master of science in finance syllabi - iscte /...

14 July 2011

Master of Science in Finance

Syllabi

CORPORATE FINANCE 2

CORPORATE VALUATION 4

FUTURES, FORWARDS AND SWAPS 7

FINANCIAL OPTIONS 9

INVESTMENTS 11

QUANTITATIVE METHODS FOR FINANCE 13

CORPORATE FINANCE STRATEGY (ELECTIVE) 14

FORECASTING METHODS (ELECTIVE) 16

SEMINARS ON FINANCE PROJECTS (ELECTIVE) 18

INTERNATIONAL FINANCE (ELECTIVE) 20

PORTFOLIO MANAGEMENT (ELECTIVE) 22

RISK MANAGEMENT (ELECTIVE) 25

14 July 2011

Course: Corporate Finance

Professor: Paul Laux

ECTS credits: 6 ECTS

Contact hours: 30 hours

Pre-requisites:

Objectives:

Program:

1. Definitions of corporate finance:

What do financial systems do?

What is corporate finance?

What are the key decisions in corporate finance?

CFA Program Corp Fin Candidate Body of Knowledge (CBOK) 2010

CFA CBOK topics match to decision areas

2. Philosophy & methods

Evaluation Methodology:

General policies

_ Guideline: ISCTE-IUL “curve” policy

– May be deviations to the high side

_ If warranted by very strong class-wide performance

– No deviations to the low side

_ Grading based on a mix of demonstrated knowledge and demonstrated

full-engagement in the learning process

– That means exams count, & participation counts too

Graded course activities & grade weights

_ Midterm exam 25 %

_ Final exam 25% (Exames de primera epoca)

_ Case Prep Questions 35%

– marked based on: lack of good faith effort (6), good faith effort (14)

or standout (18)

– expect 14

– written in groups of four

– group members evaluate each other at conclusion of course, with

grade impact

_ Scientific article Prep Questions 15%

– marked based on: lack of good faith effort (6), good faith effort (14)

or standout (18)

Attendance

_ Missed meeting: Deduct 1/2 point on course grade

_ Two absences may be excused, upon written request and explanation

– BUT only one scientific meeting will be excused

– Additional absences must bear the deduction unless I receive a formal

written request from a Directora do Mestrado em Finanças attesting

to a serious medical emergency or family emergency.

14 July 2011

Second-sitting exam policy (Exames de segunda epoca)

_ Grade depends entirely the exam mark

_ ALL course material is covered, including scientific meeting material in

full

– The second-sitting exam is intended to be substantially more comprehensive,

deeper and more difficult than the standard exams

– This is necessary & fair because the second-sitting exam substitutes

for all class attendance, activities, contributions&demonstrated learning,

as well as the other exams

Teaching Methodology

Observations:

Bibliography:

Back to course list

14 July 2011

Course: Corporate Valuation

Professor: Pedro Inácio



Pre-requisites:

NA

Objectives:

Being able to perform a analysis of the financial statements and reports issued by a company, mainly

assessing its profitability and financial strength;

Knowing how to determine the value of a company (or one of its shares, parts or businesses) according

to the main valuation concepts, methods and models;

Being able to determine the expected gains (or losses) from mergers, acquisitions and reorganization

operations, for the different parties involved in a deal.

Knowing how to read and interpret a technical analysis chart and the main technical indicators

Program:

1 – Financial Statement Analysis

Profitability Analysis. Risk analysis and leverage. Financial health of the company.

(CFA-SS 7, 8, 9 e 10)

2- Valuation Concepts, Methods and Models: Brief Introduction to Technical Analysis. Introduction to

Valuation Methods. Revenue based valuation: dividends, cash flows, future “Economic Value Added”

(EVA – or Residual Income) and “Market Value Added” (MVA). Market based valuation: market

multiples and relative valuation. Other Value Creation Metrics. (CFA SS 14)

3.- Mergers, Acquisitions, and Company Reorganization – Valuation Issues: Sinergy Valuation and the

Control of the Firm Gains and Losses for the parties involved in a M&A deal.


The main evaluation item is the final exam, in which students are allowed to bring a formula summary.

This final exam represents 40% of the grade.

There is also a mid-term exam, representing 30% of the grade.

