BUS4073 applies investment theory to the practical challenge of constructing and managing investment portfolios. Building on BUS4070 (Foundations in Finance), students examine valuation principles for equities, bonds, and other investment instruments, and learn how to evaluate investments in the context of risk, return, and portfolio objectives. The course bridges financial theory — Modern Portfolio Theory, the Capital Asset Pricing Model (CAPM), efficient markets — with real-world investment decision-making.
Investment theory and portfolio practice
Core topics
- Valuation principles: Discounted cash flow approaches to valuing equities (dividend discount model, free cash flow model), bonds (coupon bond pricing, yield to maturity), and other securities — the analytical foundation for identifying mispriced investments
- Investment instruments: The characteristics, risk profiles, and return potential of major asset classes — common stocks, preferred stocks, corporate and government bonds, mutual funds, ETFs, and alternative investments — and how each fits different investor needs and portfolio objectives
- Modern Portfolio Theory: Harry Markowitz's mean-variance framework for portfolio construction — how diversification reduces risk without proportionally reducing expected return, the efficient frontier, and the role of correlation in portfolio optimization
- CAPM and factor models: The Capital Asset Pricing Model — beta, the security market line, and systematic vs. unsystematic risk — and multi-factor models (Fama-French) that extend CAPM to explain return variation across securities
- Efficient markets and behavioral finance: The Efficient Market Hypothesis in its weak, semi-strong, and strong forms, and the behavioral finance critique — how cognitive biases and market anomalies create opportunities and risks for investors
- Portfolio management: Active vs. passive management strategies, performance measurement (Sharpe ratio, Treynor ratio, Jensen's alpha), and portfolio rebalancing — applying theory to real-world portfolio management decisions
BUS4073 assignments include investment analyses, portfolio construction projects, and performance evaluation reports
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Frequently asked questions
Harry Markowitz's 1952 paper established that investors should not evaluate securities in isolation but in terms of how they contribute to overall portfolio risk and return. Two assets each with 15% expected return but different price behaviors (negative correlation) can be combined into a portfolio with lower overall risk than either asset alone — without sacrificing expected return. This diversification benefit is the "free lunch" of investing. The efficient frontier maps all portfolios that maximize expected return for a given level of risk; rational investors should hold portfolios on this frontier. BUS4073 develops students' ability to apply these principles practically — constructing diversified portfolios, measuring their efficiency, and evaluating whether active management adds value above a passive benchmark.