Portfolio Selection and Risk Management

About this course: When an investor is faced with a portfolio choice problem, the number of possible assets and the various combinations and proportions in which each can be held can seem overwhelming. In this course, you’ll learn the basic principles underlying optimal portfolio construction, diversification, and risk management. You’ll start by acquiring the tools to characterize an investor’s risk and return trade-off. You will next analyze how a portfolio choice problem can be structured and learn how to solve for and implement the optimal portfolio solution. Finally, you will learn about the main pricing models for equilibrium asset prices. Learners will: • Develop risk and return measures for portfolio of assets • Understand the main insights from modern portfolio theory based on diversification • Describe and identify efficient portfolios that manage risk effectively • Solve for portfolio with the best risk-return trade-offs • Understand how risk preference drive optimal asset allocation decisions • Describe and use equilibrium asset pricing models.

Who is this class for: While each course in this Specialization can be viewed as self-contained, starting with fundamentals, some background in business and finance and familiarity with basic statistical concepts is recommended. It is most appropriate for working professionals interested in asset management in their careers, or for individuals either preparing for advanced degrees in finance and economics, or looking to acquire the knowledge and tools in order to establish a portfolio that fits their needs and goals and improve their personal investment performance.

Created by:  Rice University

  • Arzu Ozoguz
    Taught by:  Arzu Ozoguz, Finance Faculty
    Jones Graduate School of Business
Basic Info
Commitment5 weeks
How To PassPass all graded assignments to complete the course.
User Ratings
Average User Rating 4.6See what learners said
Module 1- Introduction & Risk and Return
This module introduces the second course in the Investment and Portfolio Management Specialization. In this module, we discuss one of the main principles of investing: the risk-return trade-off, the idea that in competitive security markets, higher expected returns come only at a price – the need to bear greater risk. We develop statistical measures of risk and expected return and review the historical record on risk-return patterns across various asset classes.
10 videos11 readings2 practice quizzes
  1. Video: Introduction & Welcome to class
  2. Reading: Grading Policy
  3. Reading: How to use discussion forums
  4. Reading: Meet & Greet: Get to know your classmates
  5. Reading: Pre-Course Survey
  6. Video: Overview – No free lunches! Risk and return trade-off
  7. Video: Measuring returns: Geometric average returns
  8. Video: Measuring returns: Arithmetic average returns
  9. Reading: Lecture handouts: Risk and return: Measuring returns
  10. Practice Quiz: Risk and return: Measuring returns
  11. Reading: Risk and return: Measuring returns Quiz Solutions
  12. Video: Measuring risk: Volatility of returns
  13. Video: Alternative measures of risk
  14. Video: More on measuring risk and risk measures
  15. Reading: Lecture handouts: Risk and return: Measuring risk
  16. Practice Quiz: Risk & Return: Measuring risk
  17. Reading: Risk & Return: Measuring risk Quiz solutions
  18. Video: Measuring risk and return: Illustration with four stocks
  19. Video: Historical record on risk-return patterns
  20. Reading: Lecture handouts: Risk and return: Historical record
  21. Reading: Investing: Stocks for the long run (optional)
  22. Video: Summary
  23. Reading: Module 1: Risk & Return Solutions
Graded: Measuring risk and return
Graded: Module 1: Risk & Return
Module 2: Portfolio construction and diversification
In this module, we build on the tools from the previous module to develop measure of portfolio risk and return. We define and distinguish between the different sources of risk and discuss the concept of diversification: how and why putting risky assets together in a portfolio eliminates risk that yields a portfolio with less risk than its components. Finally, we review the quantitative tools that help us identify the ‘best’ portfolios with the least risk for a given level of expected return by considering a numerical example using international equity data.
16 videos12 readings3 practice quizzes
  1. Video: Introduction: Measuring portfolio risk and return
  2. Video: Measuring the expected return of a portfolio
  3. Reading: Lecture handouts: Measuring portfolio expected return
  4. Practice Quiz: Measuring expected portfolio return
  5. Reading: Measuring expected portfolio return Quiz solutions
  6. Video: Let’s review how we measure risk for a single asset
  7. Video: Finding the volatility of a portfolio return
  8. Video: Portfolio volatility: Another example
  9. Video: Measuring the co-movement between securities
  10. Video: Putting it all together… portfolio risk and diversification
  11. Reading: Lecture handouts: Measuring portfolio volatility
  12. Practice Quiz: Measuring portfolio volatility
  13. Reading: Measuring portfolio volatility Quiz solutions
  14. Video: Diversification and portfolio risk
  15. Video: Diversification: A graphical illustration with two assets
  16. Video: Diversification: A graphical illustration with three assets
  17. Video: Diversification: Systematic risk and idiosyncratic risk
  18. Video: Diversification: An illustration from international equity markets (US and Japan only)
  19. Reading: Accompanying spreadsheets for "Diversification: An illustration from international equity markets (US and Japan only)"
  20. Reading: A Note on using EXCEL Solver
  21. Video: Mean-variance frontier and efficient portfolios: International equity investment example (G5 countries)
  22. Reading: Lecture handouts: Diversification and portfolio risk
  23. Reading: Lecture handouts: Mean-variance frontier and efficient portfolios: International equity investment example
