This course explores how the market is influenced by the behavior of investors, attributable to psychology or institutional constraints. We will survey recent research on possible mispricing in these markets, investor behavior, the predictability of security returns, and the practical limits to arbitrage. Possible topics include earnings and price momentum, market anomalies, tactical asset allocation, under-reaction to news, security complexity and obfuscation, and socially responsible investing. Practical implications for portfolio management are developed and emphasis will be placed on data-driven analysis of financial markets.
The course has 3 major goals. The first will be to take the view of a professional money manager to utilize knowledge of investor behavior to understand market movements and (hopefully) profit from opportunities that are available. The second will be to understand how data is used to uncover such opportunities. The third is to understand how individuals make decisions in order to make better personal investment decisions and avoid commonly exhibited biases when making financial decisions.
Achieving these goals will require learning some theories, facts and statistical tools. The theories will allow for a common language in the discussion of returns and will include risk-based asset pricing, present value relations and cognitive psychology. The facts relate to risk and return, value vs. growth, momentum, market frictions and trading costs. Support for both of these will come from the data for which we will need the tools of portfolio analysis, multifactor models and forecasting regressions.
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