## FINANCIAL MARKET MODELS

## Program

### Updated A.Y. 2022-2023

**Updated version: July 2022**

**for PDF final detailed version go to Teaching material**

The course will cover the following main areas: Theory of Choice and Expected Utility, Financial Markets and Securities, Efficient Portfolios and Frontier, Single Index Model, Standard and Non-Standard Capital Assets Pricing Model, Multifactor Models, Empirical Test of Equilibrium Models, Efficient Markets Hypothesis.

*Course’s objectives and expected learnings*:

- LEARNING OUTCOMES: Theoretical knowledge of financial assets and financial markets.
- KNOWLEDGE AND UNDERSTANDING: Evaluation of financial assets available in the markets.
- APPLYING KNOWLEDGE AND UNDERSTANDING: Analytical skill to model implementation and coding.
- MAKING JUDGEMENTS: Ability to analyze data and parameters to interpret results from estimated model.
- COMMUNICATION SKILLS: Clear approach to verbal and written statement related to results and conclusion of the analysis.
- LEARNING SKILLS: Ability to analyze solutions from theoretical models with critical approach.

**Main References**:

Elton, E. J. et *al*., * Modern Portfolio Theory and Investment Analysis*, Wiley, 2007 -- Chapter 2, 3, 4, 5, 6, 7, 9, 13, 14, 15, 17

**Section 1**: Market and Securities’ Characteristics

- Markets and Indexes Definitions;
- Prices and Returns of Securities;
- Prices and Returns of a Portfolio;
- Problem Set 1: Compute the Stocks and Portfolio’s Return/Risk Prospects.

**Section 2**: Efficient Portfolios and Efficient Frontier

- Building the Efficient Frontier;
- Shape of the Efficient Frontier;
- Extend the Efficient Frontier allowing for Risk Free Rate and Short Selling;
- Return Maximization Problem;
- Problem Set 2: Building the Efficient Frontier.

**Section 3**: Single Index Model

- Inputs for the Portfolio Analysis;
- Single Index Model: Overview and Characteristics;
- Estimating Stocks and Portfolios’ Market Betas;
- Building the Frontier with the Single Index Model;
- Problem Set 3: Estimating the CAPM and the FFC Single Stock Level and for a Portfolio.

**Section 4 and 5**: Standard and Non-Standard Capital Assets Pricing Model

- Capital Asset Pricing Model by means an Intuitive Approach;
- Capital Asset Pricing Model by means a Rigorous Approach;
- Fama-French e Carhart Multifactor Model (FFC);
- CSR Risk-Factors and the Investors’ Preferences for Responsible Investment;
- Corporate Social Responsibility, Responsible Investments on the Financial Markets;
- Responsible Fama-French-Carhart Model (RFFC);
- Standard Test for Equilibrium Models;
- Black, Jensen e Sholes Approach;
- Fama MacBeth Approach;
- Problem Set 4 and 5: Estimating the Factors’ Risk-Premia by using the Fama-MacBeth Approach.

**Section 6**: Efficient Markets Hypothesis

- Introduction to the Efficient Market Hypothesis (EMH);
- Three forms of Market Efficiency;
- Semi-Strong Market Efficiency and the Event Study Approach;
- Tests for the Semi-Strong Market Efficiency;
- Problem Set 6: Estimating the (C)AR by using the Event Study Approach.