## Advanced Investments

##### 1: Investment Decisions and Goals

When it comes to wealth, more is better. But how important is liquidity to you? How important is risk? How important is being able to leave a legacy to members of your family or to causes you hold dear? As preparation for the course, consider these and other personal goals.

##### 2: A Framework for Investing

Learn how to layer various types of active management strategies on top of a passive market portfolio. Professor Slezak outlines three primary strategies: timing the market, reallocating money across sectors, and picking stocks that may outperform their sector. He also describes shorting and arbitrage.

##### 3: Mistakes Investors Make

It's easy to fool yourself when making important investment decisions. Examine three common cognitive errors: framing, biased self-attribution, and seeing patterns where none exist. These natural human tendencies highlight the need to avoid emotional or illogical reactions to financial information.

##### 4: The Characteristics of Security Returns

Review concepts from probability and statistics that are essential to know in investing. Focus on formulas that measure three characteristics of an asset: its expected return, its return variance (or volatility), and the covariance (or correlation) of its return with the returns on other assets.

##### 5: The Theory of Efficient Markets

Is it possible to make money by actively trading in the market? According to the efficient markets hypothesis, you are better off as a passive investor, because prices almost always reflect true value. Explore three versions of this theory, including the weak form, which holds that prices follow what is called a random walk.

##### 6: Evidence on Efficient Markets

Continue your study of the efficient markets hypothesis by investigating data from actual markets. Focus on momentum phenomena and volatility anomalies as possible evidence of market inefficiencies. Are these real opportunities to beat the market or only illusions that snare overconfident investors?

##### 9: The Term Structure of Interest Rates

At a given moment, interest rates vary with the time to maturity of different bonds. Examine the yield curve and the term structure of interest rates, learning how to weigh your investment choices. Discover that bond prices are a window to the expected future performance of the market.

##### 10: The Risks in Bonds

Learn how to think about the risks of owning bonds. Start by considering interest rate risk. Then examine how default or credit risk affects the yields on bonds. While most investors only want to consider highly rated bonds, significant return can be earned by bearing default risk.

##### 11: Quantifying Interest Rate Risk

Get an intuitive feel for the features that raise or lower interest rate risk on bonds. Practice calculating duration, and discover that the time to maturity may not be particularly close to the duration of a bond. This underscores the importance of focusing on the duration of your bond investments.

##### 12: Value Creation and Stock Prices

Consider how the equity returns on two firms that are essentially in the same business can be very different based solely on differences in capital structure. Both can be efficiently priced, but one will have a higher equity return due to its higher leverage and resulting risk.

##### 14: Modeling Investor Behavior

Good investors are not necessarily those who can find good investments, but those who can predict what stocks others will pick. Learn how economists model investor behavior, focusing on the indirect utility function, which can predict people's aversion to variations in outcome.

##### 15: Managing Risk in Portfolios

Investors do not-and should not-hold just one security at a time. Explore strategies for combining securities into a variety of optimal portfolios. For any level of risk, such portfolios have the highest average return; and, for any level of average return, they have the lowest risk.

##### 16: The Behavior of Stock Prices

Learn to use regression analysis to quantify the characteristics of a security, particularly its risk and possible mispricing relative to an asset pricing model. One of Professor Slezak's goals is to introduce techniques that allow you to analyze data that is widely available on the Internet.

##### 17: The Capital Asset Pricing Model (CAPM)

Study the characteristics of an equilibrium asset pricing model. Then build the most popular version-the capital asset pricing model (CAPM)-which allows you to measure risk for a portfolio. According to CAPM, the cross- section of returns is driven by common risks that cannot be eliminated through diversification.

##### 18: How to Exploit Mispriced Securities

Explore three steps for exploiting mispriced securities. First, investigate the strategy of short selling. Then, develop a measure of mispricing called alpha. Finally, use information about a stock's alpha and its volatility to form an optimal risky portfolio.

##### 19: Performance Evaluation

How do you know if an actively managed portfolio is producing worthwhile results? Survey several performance metrics: the Sharpe ratio, the Treynor measure, Jensen's alpha, the M-squared measure, and the information ratio. The measure you need depends on how you are using the portfolio you are evaluating.

##### 20: Market Making and Liquidity

Probe the nature of liquidity, learning how it is defined, how to measure it, and when to pay the market price for a liquid security. Many less-well-known stocks may be less liquid. But because they are less well-known, they are more likely to be mispriced, presenting potential trade opportunities.

##### 21: Understanding Derivatives

Begin your examination of derivative securities, first by defining them and then by looking at option contracts called "puts" and "calls." Also examine how a lack of transparency in a type of derivative called credit default swaps contributed to instability during the financial crisis of 2008.

##### 22: Using Derivatives

Investigate two uses for options: speculation and hedging. Follow the steps for betting on the direction of movement in the price of a security. Then see that hedging is less risky and can be compared to buying insurance. Learn that the important variables in a hedge are the hedge ratio and the option delta.

##### 23: Pricing Derivatives

Continue your study of derivatives by looking at the two most popular strategies for pricing options: the binomial method and the revolutionary Black-Scholes formula. The key insight of these pricing models is that you can build structures out of existing securities that behave just like the underlying option.

##### 24: Trade Opportunities or Risk?

Return to the capital asset pricing model introduced in Lecture 17, evaluating its effectiveness. Then analyze alternatives to CAPM along with anomalies that are at odds with existing models. Close by putting the course into perspective, stressing the wisdom and profit of trusting the market in the long term.