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. Part I implies two optional homeworks that may give extra
credit (see below for details).

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.

2. Mean-variance model and the 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 Slides.
*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. The effects of human capital and life-cycle dynamics on optimal portfolio choice (3
hours)
*Lecture Slides.
CAMPBELL and VICEIRA, chapters 6-7.

RULES CONCERNING THE OPTIONAL HOMEWORKS

The course features TWO optional homework assignments. The homework assignments
are NOT COMPULSORY but – if they are turned in by following the rules detailed below –
they may give extra credit valid for one year (until the September 2015 exam session) and
up to THREE POINTS (out of 33) in addition to the regular exam score.
Students may consider working on all or only some of the submissions, depending on their
schedule and commitments.
The assignments concern simple exercises in Excel with occasional forays in VBA
programming. These exercises will relate to examples given in class. Each assignment is
composed of three parts/questions to be solved independently by each student on his/her
own time. However, help will be available through a tutoring system and at office hours.
Each assignment may receive up to one and half point in extra credit. The points will be
attributed after a rough check of completeness and reasonableness of the solution
approach adopted. However, formal feedbacks will not be provided in case only partial
score will be assigned. The reason is that these are points attributed IN ADDITION to the
regular exam score.
In case of offensive or completely unreasonable submissions, a penalty of -0.5 may be
inflicted. This is to discourage individuals to “game” the system with blank or made-up
submissions.
Sketches of solutions to the homeworks will be made available through the web site of the
instructor in charge of Part I, Prof. Guidolin. Independently of whether a student has
worked on and turned in the assignments, at least one question of the final exam will
concern comments to the solutions derived to the homework questions.
Submissions must be completed electronically following a template that will be made
available by 12 am midnight of the due date. The date of the e-mail system will count. NO
EXCEPTIONS, NO EXCUSES (these will not be read). Late submissions will not be
considered.
Homework submissions are done BY E-MAIL to mscfinance@unibocconi.it. Only
homework submissions coming from official Bocconi’s e-mail addresses will be
considered.