MSc.

Finance/CLEFIN
2014/2015 Edition

Theory of Finance Part 1

Professor Massimo Guidolin (Part 2: Prof. Claudio Tebaldi)

COURSE OUTLINE/OBJECTIVES
The course presents an introduction to quantitative financial economics, with the goal of
building a common basis for all the first-year students in view of the specialized courses that
will be taken in the following semesters. Part 1 of the course specializes in the theory and
practice of optimal portfolio choice.
Standard knowledge of mathematics (calculus and algebra) and statistics is assumed. The
quantitative tools needed for the course are summarized in the main syllabus distributed
along with this sub-syllabus. Students feeling their background does not meet these standards
are strongly advised to fill in their gaps as soon as possible. Basic knowledge of Excel and its
functions is assumed as a pre-requisite for the course, with special attention to the Data
Analysis and Solver tool packs.

Keep in mind that a Statistics Prep course has been offered between the end of August and
mid-September 2014 and that the material covered in those 20 hours represent essential
background, see
http://didattica.unibocconi.eu/mypage/map.php?IdUte=135242&idr=14063&lingua=eng
http://didattica.unibocconi.eu/mypage/doc.php?idDoc=15646&IdUte=48622&idr=7083&Tip
o=m&lingua=eng

Two lectures will be held by professional asset managers working in leading financial
institutions.
ASSESSMENT METHODS (THE EXAM)

There will be no intermediate exam. There will be a number of computer tutorials to illustrate
some practical applications of optimal asset allocation and asset valuation theory. The final
exam is written and closed-book.
TEXTBOOKS AND OTHER SUPPORT MATERIALS

The material covered in the course is outlined in lecture slides made available via the class
website, at
http://didattica.unibocconi.eu/mypage/map.php?IdUte=135242&idr=14063&lingua=eng

Lecture notes and class presentations of the material should be taken as a guidance for
further study on the two textbook:
Danthine, J.P. and J. Donaldson, 2005, Intermediate Financial Theory, Second Edition, Elsevier
Academic Press.

Campbell J. and L. Viceira, 2001, Strategic Asset Allocation: Portfolio Choice for Long Term
Investors, Oxford University Press.

For each topic we will also provide suggestions for further reading, whose consultation is left
to the students initiative.
DETAILED SYLLABUS FOR PART 1 (required readings are indicated by a *)

1. Decision making under uncertainty: state-preference approach and Expected Utility

Theory (EUH); risk aversion, utility functions; elementary portfolio selection (4 hours)
*Lecture Notes.
*CAMPBELL and VICEIRA, chapters 1-2, pp. 1-25.
DANTHINE and DONALDSON, chapters 3-5.
Guidolin, M., Preference Models in Portfolio Construction and Evaluation, in Baker, H. Kent,
and Greg Filbeck, eds. Portfolio Theory and Management. Oxford University Press, 2013, pp.
231-247.
2. Mean-variance model and portfolio frontier (two risky assets) (2 hours)

*Lecture Notes.
DANTHINE and DONALDSON, chapter 6.

3. Generalizations of the mean-variance model to many risky assets, with and without a
risk free asset); the separation theorem (3 hours)
*Lecture Notes.
*CAMPBELL and VICEIRA, chapter 2, pp. 25-45.
DANTHINE and DONALDSON, chapter 6.

4. Strategic asset allocation under linearly predictable returns (4 hours)

*Lecture Notes.
CAMPBELL and VICEIRA, chapter 4.
DANTHINE and DONALDSON, chapter 14.
Dal Pra, G., Predicting Excess Stock Returns with the Dividend-Price Ratio: an Out of Sample
Analysis, MSc. Thesis, 2014.
Nicodano, G., C., Fugazza, and M., Guidolin. Equally Weighted vs. Long-Run Optimal
Portfolios", Forthcoming, European Financial Management, 2014.

5. Strategic asset allocation under non-linearities and other forms of predictable returns
(2 hours)
*Lecture Notes.
Guidolin, M., Markov Switching in Portfolio Choice and Asset Pricing Models: A Survey",
Advances in Econometrics 27, 2011: pp. 87-114.
Guidolin, M., Preference Models in Portfolio Construction and Evaluation, in Baker, Kent, and
Filbeck, eds. Portfolio Theory and Management. Oxford University Press, 2013, pp. 247-266.
Guidolin, M., and F., Ria. Regime Shifts in Mean-Variance Efficient Frontiers: Some
International Evidence, Journal of Asset Management 12, 2011: 322-349.
6. Hints to the effects of human capital and life-cycle on optimal portfolio choice (1 hour)
*Lecture Notes.
CAMPBELL and VICEIRA, chapters 6-7.