Finally, there is a case study (team work with 3 to 5 members) on a company valuation and analysis

(see case guide).This case study will represent 30% of the final grade and will be presented in the

classroom.

Students with a final grade higher than 16 may be compeled to attend a special exam in order to

defend their grades

14 July 2011


Classes have mainly a practical content.

Theoretical subjects are presented through small cases and short exercises.

Excel woorksheets are usually used in the solution of those short cases.

Observations:

Case Study Guide

The group should pick preferably a listed company – though a non listed company could also be

analysed – and (after performing a brief financial statement analysis) the group should value the

company shares according to different valuation methods, including DCF valuation (both firm and

equity approaches), the written report should include (whenever possible)

• A brief description of the company and its environment

• A brief financial statement analysis of the last 3 years, comparing the company with its industry

average or with main competitors

• A short comment on the auditors report aimed at finding possible divergences between

accounting and fair value.

• After projecting the next 5 years the value of the company should be assessed through DCF

both firm and equity approaches. Dividends should also be addressed if the company has a

known dividend policy. EVA and MVA should be used to confirm DCF valuation.

• The company should be valued with the market multiples and a relative valuation should be

performed.

• Finally, the group should arrive at a valuation range for the company and justify that choice.

Main data sources for this kind of case analysis usually are:

1) Research reports and Company published information;

2) Market data and market multiples (v.g., P/E, P/CF,.M/BV, etc.) – can be obtained at Bloomberg

or Data Stream (INDEG/ISCTE library) or at web site www.damodaran.com;

3) Company Accounts and Yearly Reports.;

4) Financial Press News;

5) Meetings with Company managers.

Bibliography:

Koller, Goedhart & Wessels – Valuation: Measuring and Managing the Value of Companies. Wiley

Damodaran – Investment Valuation . Wiley

Rappaport – Creating Shareholder Value. Free Press

Stewart - The Quest for Value. Harper & Row

Weston, Mitchell & Mulherin – Takeovers, Restructuring and Corporate Governance. Prentice Hall

Neves, João Carvalho – Análise Financeira: Técnicas Fundamentais, Texto Editores

14 July 2011

Neves, João Carvalho – ABC das Fusões e Aquisições. Ed. IAPMEI

Neves, João Carvalho – Avaliação de Empresas e Negócios. McGraw Hill

Ferreira, Domingos – Fusões, Aquisições e Reestruturações de Empresa (2 volumes). Ed. Sílabo

Brealey & Myers – Princípios de Finanças Empresariais. McGraw Hill

Damodaran – Corporate Finance. Wiley

Damodaran – Damodaran on Valuation. Wiley

Grinblatt & Titman – Financial Markets and Corporate Strategy. McGraw Hill

Ross, Westerfield & Jaffe.- Corporate Finance. Irwin

Back to course list

14 July 2011

Course: FUTURES, FORWARDS AND SWAPS

Professor: António Gomes Mota



Pre-requisites:

Objectives:

At the end of the unit, students should be able:

To identify and understand the derivative portfolio (excluding options);

To understand the differences between organized and over-the-counter markets and the role of

intermediation;

To compute the price of each derivative and understanding the link to the spot markets associated with

each derivative;

To understand the relationship between pricing and arbitrage;

To engage in a trading negotiation in the over-the-counter markets by taking the role of the financial

institution and of the client;

To use each derivative as a speculative and risk management tool;

To identify the innovative vectors associated with each derivative and to apply them to innovative

solutions in risk management problems associated with financing and investment operations and other

corporate operations.

Program:

1. Introduction to derivatives

2. Futures

2.1. Characterization, participants and market organization

2.2. Stock and commodity futures

2.3.1. Characterization and pricing

2.3.2.Risk management and speculation

2.3.3. Brief introduction to interest and currency futures

3. Forwards

3.1. Currency and interest rate forwards (FRA)

3.1.1. Taxonomy and markets

3.1.2. Pricing and arbitrage

3.1.3.Risk management and speculation

3.1.4. Negotiating in the over-the- counter market

4. Swaps

4.1. Interest rate swaps (IRS)

4.1.1. Characterization

4.1.2. Pricing

4.1.3. Risk management

4.1.4. Rate management (fixed vs. floating)

4.1.5. Speculation

4.2. Currency swaps

4.2.1. Characterization

4.2.2. Pricing

4.2.3. Risk management

14 July 2011

5. Derivatives and financial innovation


The evaluation system includes:

Case solving (25%)

Participation in class (5%);

Final Exam (70%)

This global grading system requires a rate of attendance to classes of at least 80%; Otherwise it will fail;

to get approval in the unit the student will have a 2nd

chance final exam.


