Course Description: We study the theory of investments, and particularly portfolio management in this course. We discuss the following topics: the structure and functioning of securities markets; principles of portfolio construction; models of the tradeoff between risk and expected return, factor models of returns, transaction costs, short selling, statistical analysis of investment opportunities, and measurement of the performance of investment managers. This course relies on mathematical statistics.

David Brown

Professor
Finance

david.p.brown@wisc.edu
4291 Grainger Hall

Learning Outcomes

You may have enrolled in this course either because your program of study requires you to do so, or because you wish to learn about investments, or for both of these reasons. Independently of your reasons for enrollment, I sincerely hope that you will be a better investor after you complete this course. You will study the theory of investments during the coming semester, but you will also learn much that will help you later in life as either an individual managing your own financial plan, or as a professional investor working on behalf of others. You will learn, for example, how the stock market works, how the business cycle affects your financial welfare, how to choose between good and bad mutual funds, how to extract information the financial markets, and how to tell if your overall investment portfolio is right for you.

After completing the course Finance 320, Investment Theory, students will be able to:

Explain the roles of financial markets in a society of free individuals, and will be able to explain how the ownership and trading of financial securities, including stocks and bonds, allow individuals to improve their welfares.
Explain the role of randomness (uncertainty) as a fundamental characteristic of financial market outcomes, and will be able to explain why it is difficult to distinguish skill from luck for managers of mutual funds and other investment products.
Identify and to characterize optimal (best) portfolios in theory, and to explain both why and how these portfolios differ across investors with different personal needs and characteristics. Students will also be able to explain how to invest in optimal portfolios in practice using mutual funds or using other financial securities.
Explain the concept of equilibrium of financial markets, and to identify the characteristics of security prices that are defined by this concept. In particular, students will be able to explain the roles of risk and illiquidity as characteristics of securities that determine prices in equilibrium.
Describe how the characteristics of the participants in financial markets (forward looking, skillful and competitive) cause financial-market prices in theory to be informationally efficient, and to explain how prices in these markets behave. Students will also be able to explain why financial-market prices in practice may not be efficient, and to give historical examples of bubbles and market anomalies that are inconsistent with efficiency.
Explain the concept of present value of future cash flows, and will be able to cite alternative methods to estimate the value of a security. Students will demonstrate their understanding by calculating present values for stocks and bonds.