Introductory description

This module aims to explore and formalize the fundamental relationships between investors’ decision-making in the presence of uncertainty (“risk”) and the cross-sectional and inter-temporal properties of prices and returns of financial assets.

Module web page

Module aims

Outline syllabus

This is an indicative module outline only to give an indication of the sort of topics that may be covered. Actual sessions held may differ.

Market and Instruments.
Portfolio Choice Theory.
CAPM: Theory and Empirics.
APT and Factor Models.
Efficient Market Hypothesis and Anomalies.
Equity Valuation Models.
Financial Statement Analysis.
Bond markets: introduction.
Option markets: introduction.
Portfolio Performance Evaluation.

Learning outcomes

By the end of the module, students should be able to:

• Explain and discuss the characteristics of different asset classes, and the mechanics of the markets on which these are traded.
• Critically evaluate different theoretical models: understand and be able to explain the assumptions made and intuitively assess their validity, understand and be able to explain the implications and discuss their scope and limitations.
• Build, explain, and use formal models that capture investment opportunities with uncertain (risky) outcomes, and investors' preferences regarding such risky outcomes.
• Apply the theory to understand and implement optimal asset allocation decisions, and explain the implications for the cross-section of asset prices and returns.
• Use the theory (2) and its application (3) to quantify the risk inherent in specific assets or portfolios of assets, and compute the fair price and return of such.
• Understand and be able to explain how to develop a framework that would facilitate the empirical verification or rejection of theoretical models.
• Analyse real world events, case studies and/or data, in the context of a given theoretical framework.
• Present the results of analyses either in writing or orally, in a concise and structured manner to a non-expert audience.

Indicative reading list

Core:
Bodie, Z., A. Kane, and A.J. Marcus: “Investments“; Tenth edition, McGraw-Hill. 2013.
Additional:
Back, K.E.: “Asset Pricing and Portfolio Choice Theory”; Oxford University Press. 2017.
Penacchi, G.: “Theory of Asset Pricing”; Prentice Hall. 2007.

Subject specific skills

Build (using spreadsheet or other suitable software) implementations of the models developed in the module to explicitly calculate asset prices or optimal portfolios based on model parameters.
Build (using a spreadsheet or other statistical software) a framework in which it is possible to estimate the parameters of, or empirically assess the validity of such models.
Understand and quantify the risks and other characteristics of a given (real) market environment and construct optimal investment strategies on the basis of this analysis.

Transferable skills

Use a variety of sources to acquire data to investigate a given research hypothesis.
Use spreadsheet or other suitable software to visualise and analyse data.
Use spreadsheet or other suitable software to perform complex calculations.
Demonstrate problem solving skills.
Demonstrate written and verbal communication skills.