โ Scribed by Joseph A. Cherian
No coin nor oath required. For personal study only.
This textbook introduces the quantitatively-minded student to the essential principles of portfolio and derivatives theory. It is a very well-written book and covers a broad range of advanced topics in finance. The examples and end-ofchapter exercises are very instructive and a 'must do' in order to obtain a complete understanding of the material. Investment Science is suited for its intended audience -Masters-level students in engineering, operations research, mathematics, and economics with an interest in the science of investing. Since the book is long on technical details and short on institutional details, it may not be ideally suited for MBA programs using the case method, although it could conceivably be implemented in more quantitative MBA programs. Practitioners of financial engineering will find Znuestment Science value-added reading. What follows is an outline of the organization of the book by topic.
Chapters l-5 take the reader through the typical cycle of the time value of money, the market for fixed income securities, term structure theory, and capital budgeting in a dynamic framework without uncertainty. Dynamic programming is introduced in a creative lattice framework. This approach provides the essential structure for addressing a variety of financial (and non-financial) problems. In term structure theory, the measure of the duration (or interest rate sensitivity) of fixed income portfolios appeals to traditional ones like Macaulay and its variants. These, while still popular in practice, are yield-to-maturity based measures which, by construction, only make sense when the term structure of interest rates (TSIR) is flat and has at most parallel shifts. More generalized measures, which can accommodate the stochastic of the TSIR's evolution over time, are excluded in Investment Science.
Chapters 6-9 cover single-period portfolio optimization under uncertainty. The notions of equilibrium (CAPM) and arbitrage (APT), both extremely
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