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

  • Value stocks and bonds using classic techniques and be aware of the implications of the latest research:
  • Rank different streams of cash flows.
  • Value government and corporate bonds.
  • Have a deep understanding of the Treasury yield curve.
  • Value stocks.
  • Estimate returns and risks of individual securities.
  • List and explain the benefits of diversification.
  • Estimate the efficient frontier using the Markowtiz constrained optimization technique.
  • Estimate returns and risks of portfolios.
  • Discuss and apply the Capital Asset Pricing Model (CAPM).
  • Discuss and apply alternatives to the CAPM such as the Fama and French 3-Factor Model.
  • Have a deep understanding of the efficient market hypothesis.
  • Understand how to compute alpha and the joint hypothesis problem.
  • List and explain the key building blocks of the competing hypothesis of behavioral finance.
  • Identify relevant information and tools needed to solve complex financial problems.
  • Apply tools to personal financial decision making.
  • Make informed decisions and articulate the appropriate solutions.

Click Here for Video Transcript


ALLAN EBERHART: Welcome to Financial Markets, the inaugural course in the new Master of Science in Finance, or MSF program, here at Georgetown University's McDonough School of Business. I'm Allan Eberhart, professor of finance and director of the program. And I'm thrilled to be teaching the course with my colleagues, Sandeep Dahiya and Lee Pinkowitz.

LEE PINKOWITZ: We're going to each be the lead instructor for two of the units in this course, and we'd like to give you an idea of what each of those units is going to be like.

SANDEEP DAHIYA: Businesses make decisions, billion-dollar decisions, about launching new products, entering new markets, putting together new production facilities.

How do you assign value to these cash flows that are going to occur way out in the future when you compare it to the cash that is going out today? This is what the tool set that time value of money allows us to do.

ALLAN EBERHART: In unit two, we're going to talk about bonds. And a bond can be thought of as a promissory note, or a contract, where the issuer of the bond agrees to pay the buyer of the bond some money in the future in exchange for some money today. And the fundamental question of finance is how much should the buyer of that bond be willing to give the issuer of the bond? We're going to answer that question in this unit, with a focus on government bonds.

SANDEEP DAHIYA: So, Allan just covered government bonds. These are securities issued by the governments. In this unit, we'll be focusing on securities issued by corporations. For example, corporate bonds, or corporate equity. How do you value corporate bonds, corporate stock is the focus of this unit on security valuation.

LEE PINKOWITZ: The fourth unit is about risk and return. When we think about securities, we try to think, if I invest in them, what will I get? That's the return part. But not all securities are equal. That's the risk part. Is there a tradeoff between risk and return? We'll first take a look at this historically, and say how do we even define risk, and how do we measure return, and what does the tradeoff seem to be? And that's what we're going to do in this unit.

It's me again. In this unit, we're going to build on our discussion of risk and return, except we're going to talk about how do we measure risk and return when we combine assets together into a portfolio. That's what we're going to talk about with portfolio theory. We're actually going to see that the concept of risk changes when we put things together in a portfolio. It's what we call diversification. And that's going to be the focus of this unit.

ALLAN EBERHART: Unit six is the last unit in this course. And it covers a big topic-- how do 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 in this unit.

So welcome to Financial Markets, the first course in the MSF program. We look forward to seeing you in the live sessions.