From 0 to 1: Investments and Portfolio Theory
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From 0 to 1: Investments and Portfolio Theory

A zoom-in, zoom-out, connect-the-dots take on Investments and Portfolio Theory including Markowitz Model and CAPM
4.5 (2 ratings)
Instead of using a simple lifetime average, Udemy calculates a course's star rating by considering a number of different factors such as the number of ratings, the age of ratings, and the likelihood of fraudulent ratings.
416 students enrolled
Created by Loony Corn
Last updated 4/2017
Current price: $10 Original price: $50 Discount: 80% off
5 hours left at this price!
30-Day Money-Back Guarantee
  • 4.5 hours on-demand video
  • Full lifetime access
  • Access on mobile and TV
  • Certificate of Completion
What Will I Learn?
  • Over 21 lectures and 4.5 hours of content!
  • Understand investment, risk, return, trade-offs, portfolio theories
  • Calculate return and risk of assets and portfolios using Markowitz Modern Portfolio Theory
  • Calculate the CAPM Required rate of return and take investment decisions
View Curriculum
  • This course assumes no prior knowledge of accounting or finance

Course Description

A zoom-in, zoom-out, connect-the-dots tour of Investment and Portfolio Theory

Let's parse that

  • 'connect the dots': Investments and Portfolio Theory are a function of risk, return and the trade-offs achieved between them. The factors that affect these are interconnected. If you get a hang of the relationships, Portfolio Theories would seem like a piece of cake.
  • 'zoom in': Getting the details is very important in portfolio theory - the risk-return trade-off are the core basis for all the theories and because they are inversely related, getting the concepts right can be a little tricky. This course gets the details right where they are important.
  • 'zoom out': Details are important, but not always. This course knows when to switch to the big picture.

What's Covered:

  • Investments introduced: Returns, elements of return, time value, inflation and risk premium and how each of these change returns.
  • Various investment instruments: term deposits, bonds, stocks discussed in detail bringing out the frequency and quantum of return, sources of return and quantum of risk from each of the assets.
  • Markowitz Modern Portfolio Theory: Five elements of the theory explained: Risk Averse, Portfolios, Risk-Retun Trade off, Measuring Return and Measuring Risk.
  • Measuring Return: Explained steps for measuring individual assets and portfolio returns using random variables and probability theory along with logical explanation for each step
  • Measuring Risk: Explained measuring risk of individual assets and portfolio risk along with step-by-step procedure for variance, standard deviation, covariance, correlation coefficient and the reason for using these.
  • Types of Return: Systematic and Unsystematic risks, types of each and effect on investments
  • Diversification of Investment: Learn by example how diversification reduces Unsystematic risk and what Market Portfolio is.
  • Risk Free Assets: Real and Nominal Risk free rate of return including the components
  • CAPM: The 4 components of CAPM including in-depth on types of Beta and how investment decisions using CAPM are taken
  • Equity and Entity Valuation: A teaser on CAPM and WACC used for equity valuation.

Using discussion forums

Please use the discussion forums on this course to engage with other students and to help each other out. Unfortunately, much as we would like to, it is not possible for us at Loonycorn to respond to individual questions from students:-(

We're super small and self-funded with only 2 people developing technical video content. Our mission is to make high-quality courses available at super low prices.

The only way to keep our prices this low is to *NOT offer additional technical support over email or in-person*. The truth is, direct support is hugely expensive and just does not scale.

We understand that this is not ideal and that a lot of students might benefit from this additional support. Hiring resources for additional support would make our offering much more expensive, thus defeating our original purpose.

It is a hard trade-off.

Thank you for your patience and understanding!

Who is the target audience?
  • Yep! Business majors and aspiring MBAs
  • Yep! Finance professionals who are rusty on equity valuation
  • Yep! CFA Candidates
  • Yep! Accountants looking to strengthen their applied corporate finance skills
  • Yep! Non-finance professionals, aspiring entrepreneurs looking to understand how companies are valued
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Curriculum For This Course
22 Lectures
You, This Course and Us
1 Lecture 01:52
Why to Invest? Where to Invest?
4 Lectures 49:03

Earnings in excess of spendings is called savings. If savings are kept idle, they lose value because of inflation. Instead, savings is invested (consumption delayed) in order to increase the quantum of money through return on investment. The return is influenced by time value, inflation and the risk attached.

Preview 12:21

On investments, the investors develop an expected rate of return which increases with increase in payback time, inflation and risk. The investor has many avenues where he can invest his savings, one of which is term deposit, the simplest and least complicated asset.

Investment assets: Term Deposits

Bonds are another asset available to investors who can earn return in the form of interest or capital appreciation. The risks in bond investment depend on whether they are issued by Govt or by Corporate.

Investment assets: Bonds

Stocks is a lucrative investment option with a bit of speculative angles attached. Stocks tag along high potential return as well as risk. From the various options available, which should the investor choose from?

Investment assets: Stocks
The Markowitz Modern Portfolio Theory
4 Lectures 01:04:17

The Markowitz Modern Portfolio states that risk averse investors develop portfolios in order to optimise their return at given levels of risk. One of the main assumptions and a reasonable one is that all investors are risk averse and not risk preferring. We will look into each aspect of the theory in detail.