  24. Practice Quiz: Diversification and portfolio risk
  25. Reading: Diversification and portfolio risk Quiz solutions
  26. Discussion Prompt: Should you add emerging markets equities to your portfolio?
  27. Reading: Equity investing: Globalization and diversification (optional)
  28. Video: Are you diversified adequately?
  29. Video: Mean-variance portfolio analysis
  30. Video: Summary
  31. Reading: Lecture handouts: Are you adequately diversified?
  32. Reading: Module 2: Portfolio construction and diversification- Solutions
Graded: Measuring portfolio returns and volatility
Graded: Constructing mean-variance frontier for two risky assets
Graded: Module 2: Portfolio construction and diversification
Module 3: Mean-variance preferences
In this module, we describe how investors make choices. Specifically, we look at how utility functions are used to express preferences. We review measures to describe investors’ attitude towards risk. Finally, we discuss how we can summarize investors’ preferences using a specific utility function: mean-variance preferences.
7 videos7 readings2 practice quizzes
  1. Video: Introduction
  2. Video: Preferences: Utility functions
  3. Video: Risk aversion
  4. Reading: Lecture handouts: Utility and risk aversion
  5. Reading: A note on measuring risk aversion and certainty equivalent
  6. Practice Quiz: Utility and risk aversion
  7. Reading: Utility and Risk aversion Quiz solutions
  8. Video: Expected utility
  9. Video: Mean-variance preferences
  10. Video: Portfolio choice problem with mean-variance preferences: A graphical illustration with equity and bond data
  11. Reading: Lecture handouts: Mean-variance preferences
  12. Practice Quiz: Portfolio choice with mean-variance preferences
  13. Reading: Portfolio choice with mean-variance preferences quiz solutions
  14. Video: Summary
  15. Reading: Measure your own risk tolerance
  16. Reading: Module 3: Mean-variance preferences- Solutions
Graded: Module 3: Mean-variance preferences
Module 4: Optimal capital allocation and portfolio choice
In this module, you will learn about mean-variance optimization: how to make optimal capital allocation and portfolio choice decisions when investors have mean-variance preferences. This was one of the ground-breaking ideas in finance. We will formally set up the investor’s portfolio choice problem and learn step-by-step how to solve for the optimal allocation and risky portfolio choice given a set of risky securities. You will also have an opportunity to apply these techniques to a numerical example. This module is slightly more technical than the others. Stick with it… you will not regret it!
10 videos12 readings1 practice quiz
  1. Video: Introduction
  2. Video: Capital allocation line
  3. Video: Solving for the optimal capital allocation
  4. Video: Optimal capital allocation example: U.S. equities and Treasuries
  5. Reading: A note on optimal capital allocation
  6. Reading: Accompanying spreadsheets for "Optimal Capital Allocation Example: US Equities and Treasuries"
  7. Reading: Lecture handouts: Mean-variance optimization
  8. Practice Quiz: Mean-variance optimization
  9. Reading: Mean-variance optimization Quiz solutions
  10. Video: Finding the optimal risky portfolio: Maximizing the Sharpe ratio
  11. Video: Main insight: The optimal risky portfolio is independent of preferences
  12. Reading: Analytical solution to MVE portfolio (two risky assets)
  13. Reading: A note on finding the mean variance efficient portfolio (Two risky assets)
  14. Reading: Accompanying spreadsheets for "Finding the optimal risky portfolio: Maximizing the Sharpe ratio"
  15. Video: Finding the optimal risk portfolio when you have multiple risky securities
  16. Reading: A note on finding the minimum variance frontier with multiple risky assets
  17. Reading: Accompanying spreadsheet for finding minimum variance frontier with multiple risky assets
  18. Reading: Lecture handouts: Optimal risky portfolio choice
  19. Video: Investment decision process
  20. Video: What’s wrong with mean-variance portfolio analysis?
  21. Video: Summary
  22. Reading: Lecture handouts
  23. Reading: Optimal capital allocation and portfolio choice- Solutions
Graded: Optimal asset allocation and portfolio choice
Graded: Optimal capital allocation and portfolio choice
Module 5: Equilibrium asset pricing models
In this module, we build on the insights obtained from modern portfolio theory to understand how risk and return are related in equilibrium. We first look at the main workhorse model in finance, the Capital Asset Pricing Model and discuss the expected return-beta relationship. We then turn our attention to multi-factor models, such as the Fama-French three-factor model.
9 videos7 readings1 practice quiz
  1. Video: Introduction
  2. Video: From optimal portfolio choice to asset pricing models
  3. Video: Insight #1 from Capital Asset Pricing Model: Passive investing is efficient
  4. Video: Insight #2 from Capital Asset Pricing Model: What determines the market risk premium?
  5. Video: Beta and systematic risk
  6. Video: Capital Asset Pricing Model: Expected return-beta relationship
  7. Reading: Lecture handouts: Equilibrium asset pricing models: Capital Asset Pricing Model
  8. Reading: "The parable of money managers" (optional)
  9. Reading: "The dying business of stock picking" WSJ (optional)
  10. Practice Quiz: Equilibrium asset pricing models: Capital Asset Pricing Model
  11. Reading: Equilibrium asset pricing models: Capital Asset Pricing Model Quiz solutions
  12. Video: Multi-factor models
  13. Video: Fama-French three-factor model
  14. Reading: Lecture handouts: Equilibrium asset pricing models: Multi-factor models
  15. Video: Summary
  16. Reading: Module 5 Quiz: Equilibrium asset pricing models- Solutions
  17. Reading: End-of-Course Survey
Graded: Module 5 Quiz: Equilibrium asset pricing models
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