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This course is open to MA students only.

This master’s-level course introduces students to financial theory and practical aspects of financial decisions, with a focus on portfolio allocation decisions as they relate to investors in emerging markets.

The combination of rapid growth of investment opportunities and higher volatility raises fundamental question for investors about how to incorporate emerging markets in the overall investment process. To the extent that classic assumptions about efficient markets tend not to fully apply to emerging markets, these markets present financial managers with a great challenge of modifying their capital allocation criteria and valuation techniques to take into account particularities of emerging markets.

We will start by identifying a relevant group of countries classified as emerging markets and examining their characteristics, including past performance, market efficiency, and global integration. The methodology of constructing security market indices and calculating risk and return characteristics of securities will be covered to provide thorough background for understanding modern portfolio allocation techniques. The students will also be introduced to fundamental principles of debt and equity valuation, with critical assessment of underlying assumptions and their validity in the emerging markets environment.

The investment framework will be developed through the analysis of the intertemporal consumption problem. The validity of the classical principles of value-maximization will be discussed in the context of emerging markets. The mean-variance model will emerge from our analysis of the investment decision under uncertainty. The concepts of risk-aversion and risk-premium will be developed in the context of the expected utility theory. The appropriate measures of risk will be derived by considering the benefits of diversification.

The Capital Asset Pricing Model (CAPM) will be used to illustrate the equilibrium in asset markets, optimal portfolio allocation of investors, the concepts of systematic and unsystematic risk, and the estimation of expected rate of return on financial and real investments. The factor models/smart beta strategies of investment will also be introduced and discussed extensively.

We will review the main limitations of the CAPM and related models in an emerging market context and discuss the potential necessity and the ways of incorporating country risk in investment analysis. Modified CAPM models for calculating discount rates for investments in emerging countries will be proposed, and their advantages and disadvantages will be discussed.

At the end of the course the students are expected to deliver a 3,000-word essay. The essay is expected to be of empirical nature, showing the ability of students to collect and analyse financial data relevant for portfolio investments in emerging markets.