Advanced Investments

This subject teaches principles of advanced portfolio choice and asset pricing. The subject emphasizes the close link between theory and empirical analysis in this important area of finance. At the theoretical level, the subject introduces optimal portfolios for households and institutional investors like insurance companies and pension funds. While households are assumed to receive utility from terminal wealth or intermediate consumption, institutional investors consider their liabilities when forming an optimal asset allocation. The subject derives the asset pricing implications of portfolio choice. At the practical level, emphasis is placed on how to implement and evaluate optimal portfolio choice strategies and empirical tests of asset pricing models. The important role of asset return predictability for long-term investors is discussed and critically evaluated. The subject highlights typical biases that may prevent market participants from behaving optimally. The subject lays the foundation for a successful research essay in the fields of portfolio choice and asset pricing.