Georgetown University

Financial Markets

This course begins with a review of the building block concept of the time value of money and quickly moves onto bond and stock valuation; the relation between risk and return; and the ongoing debate about the workings of financial markets according to the Efficient Market Hypothesis and the alternative hypothesis of Behavioral Finance.

Learning Outcomes of Financial Markets

  • Know how to value government and corporate bonds.
  • Understand what determines the shape of the Treasury yield curve.
  • Know how to value stocks using the Discounted Dividend Model
  • Know how to estimate the risk and expected return of stocks and bonds.
  • Quantify the benefits of diversification.
  • Estimate the efficient frontier using the Markowitz constrained optimization technique.
  • Apply the Capital Asset Pricing Model (CAPM).
  • Understand alternatives to the CAPM such as the Fama and French 3-Factor Model.
  • Understand the efficient market hypothesis and its implications for personal investing.
  • Understand the competing hypothesis of behavioral finance.
  • Understand how to compute alpha and the joint hypothesis problem.
  • Identify relevant information and apply the tools required to solve complex financial problems.

Click Here for Video Transcript


ALLAN EBERHART: Welcome to Financial Markets, the first course in the master of science in finance or MSF program here at Georgetown University's McDonough School of Business. My name is Allan Eberhart, professor of finance and senior associate dean for the program, and I'm here to provide a quick overview of what we'll be covering in each module.

I'm starting off in module one, which is sometimes also referred to as unit one, with the building blocks of finance called the time value of money. Once you understand this concept you can answer many of the most important questions in finance, such as how much is a bond worth, or a stock? How about personal finance questions such as the computation of a monthly mortgage payment? The tools you'll learn in this module will empower you to answer these questions and many other important questions.

In module two, we're going to show how to value bonds. A bond is a contract where the bond issuer agrees to pay the bondholder some money in the future in exchange for some money at issuance. And a fundamental question in finance is, how much should the bond buyer be willing to pay for the bond? We're going to answer that question in this module with a focus on government bonds. We'll also take a deep dive into something called the yield curve, which shows the relation between interest rates and duration, a concept that I'll explain in detail.

Corporate stocks and bonds are the topics I'll cover in module three. I'll show how to value these securities using discounted cash flow, or DCF analysis, a foundational valuation method based on the time value of money principles I covered in module one and applied in module two. I'll also discuss the issuance process for corporate stocks and bonds and the multiples approach to stock valuation.

The fourth module is about risk and return. If you're like most investors, you like high expected returns but aren't so fond of high risk. We'll talk about how we can measure expected return in risk and how the notion of risk changes when we can form a portfolio by diversifying across multiple investments. We'll also show how to find the optimal trade-off between risk and expected return.

In module five, we're going to build on our discussion of risk and expected return and dive into asset pricing models, which provide explicit guidance on where you should invest your money and how to estimate the expected return to individual investments. It's extraordinarily powerful material that you should find immediately applicable to your own personal investing decisions and for your work as a finance professional.

Module six, our last module and it covers a big topic, how the financial markets work. There are two competing views on this, on the one hand, we have the efficient markets view. On the other hand, we've got the behavioral finance view. And we're going to have a cage match between these two views. I'll conclude with my take on what this debate means for the practice of finance. So welcome again to Financial Markets. I'm thrilled to be teaching this course and I look forward to seeing you in module one.