Active Portfolio Management a Quantitative Approach for Producing Superior Returns and Controlling Risk

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					                       Economics of Risk Management I ECGA XXXX

Fall 2009
Department of Economics
Prof. Johanna Francis, Erick Rengifo
Office: Francis: RH Dealy Hall E. Rengifo RH Dealy Hall E513
Email: ajofrancis@fordham.edu, rengifomina@fordham.edu
Office Hours: By appointment
Website:

This course serves as a solid introduction to the basic building blocks of risk management. The
financial and economic theories underpinning modern risk management are reviewed with
particular attention to utility theory and the maximization of utility under uncertainty as well as
theories of interest and asset pricing. Essential elements of probability and statistics are covered
along with their application to risk management techniques, including Monte Carlo simulations
and VaR (value at risk). The characteristics of key financial cash market and derivative
instruments and their markets – fixed income, equity, and currencies - are introduced.


Useful background:

      Mathematics: A solid undergraduate background in calculus, basic probability, and
                    statistics.
      Economics: A basic understanding of microeconomic and macroeconomic theory is
                    assumed.
      Finance:     A basic understanding of finance theory, financial instruments, and the
                    structure of markets is assumed.


Exams and exercises: There will be one final exam during the term. In addition, graded exercises
and quizzes will be assigned periodically (possibly weekly) and discussed in class.

Computer programs: The main software package to be used is Excel.

Grading: The final grade is based on the following:

       Class participation                    10%
       Exercises and quizzes                  40%
       Final                                  50%

Grades are earned according to the following point scale: 95 – 100 = A; 90 – 94 = A-; 87 – 89 =
B+; 83 – 86 = B; 80 – 82 = B-; 77 – 79 = C+; 73 – 76 = C; 70 – 72 = C-; 60 – 69 = D; grade <
60 = F



Topics                                      Lecture Outline
  1       Utility theory, the maximization of utility under uncertainty, theories of interest
  2       Portfolio theory, the CAPM, and Arbitrage Pricing Theory

                                                 1
   3      Bond basics and the term structure of interest rates
   4      Discount factors, spot rates, forward rates, bond prices and sensitivities
   5      Forwards, futures, and basic hedging I
   6      Forwards, futures, and basic hedging II
   7      Interest rate futures, swaps, and stock options
   8      Binomial trees and an introduction to the B-S-M model
   9      Basic VaR and Monte Carlo simulations
  10      Topics of Ethics in economics and Risk management
  11      Final Examination


References:*

   1. Milton Friedman, Price Theory, 2nd Edition (New York:Aldine de Gruyter, 1976)

   2. Noel Amenc and Veronique Le Sourd, Portfolio Theory and Performance Analysis (West
      Sussex, England: Wiley, 2003).

   3. Richard Grinold and Ronald Kahn, Active Portfolio Management: A Quantitative
      Approach for Producing Superior Returns and Controlling Risk, 2nd Edition (New York:
      McGraw‐ Hill, 1999).

   4. René Stulz, Risk Management & Derivatives (Florence, KY: Thomson South-Western,
      2002).

   5. Hull, Options, Futures, and Other Derivatives, 7th Edition.

   6. Frank Fabozzi, The Handbook of Fixed Income Securities, 7th edition (New York:
      Mcgraw Hill, 2005)

   7. Bruce Tuckman, Fixed Income Securities, 2nd Edition (Hoboken, NJ: Wiley & Sons,
      2002).

       * Additional material may be assigned at the instructor’s discretion

Useful Weblinks

http://www.markit.com/information/products.html
http://www.defaultrisk.com/
http://www.isda.org/
http://www.bis.org/
http://www.moodyskmv.com/
http://www.sandp.com
http://www.dtcc.com




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