40.324 Fundamentals of Investing (for non-ESD students only)

Learning Objectives

1. Define key accounting metrics and apply these metrics to evaluate the performance of a company.
2. Identity and interpret techniques to value cash flows from investing in firm projects.
3. Develop equity valuation frameworks that link stock prices to firm cash flows and risk.
4. Derive optimal allocation rules for investing in portfolios with one or two risky assets.
5. Identify optimal portfolio allocation rules for many risky assets, such as stocks, commodities, real estate and bonds. Combine the optimal allocation rules with index models to identify the degree of diversification in an optimal portfolio.
6. Hypothesize and derive a linear relation between risk and expected returns.
7. Define factors that determine bond prices. Synthesize bond pricing relations with no‐arbitrage equilibrium models of spot and forward rates.

Measureable Outcomes

1. Create a financial planning spreadsheet for a start‐up company.
2. Estimate cash flows generated by a company project, and develop decision rules for whether to invest in the project.
3. Determine the value of the stock using valuation by comparables.
4. Use optimal allocation rules to recommend allocations to stocks vs cash.
5. Construct optimal portfolios for investors that account for the risk and expected returns of the assets in the portfolio.
6. Devise and implement methods to estimate and test the linear relation between risk and expected return.
7. Design no‐arbitrage trading strategies to identify possible violations of no‐arbitrage equilibrium.

Pre-Requisite Subject(s)

• 10.001 Advanced Mathematics I
• 10.004 Advanced Math II
• 30.003/50.034 Introduction to Probability and Statistics

• 10.013 Modelling and Analysis
• 10.018 Modelling Space and Systems
• 10.022 Modelling Uncertainty