The Markowitz Modern Portfolio Theory

In order for investors to compare various assets in terms of the returns from them, return should be quantified. Return is expressed in terms of annualised yield. The yield of individual investments is the average return over the holding period, i.e. Mean which can be both arithmetic mean return or geometric mean return.

Measuring historical return of individual assets

The portfolio return is measured as the weighted average of the yield of individual investments where the weights are the proportion of invested amount. Expected return is found using random variables and probability theory to plot the possible returns. The dispersion of possible return around the expected return indicate the risk involved.

Measuring historical and expected return of portfolios

Risk of individual investments and of portfolio can be measured using statistical measures: Variance and Standard Deviation. Standard Deviation is the most common measure of risk as it gives the deviation of possible returns around expected returns taking into consideration both the upward and downwards swing.

Measuring risk using standard variance
Efficient Portfolio and Risk
4 Lectures 01:08:31

The risk of the portfolio is measured using standard deviation, covariance and correlation. The risk of the portfolio should be lower than the weighted average risk of the individual investments in the portfolio and this is the effect of achieving risk-return trade-off.

Standard deviation of portfolios and covariance between individual assets

Correlation gives the degree and magnitude with which one asset reacts with all other assets in the portfolio. This measure is important so that the investor avoids risk of losing money from oppositely related assets. The portfolio risk is the function of standard deviation of individual investments, weights and the correlation.

Correlation and portfolio risk

The efficient frontier contains all portfolios which have the highest return for a given risk or lowest risk for a given return. Investors aim to achieve a portfolio on the efficient frontier curve depending on their risk appetite, i.e. investor utility curve. The risk inherent in investment are of two categories: Systematic and Unsystematic.

Efficient Frontier, Investor Utility, Types of Risk

Systematic risk is the risk affecting all assets in the entire economy. This risk cannot be reduced but only unsystematic risk can be reduced through diversification of investments. The risk reduces as the investor continues to diversify his investments. At the point of diversification where the systematic risk is 0, he achieves the market portfolio.

Systematic risk, diversification of investment, market portfolio
Section 5
2 Lectures 39:31

There are certain assets which are risk-free like the Govt Treasury Bonds. These risk free assets formed the basis for yet another theory developed with the Markowitz theory as base: The Capital Asset Pricing Model, the most significant valuation model.

Risk Free Assets and the CAPM

The CAPM gives the minimum required rate of return from investments and is a function of risk free rate of return, beta and the market risk premium. We take an example and compute the CAPM to understand the model. CAPM also helps investors to decide whether to buy, sell or hold investments.

Calculating CAPM Return and Investment Decision
Sneak Peak into Equity Valuation using CAPM and Betas
7 Lectures 58:31

Discounting risky cash flows presents a challenge: you can either increase the discount rate (by risk-adjusting it) or decrease the cash flow (replace it with its certainty equivalent). Almost everyone does the former.

Discounting Risky Cash Flows

Assets with the same risk should offer the same return. This is the principle underlying risk-return models. We see a simple example of a risk-return model, calculating the cost of debt for a firm from its credit rating and the duration of the borrowing.

Risk Return Models

The CAPM is the most widely known and widely used risk-return model for equities. Understand how the CAPM works, what market beta is, and how the ERP can (or rather can not) be cleanly measured.

Equity Valuation with CAPM

The overall cost of capital for a firm with both debt and equity is given by the wacc. This is a weighted average of the costs of debt and equity. The weights used in the average? The market prices of debt and equity respectively.

Weighted Average Cost of Capital

Top-down betas are obtained from regression, but are very noisy (standard errors in regressions are quite large!) Instead, we should use bottoms-up betas, especially for conglomerates. Understand the intuition, as well as the outline of the procedure.

Beta - Top-Down or Bottoms-Up?

If you are valuing a private company, the beta you really ought to use in your WACC calculation is not the market beta, its the total beta.

Market Beta or Total Beta?

The beta that we get via regression, or (on Yahoo FInance:-)) is a levered beta, which reflects the market co-movement of a company at its current level of leverage. There is a simple way to unlever and relever betas.

Levering and Unlevering Betas
About the Instructor
Loony Corn
4.3 Average rating
4,985 Reviews
38,948 Students
77 Courses
An ex-Google, Stanford and Flipkart team

Loonycorn is us, Janani Ravi and Vitthal Srinivasan. Between us, we have studied at Stanford, been admitted to IIM Ahmedabad and have spent years  working in tech, in the Bay Area, New York, Singapore and Bangalore.

Janani: 7 years at Google (New York, Singapore); Studied at Stanford; also worked at Flipkart and Microsoft

Vitthal: Also Google (Singapore) and studied at Stanford; Flipkart, Credit Suisse and INSEAD too

We think we might have hit upon a neat way of teaching complicated tech courses in a funny, practical, engaging way, which is why we are so excited to be here on Udemy!

We hope you will try our offerings, and think you'll like them :-)