Finance 532 Investment Theory

Phil Dybvig / 935-4569 /
Washington University Olin School

Focus: concepts and tools that are useful in managing investments

Although the range of sophistication in people associated with investments varies substantially, it is more and more common to base investment strategies at least in part on quantitative tools and concepts developed by academics and more quantitative practitioners. The purpose of this course is to expose students to what will be useful to any player in the investments industry, whether a portfolio manager, a corporate financial officer overseeing a pension fund, a pension fund consultant, or a private investor. The course will include deeper coverage of tools familiar from introductory finance, tools based on option pricing theory, and other tools not seen previously in the curriculum. The course will also discuss the structure of the investments industry, in particular the connection between the institutions and the nature of the decision problem faced by practitioners.

At the frontier: Although we will cover the important aspects of investments covered by existing textbooks, those textbooks are out-of-date in important ways, and we will be covering a significant amount of material for which no adequate text exists at this point. Students should leave Washington University familiar with traditional tools as well as recent innovations.

Prerequisites Introductory Finance (5200 or both 5201 and 5202) is the only formal prerequisite. As in most quantitative courses, students with the strongest math backgrounds will breeze through most easily. This course places quantitative demands on students typical of our other finance courses.

Organization of the course The course will be in a traditional lecture format, with a final exam in the last class period.

Course Requirements Grades in the course will be based mainly on the final examination, which will measure understanding of the tools and concepts from the lectures. Class participation may change a grade near a cutoff. Understandably, job search or other obligations may occasionally conflict with class. It is your responsibility to find out from your classmates what you miss when you are absent.

Course materials Course materials include three optional texts and slides that are available on the web. There is no separate packet.

Transparencies The lectures will be based on transparencies that are available on the Web. You will probably want to print a paper copy of the transparency before each class for cross-reference during class, for study, and for taking notes on. The slides are available from my teaching page on the WEB: The text-only versions save download time and paper; the .pdf versions are more exactly the same as the slides I use in class. The materials are still under revision; be sure to use reload on your browser to get the most current version. I also invite you to visit my home page and research page: If your Web access is slow or you are tired of seeing my picture, disable ``Auto Load Images'' on your Web browser.

Textbooks The textbooks for the course are not traditional textbooks. Puzzles of Finance: Six Practical Problems and Their Remarkable Solutions, by Mark Kritzman, is an accessible explanation of six examples of how quantitative methods help us to understand decisions in investments. Active Portfolio Management, by Richard Grinold and Ronald Kahn, is focused on the connection between risk management and the selection of securities in a portfolio. And Where are the Customers' Yachts? A Good Hard Look at Wall Street, by Fred Schwed, is witty and a fun read, a voice from the past that balances the get-rich-quick tone of current marketing for financial publications and online trading. All three are optional; it should be possible to do fine in the class using only the information in the lectures and slides.

Teaching Assistance Yufeng Han and Paskalis Glabadanidis will assist in offering the course. They are both doctoral students working in the area of investments and asset pricing. They were a very popular team helping out in my computational finance, and you will discover that we are fortunate to have their assistance. Their office is Simon 284, their phone number is 935-4884, and their e-mail addresses are and Yufeng will attend the day section and Paskalis the night section, but both are available to help you. (Of course, you can also direct your questions to me; I recommend e-mail at or though my home page as an effective way of tracking me down quickly.)

About you In addition to enrolling through the proper authorities, please send me an e-mail with the following information:

If you enroll and later choose to drop the class, please let me know about that, too, with feedback about why the course didn't work for you.

About me I was previously a tenured full professor at Yale, and I came to Wash U in 1988 in the hope of building a top finance group, which we have done. More information on me is in the chatty blurb at or in my vitae at All of my Web pages can be accessed through my home page.

Feedback Feedback is especially important to me. Written feedback by e-mail is especially useful.

Integrity Students are expected to conform to the Olin School's Code of Conduct.

Summary I invite you to join me in exploring the exciting field of investments!