During the learning-teaching term each student should acquire analytical, information

gathering, according with the established learning outcomes for this unit.

To contribute to the acquisition of these skills, in the contact hours there will be used a

wide variety of teaching methodologies such as theoretical presentations, problem

solving and analysis in class and open class discussions, with an objective of

acquisition of the above mentioned skills.

Observations:

Bibliography:

Back to course list

14 July 2011

Course: Financial Options

Professor: José Carlos Dias



Pre-requisites:

Objectives:

1- Being able to read and interpret the market data of financial options contracts on equities.

2- Knowing how to use options contracts to hedge price risk and market risk.

3- Knowing how to use options to speculate either on the direction of the market or on its volatility.

4- Being able to use the binomial model in option valuation. Knowing how to build an arbitrage strategy

with options.

5- Being able to use the Black & Scholes model in the valuation of options (including their related

alternative formulations).

6- Knowing how to build a delta hedging strategy.

7- Being able to use value options on stock indices, exchange rates and financial futures contracts

8- Being able to valuate financial products with options

Program:

1. Introduction to (financial) Options Terminology; Markets and contracts; Basic positions and payoffs;

Intrinsic and time value.

2. Properties of the option priceExplanatory variables; Arbitrage restrictions; Put call parity.

3. Hedging and Speculation with Options Options’ algebra; P/L profiles.

4. Valuation of financial derivatives in discrete time Binomial model; Replicating portfolio; Equivalent

martingale measure; Risk neutral valuation.

5. Stochastic calculus Brownian Motion; Itô’s lemma and fundamental PDE; Feynman-Kac theorem.

6. Black-Scholes Model

7. Risk-Neutral Valuation Girsanov’s theorem; Change of numeraire.

8. Historical versus implied volatility

9. Merton’s model Options on stocks “with dividends”, on indices, on Exchange rates and on financial

futures.

10. Black’s model (options on futures) Stock versus futures style margining.

11. Greeks and Dynamic Hedging of option contracts

12. American-style options Black’s approximation; Quadratic approximation; Binomial model; Finite

difference schemes.


The final grade will be based on two components:

a) Mid-term exam concerning topics 1-6

(50%).

b) Final exam concerning topics 7-12 (if

mid-term exam grade >= 7.5) (50%) or

concerning all syllabus otherwise (100%).

There will be a second round final exam,

concerning the whole program.


Classes have mainly a practical content.

The classes with be focused on the application of

14 July 2011

stochastic calculus to Finance and, in special, to

the valuation of financial options.

Some basic Excel financial functions and specific

financial options software will also be used in the

solutions of some problems.

Observations:

Bibliography:

Baxter, M., and A. Rennie, 1996, Financial Calculus: An Introduction to Derivative

Pricing, Cambridge University Press.

Björk, T., 2004, Arbitrage Theory in Continuous Time, Oxford University Press, 2nd edition. Hull, J., 2008, Options, Futures and other Derivatives, Prentice Hall, 7th edition.

Shreve, S., 2004, Stochastic Calculus for Finance II: Continuous-Time Models, Springer.

Back to course list

14 July 2011

Course: Investments

Professor: João Pedro Pereira



Pre-requisites:

Objectives:

This course aims to provide a comprehensive introduction to the pricing of financial assets. We will

cover the main pillars of asset pricing, including choice theory, portfolio theory, equilibrium pricing, and

arbitrage pricing. Overall, we will opt for breadth of coverage instead of specialization.

Some empirical evidence will also be discussed and we will get our hands dirty with real data. We will

learn how to use Matlab (optional) for empirical work.

At the end of the course, you will be able to read a significant range of current research papers in asset

pricing and understand the main issues being discussed.

