4. Portfolio Diversification and Supporting Financial Institutions

Financial Markets (2011) (ECON 252)

In this lecture, Professor Shiller introduces mean-variance portfolio analysis, as originally outlined by Harry Markowitz, and the capital asset pricing model (CAPM) that has been the cornerstone of modern financial theory. Professor Shiller commences with the history of the first publicly traded company, The United East India Company, founded in 1602. Incorporating also the more recent history of stock markets all over the world, he elaborates on the puzzling size of the equity premium. very high historical return of stock market investments. After introducing the notion of an Efficient Portfolio Frontier, he covers the concept of the Tangency Portfolio, which leads him to the Mutual Fund Theorem. Finally, the consideration of equilibrium in the stock market leads him to the Capital Asset Pricing Model, which emphasizes market risk as the determinant of a stock's return.

00:00 - Chapter 1. Introduction
01:14 - Chapter 2. United East India Company and Amsterdam Stock Exchange
16:19 - Chapter 3. The Equity Premium Puzzle
21:09 - Chapter 4. Harry Markowitz and the Origins of Portfolio Analysis
29:41 - Chapter 5. Leverage and the Trade-Off between Risk and Return
39:55 - Chapter 6. Efficient Portfolio Frontiers
01:00:21 - Chapter 7. Tangency Portfolio and Mutual Fund Theorem
01:09:20 - Chapter 8. Capital Asset Pricing Model (CAPM)

Complete course materials are available at the Yale Online website: online.yale.edu

This course was recorded in Spring 2011.


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