MGMTMFE 431 LEC 1
Spring 2019
Professor: Bernard Herskovic
E-mail: bernard.herskovic@anderson.ucla.edu
Office: Room C-413
Class: Wednesdays 8:30am{11:20am, room B-301
Teaching Assistant: Denis Mokanov
E-mail: denis.mokanov.phd@anderson.ucla.edu
TA Sessions: Thursdays 10:00am-11:00am, room D307
The objective of the class is to provide you with the knowledge to manage a large portfolio of assets or to knowledgeably select and monitor someone who does so for you. Standard portfolio theory tells all investors to choose the same portfolio of risky assets. We start by highlighting the limitations of standard mean-variance analysis, and we describe newer alternatives like risk parity investing which equalizes the total risk contribution coming from each asset class. Along the course, we will study the Fama and French five-factor model, momentum (both cross-section and time-series), volatility, commodities, currency. We will also study smart-beta strategies such as betting against beta and quality minus junk. We will study return predictability, mutual fund and hedge fund performance. Finally, we will discuss p-hacking and the limitations of anomaly-based investing.
To achieve these objectives, this class builds on key concepts of modern portfolio theory and empirical asset pricing already studied in the previous MFE classes. The class draws on recent advances in empirical asset pricing. Until the 70’s, teaching investments was very straightforward but rather boring. There was only market risk, because the CAPM ruled. Portfolio advice was a one-liner. Returns were thought to be completely unpredictable coin flips, so there was no room for market timing. The new paradigm in finance has abandoned all of these views. There is whole range of priced risk factors, not just market risk. In addition, returns are widely thought to be somewhat predictable, sometimes we cannot do much better than a coin flip, but often that’s enough to create market timing opportunities that deliver high Sharpe ratios and profitable momentum trading strategies in bond, equity, currency and commodity markets. All of these new insights will be the building blocks for this class.