Copyright Kareem Abdul Jabbar. When you're putting a team together, certainly you need good shooting, you also need rebounding, defense, teamwork, same is true in the world of investments. When you're putting a financial portfolio together, you don't just care about the expected returns of assets and isolation, how do they work together as a team. What's the correlation of the performance across the different asset classes in your portfolio? In my investments course we'll talk about constructing optimal portfolios. So after that show of athletic prowess, I'm sure you have this natural question burning in your head. How many recordings did it actually take before Scott, that's me, made the basket? Okay, was it first attempt, A? Two, did it take three? Really, four more than four or did we just totally doctor the video because I so pathetic I just, kind of had no opportunity to make the shot. Well, sadly, even though this was one of my probably greatest athletic achievements, it still took four times for me to make the basket. Hi, I'm Scott Weisbenner, Professor of finance at the University of Illinois and this is module one, of my investments course. You're probably wondering why do I start off the investments course with this basketball display? Well, actually, there's a lot of similarities between putting together a good basketball team and putting together and investments portfolio, okay? You can probably see I'm a big fan of basketball, so let me give you another example to illustrate my point. How do you build a team? How do you put a portfolio together? One way you might think is, hey, let's just put in all the assets that have the highest expected return. Let's put together this team of all stars here we have like Kobe down there, Karl Malone, Phil Jackson, the coach, Shaquille O'neal, Gary Payton. Look at these accomplishments here, in fact three of the six all time leading scores were on this 2003-04 Laker team Kobe Bryant, Shaquille O'Neal. Look at all these accolades, Karl Malone, Gary Payton, so that's one way to put together portfolio. Just take the assets with the highest return, put them together and hope for the best, okay. Here's another way to build a team, the 2003-04 Detroit Pistons, so quality players, but certainly don't have the accomplishments of the Lakers. If you look at all stars or MVP awards but this was a team that really knew their roles, good rebounder, good passer, clutch shooter, good three point shooter, who won the finals, okay? You know, it's good news when you're getting to go to an event with the president, the Pistons ultimately won the finals. It's like putting together the optimal portfolio and investments so what's the lesson for investments from this NBA, finals experience. When you're constructing a portfolio, certainly you care about the returns of the assets, but that's not the only thing you care about, how well do the assets work together? How correlated is their performance? When you're putting together a portfolio, you want some assets that are going to go up when other assets are going down. You have one of those assets, it's called home insurance, also past performance is no guarantee of future performance, right? You know that the Lakers on paper where the team that was the odds on champion but that's not how it turned out. Same thing with investing in the stock market, historically returns for US stocks have been about 12% per year, will that continue? Who knows? So, in module one of this course, I view this as providing the fundamentals that we'll need to develop the asset pricing models. That allows us to do the things like evaluate performance or see investment tendencies of certain portfolio managers. So, I want to get a sense of accomplishment here, so we've already almost done with lesson 1-1, the objectives and overview. In lessons 1-2, I'll provide a review of certain investment concepts and statistical analyses that I think that you should hopefully already know. But if you don't don't worry about it, we'll do it, we'll do a quick review. In lesson 1-3 we want to provide background and the Historical Returns in the US, past does not necessarily become prologue but it is useful to, at least know how assets performed in the past. In lesson 1-4 Introduction to Putting Together Portfolio, so some simple examples of how they calculate the average return, the volatility of a portfolio when we combine certain assets. And then we'll expand upon that to look at portfolio choice in general settings where we consider, an allocation between risk free assets and stocks or different types of stocks. How we can get, you know, kind of the maximum return given a certain level of risk tolerance. And then we'll build upon that, throughout the course we're going to have five assignments, two of those will be in module one when we're building up the fundamentals. In lesson 1-6 we'll have assignment one which you do on your own and then I'll provide a discussion of that assignment. Where we look at how does your portfolio choice decision change when we change the correlations of assets in the portfolios. Then to kind of wrap things up in less than 1-7 we're going to calculate what I'll call efficient portfolios or optimal portfolios of risky assets. What I just mean by that is given a certain level of risk or volatility you're willing to take on in your portfolio. How can you combine assets to get the highest return for that level of volatility and then we'll follow that on the best way to learn something to actually do it. So I've prepared an excel spreadsheet for you to calculate efficient portfolios, given historical assumptions on various asset classes. And what's nice about this spreadsheet is after we're done with the course, you can put in your own assumptions, you can look at your own asset classes and see what optimal portfolio pops out. And then finally with all the modules in the course, we'll do a review at the end to kind of highlight the key takeaways from the course. So if you want to take this up to another level, there's ability to take a high engagement credit offering from the University of Illinois. And if you're so excited about these Coursera courses, you can take a bunch of high engagement for credit offerings to get an IMBA, degree. So for those you want to do the high engagement option, we're going to do further practice on optimal efficient portfolio formation. We're going to look at this organization, Partners Healthcare and consider whether they should add real estate investment trusts and commodities here to their asset mix. >> Check the syllabus for any high engagement offering using this Coursera video as the Partners Healthcare case has not been part of the high engagement portion of the course in recent years. >> So, my view in a nutshell on a module one of the course, this is basically the broccoli part of my investments course here. Before you get to the chocolate cake, which most people like the best you have to eat the broccoli. So before we can use the asset pricing models, like the capital asset pricing model, CAPM the Fama French 3 factor model - we need to build the intuition, okay, that's what we're doing in module one. Without these fundamentals were basically living in a house like this here. See, I wanted to get away from it, so I kind of skipped over if you don't, it's kind of like without module one, you're building a house on the beach. I can just give you, here's the equation for the asset pricing model, but you're going to know it and understand it much better if we built the fundamentals that lead up to that asset pricing model. So, practical knowledge and experiences that I hope you'll take away from module one, a good sense of what historical returns are in the United States. How to form a portfolio of securities and calculate the return and risk of that portfolio. So, you notice I have risk in quotation marks at this stage, will just mean by risk, the standard deviation or volatility of the returns. I'll use those terms, meaning the same thing standard deviation or volatility throughout the course. Other practical knowledge and experiences how to graph a return volatility trade off and construct optimal or efficient portfolios. Again, optimal efficient meaning the same thing, given the level of risk you're willing to take on. What combination of assets gives you the highest return for that level of risk you're willing to absorb? And we'll look at some kind of interesting real-world example, so does it make sense to add gold to a portfolio that already consists of kind of large-stock US stocks? Does it make sense to add international funds? You may be thinking in your 401k retirement plan, should I invest in international stocks? Is there any benefit you're already holding kind of the US stock market?