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Finance

Professor Kay Giesecke Management Science & Engineering Stanford University

Kay Giesecke

Finance

Making decisions
You have saved 2000 dollars from your summer internship. Should you put it under your mattress, buy a Certicate of Deposit, Apple stock or an S&P 500 index fund? You are the manager of a mutual fund specializing in technology stocks. Which proportion of the funds total assets should you invest in each of the stocks that were recommended by your analysts? You work for a venture capital rm that wants to sell o a venture through an IPO. What is the fair value the venture? You are an engineer overseeing a circuit manufacturing facility. The management has decided to expand its production and wants you to assess the dierent oers it solicited. The options dier in their total costs, their output, their expected lifetime, their maintenance schedule, among other things.
Kay Giesecke

Finance

Finance
In each situation, you need to Commit resources (money, eort, time etc.) In the face of uncertainty about the future Finance is the quantitative analysis of these situations This is a fascinating interdisciplinary subject that draws on methods from probability and statistics, nance and economics, optimization and computer science In this course, you will learn the fundamental principles of nance and get an understanding of how these principles are applied in practice This course is not about how to beat the market
Kay Giesecke

Finance

Relevance
We live in an uncertain world and every day, we have to make decisions about alternatives whose outcomes cannot be predicted with certainty If we can evaluate alternatives in terms of money, then nance provides us with a quantitative framework in which to analyze these decisions and their consequences Finance has a profound impact on how risk is measured and managed in society

Kay Giesecke

Finance

Overview
Part I: Finance under certainty We analyze the most basic questions in an idealized world without uncertainty to get a feeling for the issues Concepts we consider include present value and internal rate of return, which can be used to rank investment projects We discuss the fundamentals of xed income markets, examine the basic theory of interest, with concepts such as duration, portfolio immunization, convexity and the term structure of interest rates We will take a rst look at arbitrage

Kay Giesecke

Finance

Overview
Part II: Finance under uncertainty in one period We introduce (one-period) uncertainty and model risk in a probabilistic framework We discuss the measurement and management of nancial risk, the trade-o between risk and reward, and the design of optimal portfolios We examine how this determines security prices on the nancial market, which leads to the Capital Asset Pricing Model We consider the statistical estimation of model parameters and the statistical testing of model predictions; the projects will involve working with real nancial market data We derive practical implications for investment management, portfolio construction, risk management and project choice
Kay Giesecke

Finance

Tools we will need

Probability to model uncertainty and characterize risk (Micro) Economics to model the behavior of rational investors under conditions of risk Optimization to construct optimal strategies under constraints Statistics to estimate the model parameters from observable data Spreadsheets We will not assume knowledge of advanced material from these areas

Kay Giesecke

Finance

Problem sets and projects

There will be regular problem sets There will be a course project that involves actual nancial market data that you will download from the internet, and analyze using spreadsheets

Kay Giesecke