Program:

This course aims to provide a comprehensive introduction to the pricing of financial assets. We will

cover the main pillars of asset pricing, including choice theory, portfolio theory, equilibrium pricing, and

arbitrage pricing. Overall, we will opt for breadth of coverage instead of specialization.

Some empirical evidence will also be discussed and we will get our hands dirty with real data. We will

learn how to use Matlab (optional) for empirical work.

At the end of the course, you will be able to read a significant range of current research papers in asset

pricing and understand the main issues being discussed.


The final grade is computed as follows:

Final Exam: 50%

Midterm: 40%

Quizzes, Homework, Class participation, Group presentations: 10%

You are strongly encouraged to work jointly on the homework assignments

The exams are closed-book and closed-notes. However, you may use a formula sheet.


Lectures. Frequent homework assignments.

Observations:

Bibliography:

Danthine, J-P and J. Donaldson, 2005, Intermediate Financial Theory, 2nd

edition, Elsevier Academic

Press.

Financial Economics:

Cochrane, J.H., 2001, Asset Pricing, Princeton University Press.

Ingersoll, J.E., 1987, Theory of Financial Decision Making, Rowman & Littlefield.

Huang, C-f and R. H. Litzenberger, 1988, Foundations for Financial Economics, Prentice Hall.

LeRoy, S.F. and J. Werner, 2001, Principles of Financial Economics, Cambridge University Press.

Undergraduate Finance:

Bodie, Kane, and Marcus, 2005, Investments, McGraw-Hill.

Microeconomics:

Varian, H.R., 1992, Microeconomic Analysis, W.W. Norton & Company.

Mas-Colell, A., M.D. Whiston, and J.R. Green, 1995, Microeconomic Theory, Oxford University Press.

Math and econometrics:

14 July 2011

Chiang, A.C., 1984, Fundamental Methods of Mathematical Economics, McGraw-Hill.

Greene, W.H., 2003, Econometric Analysis, Prentice Hall.

Back to course list

14 July 2011

Course: Quantitative Methods for Finance

Professor: José Dias Curto



Pre-requisites:

NA

Objectives:

The objective of this course is to provide the students with statistical and econometric tools for data

analysis in management and economics. At the end of the course the students should be able to

estimate and analyse several types of models.

Program:

1. Introduction

2. Causal models

2.1 The classical linear regression model.

2.2 Extensions of the classical model. Violation of the basic assumptions - heteroscedasticity,

autocorrelation and multicolinearity.

2.3 Other topics – Dummy variables, nonlinear models, models with qualitative dependent variable,

information criteria AIC and SBC, Wald, Likelihood ratio and Lagrange Multiplier tests

3. Time Series models

3.1 Decomposition methods.

3.2 Smoothing methods.

3.3 Auto-regressive and moving average models. The Box-Jenkins methodology.


The continuous evaluation includes:

• Classes audience: 20%;

• Team work: 30%;

• A final written test with all the subjects of the course: 50%;

In the written test the students can use the formulas, the statistical tables and one calculator.


The classes will take place in a computer’s lab room. By this, the theoretical concepts will be discussed

and applied by using management and economics real applications.

Observations:

Bibliography:

• Wooldridge, Jeffrey (2005), Introductory Econometrics : A Modern Approach.

• Johnston, J. e Dinardo, John (2000), Métodos econométricos, McGraw-Hill, 4ª edição.

• Lecture Notes

• Greene, William (2002), Econometric analysis, Prentice-Hall, Fourth edition.

Back to course list

14 July 2011

Course: Corporate Finance Strategy (elective)

Professor: Helena Lopes da Costa



Pre-requisites:

Knowledge on basic finance (undergraduate level); knowledge on financial options

Objectives:

Towards the end of this curricular unit, students should be able to: • Establish the relationship between

firm value, equity and debt using financial options valuation; • Understand the structure and payoffs of

financial instruments issued by companies: warrants, rights, convertible bonds; • Apply the main

methods of options valuation to warrants, rights and convertible bonds; • Understand the concept of

real option and its analogy to financial options;

• Know the different types of real options and their valuation techniques;

• Value an investment project that includes a real option;

• Understand the interaction effects between several real options (compoundness);

Program:

