Abstract
Financial Modelling and Management – Part II concerns the application of scientific tools to investment and funding activities that are also represented in terms of random cash flows. More precisely, it deals with some validated models and procedures that support decisions on the appraisal of companies; the management of portfolios according to the requirements in terms of liquidity, diversification, income/growth, risk/return. The presentation is both qualitative and quantitative. Emphasis is placed on data and procedures that are used or taken into consideration by financial advisors, financial analysts, and portfolio managers, e.g. of mutual or pension funds. Although coverage is neither exhaustive nor entirely up-to-date, it is rigorous; a broad set of useful and consistent notions is explained in the clearest possible form. Accordingly, students will learn which data to analyse and how to go about financial analysis and discretionary portfolio management, especially in connection with stocks, bonds, and exchange-traded funds. After outlining the stages and tasks of a portfolio management process, students will learn how to choose a strategic asset allocation in line with household age, goals, and risk tolerance; spot social, technical, economic/ecological, or political trends by following a top-down approach; look for mispriced stocks by relying on fundamental analysis, a bottom-up approach. As for equity research and value investing, students will focus on whether a listed company benefits from a sustainable competitive advantage and whether stock price and fundamental value are consistent. In doing so, Benjamin Graham’s, Philip Fisher’s, and Warren Buffett’s guidelines will be mentioned. A problem-oriented and hence multidisciplinary approach is adopted so that reference is made to the theoretical principles and practical notions of other related subjects such as business economics and applied statistics; due attention is paid to economic science, the main findings of selected empirical studies being summarised in the simplest possible form. Different anomalies and regularities of US financial markets are taken into consideration, as they lay the foundations for proficient portfolio management by both individual and institutional investors. In other words, stress is put on a business practice that is consistent with empirical evidence; the informational and fundamental efficiency of US financial markets is examined, with attendant neoclassical and behavioural interpretations being contrasted. As investment decisions are both rational and emotional, emphasis is placed on bounded rationality and cognitive biases leading to irrational exuberance and speculative bubbles. The author shares the belief with other Italian colleagues that a fruitful theory rests on a solid and practical basis, and vice versa. Accordingly, learning and retaining Financial Modelling and Management – Part II should be made easier by a twofold course of reading the theoretical one, concerned with analytical processes or statistical inquiries and their peculiarities; the operational one, focused on financial contracts, financial transactions, and business practice.