1F019 Financial Economics (A) - 4 credits

Finance Academic Department

Instructor: Rolando Luna Victoria, MSc, CFA
lunavictoria_ra@up.edu.pe
2023-1

COURSE SYLLABUS

I. Goals and Objectives

The main goal of this course is to enable you to apply the theoretical concepts in finance to problems in the
area of asset management. This course will give you the fundamental ideas to deal with the complexities
that the real-world entails.

Through cases, presentations, lectures, readings, and discussion of topical issues, the course will give you
the opportunity to analyze practical financial situations and problems.

In addition to analyzing the specific characteristics of every asset class (equities, fixed income and
derivatives), we will consider how those asset classes behave inside a portfolio, which is the relevant risk
and which are the benefits of diversification are (Modern Portfolio Theory). Additionally, you will have an
introductory class in Asset Pricing, a class for Multifactor Models and programming classes in Python to put
into practice everything learned during the course.

I teach this course on the assumption that you are already familiar with fundamental ideas from previous
finance courses such as Time Value of Money, Internal Rate of Return, Net Present Value, Normal
distributions, and some mathematical tools (derivatives). It is mandatory that you have taken “Estadística”
and “Evaluación Privada de Proyectos”.

II. Skills from our alumni

General

 Global and competitive leader, particularly in the Asset Management area.

 Game Changer: Having an active role in positions related to portfolio management,

 High quality: The course needs rigorous discipline in order to have a strong financial
knowledge. Leadership in the financial industry by using state of the art technics in the Asset
Management business.

Specific

 Leadership in the financial industry by using state of the art technics in the Asset
Management business.

III. Learning Goals (LG) and Learning Objectives (LO)

The learning goal is that you will learn how to manage portfolios from individual and institutional
investors. These investors have the following questions: how to maximize their profits subject to a
desire level of risk.

The following are the objective you need to accomplish your goal:

i. Understand the risk-return trade-off, specially, the role of systematic risks as a source of
expected returns (risk premiums) for any asset class (fixed-income, equities, derivatives)

ii. Understand the impact of market efficiency in the price dynamics and in the generation
of alfa.

iii. Understand the benefit of diversification when combining assets in a portfolio.

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IV. Learning Outcomes

You will be able to understand the risk-return trade-off and make educated investment decisions in
a portfolio perspective.

V. Summary of Course Outline

This is a summary of the course outline. This outline is a tentative schedule and it might be subject to
changes as the term progresses.

Topic 1: Risk and Returns definitions (21/03)

Guided activity: Introduction to python I (23/03)

Mandatory readings:
 Bodie Z., A. Kane y A. Marcus (2021) Investments 12th edition. McGraw-Hill. International
Edition. Chapter 5: Learning about Return and Risk from the Historical Record.

Topic 2: Asset Pricing (28/03, 04/04)

Guided activity: Introduction to python II (30/03)

Mandatory readings for class discussion:

 Cochrane. J (2001) Asset Pricing. Princeton University Press. Chapter 1: Consumption Based
Model

 Ang, A. (2014) Asset Management. Oxford University Press. Chapter 6: Factor Theory

Optional Reading:
 John Y. Campbell, The Journal of Finance - vol. LV, No. 4, August 2000, “Asset Pricing at the
Millennium”

Topic 3: Fixed-Income Securities (11/04, 18/04)

Guided activity: Numpy and Pandas (13/04). Data cleaning and preparation (20/04)

Mandatory readings for class discussion:

 CFA Program Level 1, Reading 41: “Fixed-Income Securities: Defining Elements” , Reading 43:
“Introduction to Fixed- Income Valuation”, Reading 45: “Understanding Fixed-Income Risk and
Return”
 Ang, A. (2014) Asset Management. Oxford University Press. Chapter 9: Bonds
 Ilmanen (2011) Expected returns. Wiley Finance. Chapter 9: Bond risk premium

Topic 4: Equity Investments (25/04)

Mandatory readings for class discussion:

 CFA Program Level 1, Reading 35: “Market Organization and Structure”, Reading 38: “Overview
of Equity Securities”, Reading 40: “Equity Valuation: Concepts and Basic Tools”, Reading
39:”Introduction to Industry and Company Analysis”
 CFA Program Level 3, Reading 23: “Active Equity Investing: Strategies”
 Ang, A. (2014) Asset Management. Oxford University Press. Chapter 8: Equities
 Ilmanen (2011) Expected returns. Wiley Finance. Chapter 8: Equity risk premium