Part I – Security Design

1. Warrants Issues

2. Rights Issues

3. Convertible Bonds Issues

Part II – Real and Strategic Options

1. “Traditional” DCF Analysis

2. Decision Trees

3. Real Options

3.1. Methodology

3.2. Types of Options: Abandonment, Expansion,

Wait-and-see

3.3. Interaction between Real Options and

Financing

3.4. Switch Option and “Compoundness”

3.5. Applications


For those attending at least 80% of the classes,

assessment is comprised of two elements:

Individual (70%)

o Class attendance and participation – 10%

o Written final exam (open book) – 60%

Group (30%)

o Group assignment – 30%

Notes:

o The due date for assignment submission is nonnegotiable and late submissions are penalized;

o The group assignment is carried out in groups of 3 to 5 people; Alternatively and for those who fail to

attend at least 80% of the classes, course approval requires passing a comprehensive exam.


14 July 2011

• Learning objectives are presented beforehand, so as to frame the topics to be covered during the

class;

• Lectures are presented using projections, spreadsheets and blackboard, resorting to practical

cases and classroom participation of students.

• The group assignment and case studies are provided during the previous session, in order to develop

critical thinking to be shared and tested in the classroom;

• Further reading and additional materials are provided as deemed necessary;

• Classes may include tutorial discussions, guest lectures and student presentations;

• Students are expected to prepare for classes as appropriate.

Observations:

Since this course takes place in the second semester of the masters program, greater participation and

interaction from students are expected. Students will be required to perform group work and

classroom presentations.

Bibliography:

Notes distributed by the course instructor (via elearning platform);

• Case Studies and Articles provided by instructor (via e-learning platform);

• Grinblatt and Titman, “Financial Markets and Corporate Strategy”, McGraw-Hill;

• Hull, “Options, Futures and Other Derivatives”, Prentice Hall;

• Trigeorgis, “Real Options – Managerial Flexibility and Strategy in Resource Allocation”, MIT Press;

Back to course list

14 July 2011

Course: Forecasting Methods (elective)

Professor: José Dias Curto



Pre-requisites:

Objectives:

a) To give a general overview of the different forecasting methods and techniques and of their

use and limits.

b) To identify the needs for forecasting in Management and Business and the way the forecasts can be

obtained, matching the method to

the situation.

c) To obtain the required capability to apply the forecasting methods and techniques and evaluate the

results.

d) To gain familiarity with some statistical software packages, such as SPSS, EVIEWS and Excel statistical

tools.

Program:

1. Simple smoothing methods (2 lectures)

2. Decomposition methods and seasonal indexes (2 lectures)

3. Trend- Seasonal and Holt-Winters Smoothing (2 lectures)

4. Evaluating and combining forecasts (2 lectures)

5. Unit Roots, Stochastic Trends, ARIMA forecasting models and smoothing (6 lectures)

6. Volatility measurement, ARCH modeling and forecasting (4 lectures)

7. Introduction to multivariate models (2 lectures)


Exam (50%).

Research Work (50%).

Notes:

• Exam: Reading material limited to one sheet of paper size A4. The exam date is May 20, 2010.

• Research Work: Individual or teams of two (depending on class size). The deadline for the written

report is May 20, 2010.


The individual study, based on the suggested bibliography, it will be guided and supported by the

accomplishment of theoretician-practical lessons. The use of software such as EXCEL, EVIEWS and SPSS

and the analysis of the respective results will be made in sessions of computer science laboratory.

Observations:

Bibliography:

Book References:

Financial Econometrics:

Campbell, J.Y., Lo, A.W. and MacKinlay, A.C. (1997), “The Econometrics of Financial Markets”, Princeton

University Press: Princeton, NJ.

Cochrane, J.H. (2005), “Asset Pricing”, Princeton University Press:

Princeton, NJ.

Forecasting:

Diebold, Francis X. (2004), “Elements of forecasting”, South-Western:

14 July 2011

Canada, third edition.

Pindyck, R. S. and Rubinfeld, D. L. (1998), “Econometric models and

economic forecasts”, McGraw-Hill, 4th edition.

DeLurgio, S. A. (1998), “Forecasting principles and applications”,

McGraw-Hill.

