The goal of this page is to make us familiar with the theory and empirical evidence related to investment. Discussion will include fundamentals of security and portfolio analysis. Topics emphasize on stocks, but other investments such as fixed income securities and financial derivatives will also be considered.
Understanding the principles of investment management requires a solid grounding in statistics. Familiarity with statistics should extend through covariance, correlation, and regression analysis.
William Sharpe, Gordon J. Alexander, Jeffrey V. Bailey. 2003. Investment. 7th Edition. Prentice-Hall International Edition.
Zvi Bodie, Alex Kane, and Alan Marcus. 2001. Investments. Fifth Edition. Irwin/ McGrawHill Publishing.
Peter Bernstein. 1992. Capital Ideas. Free Press.
Robert Haugen. 1999. The New Finance: The Case Against Efficient Markets. Second Edition. Prentice Hall.
Optimal Portfolio Theory, so called Modern Portfolio Theory, is a theory on how risk-averse investors can construct portfolios to optimize or maximize expected return based on a given level of market risk, emphasizing that risk is an inherent part of higher reward. According to the theory, it’s possible to construct an “efficient frontier” of optimal portfolios offering the maximum possible expected return for a given level of risk. This theory was pioneered by Harry Markowitz in his paper “Portfolio Selection,” published in 1952 by the Journal of Finance.
There are four basic steps involved in portfolio construction: