The module introduces modern financial economic theories and methods on portfolio management to construct asset models to assist risk management of financial services firms.

**Syllabus**

1. Utility Theory and Investment Risk

Utility function, expected utility theorem, measures of investment risk – variance of return, downside semi-variance of return, shortfall probabilities and Value-at-Risk (VAR) / Tail VaR.

2. Mean Variance Portfolio Theory

Short sales and portfolios of assets, diversification, the Markowitz model, the two-fund theorem, inclusion of a risk-free asset, the one-fund theorem.

3. The Capital Asset Pricing Model (CAPM)

Capital asset pricing model, betas and CAPM for portfolios, security market line, CAPM as a pricing formula, the Efficient Market Hypothesis (EMH)

4. Factor Models

Single factor models, multi-factor models, construction of the different types of multifactor models and perform calculations using both single and multi-factor models.

5. Arbitrage Pricing Theory

Simple APT, compatibility of APT with CAPM, More on compatibility of APT with CAPM, two-factor model, diversifying the portfolio, arbitrage pricing on the diversified portfolio

**On completion of the module students should be able to:**

- Describe and discuss the application of utility theory to economic and financial problems.

- Discuss the advantages and disadvantages of different measures of investment risk.

- Describe and discuss the assumptions of mean-variance portfolio theory and find mean-variance optimal portfolios.

- Describe and discuss the properties of single and multifactor models of asset returns.

- Describe asset pricing models, perform calculations and appreciate the limitations of the models studied.

- Module Supervisor: Spyridon Vrontos