� (Lecture Notes)

Complementar

� Financial Econometrics: Brooks, C. (2002); Cuthbertson, K. (1996); Gourieroux,

C. and Jasiak, J. (2001); Blake, D. (2001).

� Econometrics: Hayashi, F. (2000); Davidson, J. (2000); Greene, W. (2003).

Back to course list

14 July 2011

Course: Seminars on Finance Projects (elective)

Professor: Luís Laureano



Pre-requisites:

Knowledge on basic finance (undergraduate level)

Objectives:

Towards the end of this curricular unit students should be able to:

Gather financial data and financial literature by their own.

Use their writing and analysis skills write a research paper.

Use their communication skills, team work skills and argument support skills.

Use critical thinking in the analysis of financial topics.

Program:

Managing Financial Data

Reuters 3000 Xtra

Bloomberg

WRDS\Compustat

Datastream

Presentation and discussion of research topics

Overview of Final Project Process

Formalities

Planning

Supervision

Differences in finance projects

Data Collection

Citations/references

Articles Sources

Presentation and oral defense of the candidate


Individual (70%)

Written final exam: 50%

Individual assignment: 20%

Group (30%)

Two group assignments: 30%


The instructional method emphasizes active and interactive learning, through student participation in

practical applications

Observations:

Bibliography:

Tutorial Guides of Financial Databases

Baranano, Ana Maria (2004) Métodos e Técnicas de Investigação em Gestão, Edições Sílabo

Sekaran Uma e Bougie Roger (2010) Research Methods for Business, 5ª edição, John Wiley and Sons

14 July 2011

Bem, Daryl., 2002, Writing the Empirical Journal Article, in In Darley, J.M., Zanna, M.P., & Roediger III,

H.L. (Eds.), The Complete Academic: A Career Guide.

Back to course list

14 July 2011

Course: International Finance (elective)

Professor: Mohamed Azzim



Pre-requisites:

Objectives:

Towards the end of this curricular unit, the students should be able to:

• Revisions of topics in investments;

• To be able to interpret the international financial and economic phenomena which affects the return

on investments;

• Analyse and use international parity conditions;

• Analyse and evaluate the accounting exposure of firms to currency fluctuations;

• Analyse and evaluate foreign investment decisions;

• Analyse and evaluate foreign currency financing;

• Analyse and evaluate the economic exposure of firms to currency fluctuations;

• Determine value of some real options in foreign investment decisions.

• Evaluate influence of political risk.

• Cost of Capital.

Program:

I – Revision of concepts in investments

and international parity conditions

II – Foreign Direct Investment

1. Basic concepts: NPV, PV, APV

2. Methods of Evaluation

3. Perspectives of Evaluation

4. Internal Markets

5. Taxation

6. Inflation e Hiper-inflation

7. International Financing

8. Global Evaluation

9. Economic Exposure

III – Topics in Foreign Direct

Investment*

1. Real Options – Waiting, Expansion,

Abandonment , Strategic Flexibility

2. Real option valuation through the theory

of derivatives

3. Political Risk

4. Cost of Capital


Practical case studies and Written final exam (open book)


Lectures with presentation of the topics using powerpoint and blackboard, appealing

to practical cases and oral participation of the students. Individual problem sets to practice at home,

with solutions made available. Problem sets solved in class, making use of tailor-made spreadsheets.

14 July 2011

Pointers regarding the individual work to be

carried out outside the classroom.

Observations:

Bibliography:

Eitman, D., A. Stonehill e M. Moffett (2001, 9ª Ed.) "Multinational Business

Finance", Addison Wesley.

Back to course list

14 July 2011

Course: Portfolio Management (elective)

Professor: Sofia Ramos



Pre-requisites:

Objectives:

In the end of this learning unit’s term, the student must:

1. Distinguish organizational aspects of markets such as primary and secondary capital markets, call and

continuous

markets; short selling

2. Define an efficient capital market. Describe and contrast the three forms of the efficient market

hypothesis (EMH);

3. List the assumptions about investor behavior underlying the Markowitz model; describe the efficient

frontier and explain the concept of an optimal portfolio,

4. Understand and use the capital asset pricing model, including the security market line (SML) and

beta;

5. About passive portfolio management • Explain the theoretical support for passive management

• Define passive management, mimicking portfolio and tracking error • Compare advantages and

disadvantages of individual portfolio management versus pooling • Describe several approaches used

to compute mimicking portfolios.

