The aim of the first part of this course is to make students familiar with state-of-the-art models of (strategic) asset allocation. We will investigate the properties of alternative asset classes, such as commodities, private equity, hedge funds, or inflation-link bonds, and discuss their value for different types of investors. We will learn how quantitative techniques, such as (extensions of) mean-variance optimization, can help in taking optimal asset allocation decisions. The second part of the course will firstly introduce the many aspects of the discount factor from the perspective of a portfolio manager, by concentrating on the typical risk corrections when valuing an asset. What drives systematic risk in the different asset classes, how do we estimate these risks and how can we integrate risk into the construction of an optimal portfolio will be among the questions explored. Secondly, we will examine what the concept of alpha-beta separation entails for portfolio management in terms of predictability of asset returns. Building on the risk framework developed earlier in the course, we will distinguish beta allocation from pure alpha generation and relate the latter to the efficient-market hypothesis and alternatively behavioural finance.
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