reality of the assumptions Single Index Model (SIM) Single index model vs. Markowitz model, Assumptions of the model, Formulating single index model, Beta, Estimating betas and intercepts Return and risk of a security in the single index model, Return and risk of a portfolio in the single index model, single index model and concept of diversification, Inputs required in the single index model vs. inputs required in the Markowitz model Asset Pricing Theory (APT) Assumptions of APT and comparison with CAPM, Arbitrage process, Single factor model, Arbitrage portfolios, Equilibrium asset pricing equation, Two factor model, Multiple factor model, Identification of factors in APT, A synthesis of CAPM and APT, Relationship between betas and factor sensitivities, Is CAPM or APT more accurate asset pricing model Portfolio performance evaluation Identifying the benchmark portfolio, Sharpe s Reward to Variability Ratio (RVAR), derivation and interpretation, Treynor s Reward to Volatility ratio (RVOL), derivation and interpretation, Appropriateness of RVAR and RVOL in the case of non-perfect diversification, Jensen s portfolio performance measure, derivation and interpretation, Ranking of portfolios using the three measures, Comparisons and limitations of the three measures International diversification The case for international diversification, International stock exchange markets, Emerging markets, Risk from foreign investing: domestic risk vs. foreign risk, Exchange rate (currency) risk, Management of the exchange rate risk, Correlation between international markets, Constraints and costs of international investing
4 READING ΜΑTERIAL Sharpe, W. F, Alexander, G. J & Bailey, J. V: Investments, Prentice-Hall Jones, C. P, Investments, Analysis and Management, Wiley Fabozzi, F. J, Investment Management, Prentice Hall Elton E. J. and Gruber M. J, Modern Portfolio Theory and Investment Analysis, John Wiley & Sons. In addition to the above, it is recommended to read: The finance related journals, such as: Journal of Finance, Review of Financial Studies, Journal of Financial and Quantitative Analysis, Journal of Financial Economics, Financial Analysts Journal, Journal of Applied Corporate Finance, Journal of Portfolio Management, Journal of Investment Management, Financial Management, Journal of Futures Markets, Journal of Derivatives, etc. Financial periodicals/papers, which include: Financial Times, Economist, Wall Street Journal, Ναυτεµπορική, Express, Χρηµατιστήριο, Ηµερησία, Κέρδος, Ισοτιµία (Εβδοµαδιαία), Καθηµερινή, Ένθετο Βήµατος, Οικονοµικός Ταχυδρόµος. Use Databases for data collection, such as: Reuters, Bloomberg, Datastream, Web pages of Companies and Stock Exchanges. Below are some publications in the area which may be referred to during the lectures Kavussanos, M.G., Alexakis, P. and Vasila, A., The road to financial integration in the Eurozone, in Gortsos, C. and G. Provopoulos eds (2004), The new European Financial Environment: Trends and Prospects, Hellenic Bankers Association, p , Sakoulas publications, Athens, with Alexakis, P. and Vasila, A. in Greek. Kavussanos, M.G., A. Juell-Skielse and M. Forrest, International Comparison of Market Risks across Shipping Related Industries, Maritime Policy and Management, Vol. 30, No 2, , Kavussanos, M.G., A. Arkoulis and S. Marcoulis, Macroeconomic factors and international industry returns, Applied Financial Economics, 2002, 12, Kavussanos, M.G. and S. Marcoulis, 'Risk and Return in Transportation and other US and Global Industries', Kluwer Academic Publishers, Kavussanos, M.G. and A. Alizadeh, 'Efficient Pricing of Ships in the Dry Bulk Sector of the Shipping Industry', Maritime Policy and Management, Vol. 29, No 3, , Kavussanos, M.G. and K. Phylaktis, Trading Systems and the relationship between stock returns and trading activity, Greek Economic Review, Vol. 21, No 1, pp , Spring Kavussanos, M.G. and E. Dockery, A Multivariate test for stock market efficiency: The case of ASE, Applied Financial Economics, Vol. 11, No 5, pp , Kavussanos, M.G. and S. Marcoulis, The stock market perception of industry risk and macroeconomic factors: The case of the US water transportation industry versus other transport industries, International Journal of Maritime Economics, Vol. 2, No 3, pp , July-September Kavussanos, M.G. and S. Marcoulis, The stock market perception of industry risk through the use of a multifactor model, International Journal of Transport Economics, Vol. XXVII, No. 1, pp , February Kavussanos, M.G., K. Phylaktis and Manalis, G., Price limits and the stock market volatility in the Athens Stock Exchange, European Financial Management, Vol. 5,1, pp , March 1999.
5 Kavussanos, M.G. and S. Marcoulis, Beta comparisons across industries - A water transportation industry perspective, Maritime Policy and Management, Vol. 25, No 2, pp , Kavussanos, M.G. and S. Marcoulis, The stock market perception of industry risk and microeconomic factors: The case of the US water transportation industry versus other transport industries, Transportation Research, Part E (The Logistics and Transportation Review), Vol. 33, No. 2, pp , July Kavussanos, M.G. and S. Marcoulis, Risk and return of US water transportation stocks over time and over bull and bear market conditions, Maritime Policy and Management, 1997, Vol. 24, No. 2, pp Kavussanos, M.G. K. Phylaktis and G. Manalis, Stock prices and the flow of information in the Athens stock exchange, European Financial Management, 1996, Vol. 2, No 1, pp Kavussanos, M.G. and E. Dockery, Testing the efficient market hypothesis using panel data, with application to the Athens stock exchange, Applied Economic Letters, February 1996, Vol. 3, Issue 2, pp
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