6. About active portfolio management• Describe several forms of market efficiency

• Describe several market pricing anomalies

• Identify and apply several approaches to active portfolio management

• Recognise the usefulness of predictive models

• Distinguish predictive from explanatory models

7. About Performance Analysis

- To identify measures and methodologies on performance analysis

Discuss implications of performance persistence

- Identify risk measures and their reasoning

8. Identify and describe alternative investments. Identify advantages and disadvantages of these

investments.

9. Explain investment strategies used by hedge funds

10. Explain the reasoning for international diversification

11 Apply the Black-Litterman model in global asset allocation

Program:

Part 1- Basic Concepts

1.1.Organisation of Securities Markets

1.2 Market indexes

1.3 Efficient Markets Hypothesis

1.4 Portfolio Theory

Part 2- Portfolio Management

Fundaments

2.1 Passive Portfolio Management

- Market Efficiency

- Indexation Methods: Perfect copy, sample stratification, optimization andstock index futures

14 July 2011

- Tracking error

2.2. Active Portfolio Management

- Pricing anomalies

- Market Timing

- Security selection: The Treynor-Black

Model

- Predictability

2.3 Alternative Assets and Investment Styles

2.4 Traditional Measures of performance

- Arithmetic and geometric mean

- Measures of performance: Sharpe ratio,

M2, Treynor Ratio, Jensen Alpha and

Appraisal Ratio

2.5. Performance Analysis

- Measures of performance in practice

- Performance attribution

- Performance persistence

- Comparison of active and portfolio management

- Downside and Drawdown risk measures

- Practical Issues

Part 3 -Advanced Portfolio Management

3.1 Basic aspects of Portfolio Construction

• Goals and Limitations

• Historic values of returns and interest rates

3. 2 International Diversification

3.3. Strategical and Tactical asset allocation:

The Black-Litterman Model


The continuous evaluation system includes:

(1) Class participation and resolution of problem sets. (50% of the final grade);

Students are required to attend classes as well as solving exercises, homework,participation in class

discussions and other class activities. There will be problem sets for turning in.

(2) Final Exam (50% final grade)

For passing students are required to have a minimum of 8.5 in individual evaluation.

Students that opt for not following continuous evaluation make a final exam.


During the learning term, the student must acquire and develop cognitive, analysis and synthesis,

research, critical and self-critical, communication and relationship competences, in the scope of this

learning unit and in compliance with the objectives, defined above.

For the acquisition of these competences will be used, in the contact hours of this learning unit, a range

of teaching methods (e.g., theoretical expositions; cases’ analysis and debate; problem solving

techniques and instruments; etc.) that, in an articulated manner, allow the mastering of the above

competences.

Observations:

Bibliography:

• Textos de Apoio teórico/práticos a facultar pelo docente durante o semestre;

• Bodie, Kane & Marcus, Investments – 7th Ed. – McGraw Hill Irwin International

Editions, 2007.

- Francis, Jack and Roger Ibbotson, Investments, A Global Perspective, Prentice Hall, 2002

• Lofthause, Stephen, Investments Management, Wiley, 2001

Frank J. Fabozzi, Franco Modigliani, Portfolio Management, Prentice Hall.

14 July 2011

- Damodaran, A., Investment Philosophies, Wiley, 2003.

Back to course list

14 July 2011

Course: Risk Management (elective)

Professor: António Barbosa



Pre-requisites:

Objectives:

The objective of this course is to provide you with (i) the analytical tools to analyze the market and

credit risk of a portfolio and (ii) the critical judgment to choose the most adequate methodologies to

tackle the problem at hand. Although we cover both market and credit risks, the focus will be on

market risks. By the end of the course, a successful student will be able to design, implement and

validate a Value at Risk system to assess the market risks of a portfolio of financial assets.

