Portfolio Selection and Risk Management

Module 1- Introduction & Risk and Return

This module introduces the second course in the Investment and Portfolio Management Specialization In this module, we discuss one of the main principles of investing: the risk-return trade-off, the idea that in competitive security markets, higher expected returns come only at a price – the need to bear greater risk We develop statistical measures of risk and expected return and review the historical record on risk-return patterns across various asset classes

Module 2: Portfolio construction and diversification

In this module, we build on the tools from the previous module to develop measure of portfolio risk and return We define and distinguish between the different sources of risk and discuss the concept of diversification: how and why putting risky assets together in a portfolio eliminates risk that yields a portfolio with less risk than its components Finally, we review the quantitative tools that help us identify the ‘best’ portfolios with the least risk for a given level of expected return by considering a numerical example using international equity data

Module 3: Mean-variance preferences

In this module, we describe how investors make choices Specifically, we look at how utility functions are used to express preferences We review measures to describe investors’ attitude towards risk Finally, we discuss how we can summarize investors’ preferences using a specific utility function: mean-variance preferences

Module 4: Optimal capital allocation and portfolio choice

In this module, you will learn about mean-variance optimization: how to make optimal capital allocation and portfolio choice decisions when investors have mean-variance preferences This was one of the ground-breaking ideas in finance We will formally set up the investor’s portfolio choice problem and learn step-by-step how to solve for the optimal allocation and risky portfolio choice given a set of risky securities You will also have an opportunity to apply these techniques to a numerical example This module is slightly more technical than the others Stick with it you will not regret it!

Module 5: Equilibrium asset pricing models

In this module, we build on the insights obtained from modern portfolio theory to understand how risk and return are related in equilibrium We first look at the main workhorse model in finance, the Capital Asset Pricing Model and discuss the expected return-beta relationship We then turn our attention to multi-factor models, such as the Fama-French three-factor model