Preface.

Acknowledgements.

1 Basic Concepts in Finance.

Aims.

1.1 Returns on Stocks, Bonds and Real Assets.

1.2 Discounted Present Value, DPV.

1.3 Utility and Indifference Curves.

1.4 Asset Demands.

1.5 Indifference Curves and Intertemporal Utility.

1.6 Investment Decisions and Optimal Consumption.

1.7 Summary.

Appendix: Mean-Variance Model and Utility Functions.

2 Basic Statistics in Finance.

Aims.

2.1 Lognormality and Jensen’s Inequality.

2.2 Unit Roots, Random Walk and Cointegration.

2.3 Monte Carlo Simulation (MCS) and Bootstrapping.

2.4 Bayesian Learning.

2.5 Summary.

3 Efficient Markets Hypothesis.

Aims.

3.1 Overview.

3.2 Implications of the EMH.

3.3 Expectations, Martingales and Fair Game.

3.4 Testing the EMH.

3.5 Using Survey Data.

3.6 Summary.

Appendix: Cross-Equation Restrictions.

4 Are Stock Returns Predictable?

Aims.

4.1 A Century of Returns.

4.2 Simple Models.

4.3 Univariate Tests.

4.4 Multivariate Tests.

4.5 Cointegration and Error Correction Models (ECM).

4.6 Non-Linear Models.

4.7 Markov Switching Models.

4.8 Profitable Trading Strategies?

4.9 Summary.

5 Mean-Variance Portfolio Theory and the CAPM.

Aims.

5.1 An Overview.

5.2 Mean-Variance Model.

5.3 Capital Asset Pricing Model.

5.4 Beta and Systematic Risk.

5.5 Summary.

6 International Portfolio Diversification.

Aims.

6.1 Mathematics of the Mean-Variance Model.

6.2 International Diversification.

6.3 Mean-Variance Optimisation in Practice.

6.4 Summary.

Appendix I: Efficient Frontier and the CML.

Appendix II: Market Portfolio.

7 Performance Measures, CAPM and APT.

Aims.

7.1 Performance Measures.

7.2 Extensions of the CAPM.

7.3 Single Index Model.

7.4 Arbitrage Pricing Theory.

7.5 Summary.

8 Empirical Evidence: CAPM and APT.

Aims.

8.1 CAPM: Time-Series Tests.

8.2 CAPM: Cross-Section Tests.

8.3 CAPM, Multifactor Models and APT.

8.4 Summary.

Appendix: Fama–MacBeth Two-Step Procedure.

9 Applications of Linear Factor Models.

Aims.

9.1 Event Studies.

9.2 Mutual Fund Performance.

9.3 Mutual Fund ‘Stars’?

9.4 Summary.

10 Valuation Models and Asset Returns.

Aims.

10.1 The Rational Valuation Formula (RVF).

10.2 Special Cases of the RVF.

10.3 Time-Varying Expected Returns.

10.4 Summary.