Program:

I. Introduction to Value at Risk (VaR)

1. Definition and attractive features (IV.1.4)

2. Total vs. Risk Factor VaR (IV.1.6)

3. Decomposition: Systematic and Specific VaR, Stand-alone VaR, Marginal and Incremental

VaR (IV.1.7)

4. Associated risk metrics and coherence (IV.1.8)

5. Introduction to VaR models: Normal Linear VaR, Historical Simulation and Monte Carlo

Simulation (IV.1.9)

II. Parametric Linear VaR models

1. Foundations of Normal Linear VaR: Normal Linear VaR formula, Static vs. Dynamic VaR,

scaling for different risk horizons, adjusting for autocorrelation, Stand-alone, Marginal and

Incremental VaR (IV.2.2 and IV.1.5)

2. Portfolio mapping: risk factors and risk factor sensitivities and cash-flow mapping (III.5.2,

III.5.3, III.1.8)

3. Normal Linear VaR for cash-flow maps (IV.2.3)

1

4. Normal Linear VaR for stock portfolios: Systematic and Specific VaR, estimation of Specific

VaR, Systematic VaR decomposition (IV.2.5 & IV.2.6)

5. Non-Normal Linear VaR: student t and mixture distributions (IV.2.8 & IV.2.9)

6. Exponentially Weighted Moving Average estimation of covariance matrices (IV.2.10)

7. Expected Tail Loss (ETL) (IV.2.11)

III. Historical Simulation

1. Standard historical VaR: Definition, choice of sample size and data frequency, scaling historical

VaR assuming stable distributions (IV.3.2)

2. Improving the sensitivity of historical VaR to changing market conditions: equally weighting

vs. exponential weighting of probabilities, volatility adjustment of returns and filtered

historical simulation (IV.3.3)

3. Improving the precision of historical VaR at extreme quantiles (IV.3.4)

4. Historical VaR for linear portfolios: volatility adjustment and estimation of specific VaR

for a stock portfolio, marginal historical VaR (IV.3.5)

5. ETL (IV.3.6)

IV. Monte Carlo VaR

14 July 2011

1. Introduction and random number generation (IV.4.2)

2. Modeling dynamic properties in risk factor returns: multi-step vs. one-step Monte Carlo

VaR, volatility clustering and mean reversion (IV.4.3)

3. Modeling risk factor dependence: multivariate normal, multivariate normal mixture (IV.4.4)

V. Risk model risk

1. Sources of risk model risk: risk factor mapping, risk factor returns model, VaR resolution

model, scaling (IV.6.2)

2. Estimation risk: confidence intervals for VaR in parametric linear models (IV.6.3)

3. Backtesting: exceedance rates, unconditional and conditional coverage tests, independence

tests, regression based tests, backtesting ETL, bias statistics for normal linear VaR, distribution

forecasts (IV.6.4)

VI. Scenario analysis and stress testing

1. Scenarios on financial risk factors: single case vs. distribution scenarios, historical vs.

hypothetical scenarios (IV.7.2)

2. Stress testing: stressed covariance matrices, generating hypothetical covariance matrices,

stress tests based on principal components analysis (IV.7.6)

VII. Capital allocation

1. Minimum market risk capital requirements for banks: Basel accords, internal models, standardized

rules (IV.8.2)

2. Economic capital allocation: measurement of economic capital, RORAC, RAROC (IV.8.3)

VIII. Credit risk

1. The Credit Metrics approach

2. Credit VaR for a stand-alone exposure

3. Credit VaR for a portfolio: analytic and simulation methods


The course grade is based on 2 individual assignments and in class participation (60%) and a final

exam (40%), provided that you attend to at least 80% of classes. The assignments will focus on the

implementation of the methods covered in class. This is a fundamental part of the course and so I

expect you to work hard on the assignments.

You also have the choice to skip the assignments and do the final exam for 100% of the grade (you

will have to answer extra questions, though). However, I strongly advise you against it. It makes no

sense to take this course and not working on the practical implementation of the methods covered in

class. If you don’t feel like working much, or you cannot attend to classes regularly, I’m sure you can

find other courses that will suit you better.


Observations:

Bibliography:

• Alexander, Carol, Market Risk Analysis Vol IV: Value at Ris

• Credit Metrics - Technical Document, J.P. Morgan, 1997 • Alexander, Carol, Market Risk Analysis Vol III: Value Pricing, Hedging and Trading Financial

Instruments, Wiley, 2008

• Risk Metrics – Technical Document, J.P. Morgan, 1996

Back to course list

master of science in finance syllabi - iscte /...

Documents