Financial Engineering & Portfolio Theory -CM2 Actuarial Exam

By MJ the Fellow Actuary

Section 1 - Introduction

1. Financial Markets

   1. We look at various markets such as the Stock Market, the Bond Market, the Derivative Market as well as Risk markets.

2. Efficient Market Hypothesis

   1. We consider the Strong, Semi and Weak form of the Efficient Market Hypothesis as well as the evidence for and against each one.

3. Can you Beat the Market?

   1. We compare the success of Warren Buffet vs the success of John C Bogle

4. Active vs Passive Strategies

   1. We compare two investment philosophies and consider the problems with each

5. Covid-19 Investment Strategies

   1. I share my own investment strategies before and after Covid-19

6. What Caused the Great Recession

   1. We look at what caused the global recession in 2008

Section 2 - Utility Theory

1. Irrational Behaviour

   1. We play the St Petersburg Paradox and consider if our decisions can be irrational

2. Consumer Choice Theory

   1. We look at indifference curves and budget lines to make decisions around bundles.

3. Utility Theory

   1. We make observations about the utility of money and consider various attitudes towards risk.

4. Axioms of Utility

   1. We look at Completeness, Transitivity, Continuity and Independence

5. Expected Utility Theory

   1. We consider consumer choice theory with uncertainty

6. Stochastic Dominance

   1. We look at Absolute, First Order and Second Order Dominance

Section 3 - Behavioural Economics

1. Behaviour Economics

2. Heuristics

3. Framing

4. Herd Instinct

5. Anchoring

6. Myopic Loss Aversion

7. Mental Accounting

8. Bias - (Self Serving, Confirmation, Availability and Familiarity)

9. Story Believing

10. How to Fight Irrationality

Section 4 - Risk Measures

1. Variance and Semi Variance

2. Shortfall Probability

3. Value at Risk

4. Expected Shortfall (Tail VaR)

5. Relationship between Risk Measures and Utility Functions

Section 5 - Mean Variance Portfolio Theory

1. Introduction to Portfolio Theory

2. Introduction to Mean Variance Portfolio Theory

3. Assumptions

4. Opportunity Set & Efficient Frontier

5. Diversification Benefit

6. Optimal Portfolio

Section 6 - Capital Asset Pricing Model