Abril 27th. Test 1 and delivery of the fixed income case instructions

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 Topic 5: Options, Futures and Other Derivatives (02/05, 16/05, 23/05)

Guided activity: Algorithms (04/05). Exploratory data Analysis (18/05). Data manipulation with Pandas
and Time series (25/05)

Mandatory readings:

 Bodie Z., A. Kane y A. Marcus (2021) Investments 12th edition. McGraw-Hill. International
Edition.
Chapter 20: Options Markets: Introduction
Chapter 21: Option Valuation

 John C. Hull (2014) Fundamentals of Futures and options Markets. Pearson Education.
International Edition.
Chapter 11: Trading Strategies Involving Options

May 4th. at 3:30pm deadline for the fixed income case.

May 11th. Exam 1.

Topic 6: Portfolio Theory and Practice (30/05,06/06,13/06)

Guided activity: Statistical Analysis with Python (01/06), Portfolio Optimization with CVXPY (08/06)

Mandatory readings:

 Bodie Z., A. Kane y A. Marcus (2021) Investments 12th edition. McGraw-Hill. International Edition.
Chapter 6: Risk Aversion and Capital Allocation to Risky Assets.
Chapter 7: Optimal Risky Portfolios
Chapter 8: Index Models

 Ang, A. (2014) Asset Management. Oxford University Press. Chapter 3: Mean-Variance Investing

Topic 7: Factor models (20/06)

Mandatory readings:
 Bodie Z., A. Kane y A. Marcus (2021) Investments 12th edition. McGraw-Hill. International Edition.
Chapter 9: The Capital Asset Pricing Model
Chapter 10: Arbitrage Pricing Theory and Multifactor Models of Risk and Return
Chapter 11: The Efficient Market Hypothesis
Chapter 13: Empirical Evidence on Security Returns

 Ang, A. (2014) Asset Management. Oxford University Press. Chapter 7: Factors

June 22th. Test 2 and delivery of the portfolio case instructions.

Topic 8: Behavioral Finance and Technical Analysis (27/06)

Mandatory readings:
 Bodie Z., A. Kane y A. Marcus (2021) Investments 12th edition. McGraw-Hill. International Edition.
Chapter 12: Behavioral Finance and Technical Analysis

 Ilmanen (2011) Expected returns. Wiley Finance. Chapter 6: Behavioral Finance

June 29th. at 3:30pm deadline for the portfolio case.

July 06th. Exam 2.

VI. Teaching methodology

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 Lecture: I will explain the theory and relate it with real world examples. I need you to participate and
answer the questions I will be asking during the class. Class participation is needed.

Readings: Most of the material will be posted on Blackboard during the term (subject to copyright
regulation).

VII. Grading

Grading will be based on class participation, Group Case Write-Ups, Individual In-Class Exam

Criteria Weighting
NOTA DE Two tests including mandatory readings and
TRABAJO problems. 40%
(10% each)
Two hands-on cases (use of Excel is strongly
advised). The last one will be a defense of a
portfolio investment decision in front of an
investment committee
EXAMEN PARCIAL Reading Comprehension, Problem Solving skills, 30%
writing skills, critical reasoning and ability to
synthetize.

EXAMEN FINAL Reading Comprehension, Problem Solving skills, 30%

writing skills, critical reasoning and ability to
synthetize.

We will only round the grade that will be upload into the system.

** NOTA de TRABAJO will be 40%

For example, if you obtain the following grades:

Test 1: 14.35 (10%)
Test 2: 11.50 (10%)
Case 1: 16.70 (10%)
Case 2: 14.00 (10%)
EXAMEN PARCIAL: 08 (30%)
EXAMEN FINAL: 12 (30%)

“Nota de Trabajo” = (14.35 + 11.50 + 16.7 + 14.00)/4 = 14.1375  rounded 14.00

NOTA DEL CURSO = 0.4 x 14 + 0.30 x 08 + 0.30 x 12 = 11.60  rounded 12

VIII. Office Hours and Contact Information

The best way to get in touch with me is via email: lunavictoria_ra@up.edu.pe.

My teaching assistants are Julio Miranda and Camila de la Cruz. We work as a team, so feel free to contact
any of them for any inquiry.