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7/29/2019 Intro Online

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Finance

Professor Kay Giesecke

Management Science & Engineering

Stanford University

Kay Giesecke


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Finance 2

Making decisions

You have saved 2000 dollars from your summer internship. Shouldyou put it under your mattress, buy a Certificate 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 youranalysts?

You work for a venture capital firm that wants to sell off 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 different offers it solicited. The options differ in

their total costs, their output, their expected lifetime, their

maintenance schedule, among other things.

Kay Giesecke


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Finance 3

Finance

In each situation, you need to Commit resources (money, effort, 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, finance and economics,

optimization and computer science

In this course, you will

learn the fundamental principles of finance and

get an understanding of how these principles are applied in

practice

This course is not about how to beat the market

Kay Giesecke


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Finance 4

Relevance

We live in an uncertain world and every day, we have to makedecisions about alternatives whose outcomes cannot be predicted

with certainty

If we can evaluate alternatives in terms of money, then finance

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

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Finance 5

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 fixed 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 first look at arbitrage

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Finance 6

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 financial risk,

the trade-off between risk and reward, and the design of optimal

portfolios

We examine how this determines security prices on the financial

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 financial market data

We derive practical implications for investment management,

portfolio construction, risk management and project choice

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Finance 7

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

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Finance 8

Problem sets and projects

There will be regular problem sets

There will be a course project that involves actual financial market

data that you will download from the internet, and analyze using

spreadsheets

Kay Giesecke

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