This course begins with the building block concept of the time value of money, and quickly moves onto applying this concept to government bond valuation, Macauley and Modified duration, the shape of the yield curve, the relation between spot and forward rates of interest, and the relation between nominal and real returns. We then apply these skills to corporate bond and stock valuation with a deep dive on bond covenant provisions, the discounted dividend model and the use of comparables in valuation. We next make a connection between these valuation approaches and the Markowitz efficient frontier method for constructing an optimal portfolio. The relation between the Markowitz method and the Capital Asset Pricing Model (CAPM) is our next topic followed by how to apply to CAPM for constructing an optimal portfolio and estimating a security’s expected return. We conclude with a detailed explanation of how markets work—and consequently how investors should invest—according to the efficient market hypotheses and the competing hypothesis of behavioral finance.
Student Learning Objects
Listed below are some important examples of what the student should know at the end of this course.
- How to value government and corporate bonds
- What determines the shape of the yield curve
- How to value stocks using the Discounted Dividend Model
- How to estimate the risk and expected return of stocks and bonds
- How to quantify the benefits of diversification
- How to invest using the Markowitz constrained optimization technique
- How to apply the Capital Asset Pricing Model (CAPM)
- Alternatives to the CAPM such as the Fama and French 3-Factor and 5-Factor Models
- The efficient market hypothesis and its implications for investing
- The competing hypothesis of behavioral finance
- How to evaluate the investment performance of actively managed mutual funds/ETFs, and the performance of passively managed mutual funds/ETFs
- How to identify relevant information and apply the tools required to solve complex financial problems
Click Here for Video Transcript
[MUSIC PLAYING]
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.