Portfolio Selection and Risk Management

Go to Course: https://www.coursera.org/learn/portfolio-selection-risk-management

Introduction

### Course Review: Portfolio Selection and Risk Management #### Overview If you’re looking to enhance your investment strategies and understand the intricate dance between risk and return, the "Portfolio Selection and Risk Management" course offered by Coursera is a must-enroll. This course is part of the Investment and Portfolio Management Specialization, and it addresses one of the most pressing challenges investors face: how to construct and manage an optimal portfolio amidst a plethora of options. As the financial landscape grows ever more complex, understanding the principles of portfolio construction and risk management is vital for both novice and seasoned investors. This course breaks down these concepts into manageable segments, providing valuable insights that can lead to smarter investment decisions. --- #### Course Syllabus Breakdown **Module 1: Introduction & Risk and Return** This foundational module introduces participants to the essential concept of the risk-return trade-off. It dives into statistical measures of risk and expected return while reviewing historical patterns across different asset classes. By the end of this module, you’ll grasp the fundamental principles driving investor behavior in competitive markets, making it a vital primer for the entire course. **Module 2: Portfolio Construction and Diversification** Building on the first module, this section offers practical insights into measuring portfolio risk and return. It emphasizes the crucial concept of diversification, detailing how combining assets can lead to reduced overall risk. With the help of quantitative tools and real-world international equity data, you'll begin to understand how to identify optimal portfolios that maximize returns for given risk levels. **Module 3: Mean-Variance Preferences** This module delves into how investors make choices using utility functions. It simplifies the complex thought processes behind risk perception and preferences, guiding you to understand mean-variance preferences as a way to summarize these attitudes. It’s an excellent way to bridge the gap between theory and practical application in investment strategies. **Module 4: Optimal Capital Allocation and Portfolio Choice** Considered the meat of the course, this module introduces mean-variance optimization. Here, you'll learn how to structure portfolio choices systematically, applying quantitative techniques to find optimal allocations of risky securities. While slightly more technical than previous modules, the knowledge gained is invaluable, equipping you with the tools to make data-driven investment decisions. **Module 5: Equilibrium Asset Pricing Models** The final module draws on previous insights to explore how risk and return correlate in equilibrium. You’ll understand the fundamentals of the Capital Asset Pricing Model (CAPM) and delve into advanced multi-factor models like the Fama-French three-factor model. This knowledge not only adds depth to your understanding but also enhances your ability to evaluate asset pricing effectively. --- #### Recommendations The "Portfolio Selection and Risk Management" course comes highly recommended for anyone serious about investing. Its structured approach demystifies complex concepts and equips learners with practical skills that can be applied in real-life investment scenarios. **Pros:** - Comprehensive coverage of crucial investment concepts. - Blend of theoretical foundations and practical applications. - Well-structured modules that progressively build knowledge. - Instructors with expertise in finance and investment. **Cons:** - Some technical content may be challenging for complete beginners. - Requires dedication to fully grasp and apply the quantitative tools introduced. #### Conclusion In conclusion, whether you're a budding investor or a seasoned professional looking to sharpen your skills, this course offers an enriching experience. The insights gained will empower you to make more informed decisions, construct optimal portfolios, and ultimately enhance your financial acumen. Don’t hesitate to enroll; it could be a significant step towards mastering the art and science of portfolio management!

Syllabus

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.

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.

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.

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!

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.