Hello! I'm Arzu Ozoguz and I would like to welcome you to the second course in our investment and portfolio management specialization. Welcome to Portfolio Selection and Asset Pricing. You can call me Arzu, or Dr. O, or Professor O, which is what my students here at Rice University sometimes call me. Almost everyone owns a portfolio or a group of assets. This portfolio may contain real assets such as a car or a house or a refrigerator, of course, as well as financial assets such as stocks or bonds or other securities. Now, the composition of this portfolio may be the result of maybe a series of unrelated ad hoc decisions. Or it could be the outcome of deliberate planning. Now, when we are faced with a portfolio selection problem, the number of possible assets, and the various combinations and proportions in which we can combine them, may sometimes feel overwhelming. So in this course, you're going to learn the basic principles of how you can construct portfolios effectively and also what that means for asset prices determined in the market place. Of course, we're going to focus our attention on financial assets, although much of what we do here can be also applied to real assets as well. Okay, so before I walk you through what we are going to be doing in this course, here are some big picture questions that you will be able to answer after taking this course. One, how do you allocate your wealth across different assets? How do you choose a smart investment portfolio? Three, how do you maximize the reward you will get for bearing risk? How do you measure risk? How can you convince your boss to follow your asset allocation recommendation? And finally, how can you convince a client, or an employer, to hire you to manage their wealth? So, this course will give you the tools and the skills you need to answer these questions and manage an investment portfolio successfully. All right, so what do you already need to know? Well, for starters, if you've already taken the first course in this specialization, on global financial markets and instruments, you already have the prerequisite background. You are already familiar with the different types of asset classes and instruments in financial markets. So what else? Well, as we've seen before, finance and investments uses a lot of arithmetic, right? Because we often speak in terms of numbers, dollars or euros, right? But most of what we do, I was say, 99.99% of what we do requires high school math, right? There are no integrals, no linear algebra, or anything like that. Now of course, being good with numbers helps, but with good attitude and work, everybody can do well. Don't let the notations scare you away. I will help you get through it. So, I will refer to some basic statistical concepts like means, correlations, and covariances. While I will always define and review these concepts whenever I use them, some prior familiar with this basics statistics will definitely help you. Finally, having some knowledge of basic Excel, will make a lot of what we do here much, much simpler. I will provide you spreadsheets for you to work on and I will also illustrate how to use them. Of course, web access, which you must clearly have if you're watching this and taking this course. Okay, so what are the course materials you're going to need? Well, the most important material will be the lecture notes, which I will provide for you to accompany the video lectures. I encourage you to print them out and follow along. You will see that sometimes, they may be blank so that you can take notes and fill them in or work things out with me as we go along. For each module, you will also find some additional reading material that supplements the lecture material. Sometimes it's to clarify a concept that we talk about in the lecture. Sometimes they're just meant to give you a different view on the material or give some illustrative examples of the concepts. You will find many many opportunities to practice applying the tools and concepts you learn. This should help you to complete the quizzes or assignments successfully as well as help you master the tools so that you can start using them in making smart investment decisions. Finally, I encourage you to make use of the discussion forums. I find that some of the best discussion and learning takes place in these forums. And this will also be where I will occasionally post examples for current events. I'm looking forward to great discussions with you. Okay, so this course is organized into 5 modules. In this first module, which is what you're listening to right now, you'll start by acquiring the tools to characterize the risk and return profile of any assets. You will start working with data and learn how to compute the measures you're going to need to summarize the risk and return characteristics of a single asset. Now, after this quick introduction, in the second module, you will learn how to compute these measures for a portfolio of assets. And you will learn how and why combining assets into your portfolio is able to diversify away risk and what kind of risk. Now I will illustrate these points, both graphically, as sometimes a picture is equal to a thousand words, but I will also illustrate them numerically with real data. Basically, you will learn the building blocks of modern portfolio theory, how to identify efficient portfolios that manage risk effectively. Now in module three we're going to turn our attention to how we, as investors, make choices, all right? You're going to learn how to describe investor's preferences and risk aversion. Each investor is different, and this is very, very important in determining what that optimal investment portfolio should look like. Module four puts everything together. And in this module, you're going to learn how to set up the asset allocation problem, how to solve this problem and how to implement the optimal portfolio solution. You will learn how to construct a portfolio of risky assets that give you the biggest bang for your buck, that is the maximum reward for the risk that you're taking. You will also learn how to determine the optimal asset allocation that is tailored for your or your client's risk profile. Now of course an optimal portfolio selection would not be complete if I didn't also tell you about what all this means for asset prices and how risk should be compensated in equilibrium. In the last module you will learn about the main assets pricing models, the capital asset pricing model and the fee factor from a French model. These are our work horse models in finance. You will learn how to use them, but more importantly you will acquire an understanding of how return is related to risk. Okay, so here we go. Welcome again and have fun.
