IB9R4-10 Investments and Risk Management

Department: Warwick Business School
Level: Taught Postgraduate Level
Module leader: Sohnke Bartram
Credit value: 10
Module duration: 4 days
Assessment: 100% coursework
Study location: University of Warwick main campus, Coventry

Introductory description

The objective of this module is to provide an in-depth introduction into the theory and practical applications of Asset Management and Risk Management.

Module aims

The objective of this module is to provide an in-depth introduction into the theory and practical applications of Asset Management and Risk Management. The fundamental problem of Asset Management is the choice of an optimal investment strategy within the framework of specific objectives and constraints. As illustrated in recent periods, this can be a challenging task. To start, successful investment management requires an understanding of the characteristics of different classes of financial assets and the mechanics of the markets in which they are traded. These assets are contracts, and we will focus on understanding the contract between seller and investor. The module will also discuss the basic theory that can help understand and analyze the optimal investment decision, based on our knowledge of the risk and return characteristics of the available assets, and the investor’s risk and return preferences.

Once an investment strategy is chosen, the question naturally arises as to how to assess the success of the strategy being implemented. The module will introduce a range of different measures of portfolio performance, such as Sharpe ratio, Jensen’s alpha, and tracking error, and it will discuss their respective strengths and limitations. One of the key determinants of the optimal investment decision is risk. It is therefore necessary not only to establish methods to measure the relevant risk factors but also to develop techniques to manage – that is, reduce, eliminate, or magnify – risk. The module will discuss duration and value-at-risk as ‘industry standards’ for measuring market risk and show how these methods can be implemented in practice. Once the necessary tools to measure risk have been developed, the focus will be on the management of risk, such as the use of derivatives to alter the risk profile of portfolios. The module will also discuss some of the benefits and risks involved in international portfolio investing. Finally, it will cover active investment management in general and hedge funds in particular.

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.

The following is a preliminary list of topics covered in this module.

Financial Markets and Instruments
markets and instruments, asset classes
money markets (T-bills, CDs, commercial paper, LIBOR, etc.)
capital markets (equity, sovereign and corporate bonds, asset-backed debt, preferred and common stock)
investment companies
mechanics of trading.

Portfolio Theory
risk, return, investor preferences and risk premium
diversification
optimal asset allocation.

Asset Pricing Models
Capital Asset Pricing Model
multifactor models
market efficiency
behavioral finance

Security Valuation
valuation of debt instruments
valuation of stocks

Risk Management
types of risk
risk management tools
interest rate risk (duration, gap management, caps/floors, swaps)
measuring and managing market risk (VaR)
international investing
forwards and futures
options

Active Investment Management
portfolio performance measurement and attribution
active management (the ‘Search for Alpha’)

Learning outcomes

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

Demonstrate a comprehensive understanding of the characteristics of different classes of financial securities and the mechanics of the markets in which these securities are traded
Demonstrate a comprehensive understanding of the basic valuation techniques for cash instruments such as equities and bonds and derivative securities such as options and futures
Demonstrate a comprehensive understanding of the various types of risk an investor or corporation is exposed to, how to measure risk using VaR and other methods, and the reasons why it is important to actively manage these risks using techniques such as derivative securities
Demonstrate a comprehensive understanding of the trade-off between risk and expected return
Acquire and analyse data and information, evaluate its relevance and validity, and synthesise a range of information in the context of new situations
Demonstrate a critical application of relevant knowledge to a range of complex situations taking account of their relationship and interaction with other areas of the business or organization
Reflect on and learn from prior experience and thus be able to integrate new knowledge with past experience and apply it to new situations
Demonstrate strengths in analysing, synthesising and solving complex unstructured business problems

Indicative reading list

The core textbook provided for this module is:

Bodie, Z.; Kane, A. and Marcus, A.J. (2019)
Essentials of Investments (11th edn)
Maidenhead, Berks: McGraw-Hill Irwin

There is also a more comprehensive version of this textbook:

Bodie, Z.; Kane, A. and Marcus, A.J. (2018)
Investments and Portfolio Management (11th edn)
Maidenhead, Berks: McGraw-Hill Irwin

Other texts

Peterson, S. (2012)
Investment Theory and Risk Management
Hoboken: Wiley

Jordan, B.; Miller, T. and Dolvin, S. (2011)
'Bumpy Market Reminds Investors to Assess their Risk Tolerance'
in Fundamentals of Investments (6th edn)
Maidenhead: McGraw-Hill, Chapter 2

Bodie, Z. and Merton, R.C. (2000)
'The Time Value of Money and Discounted Cash Flow Analysis'
in Finance
London: Prentice Hall

Case studies and The Economist will also be used

Research element

The module includes coverage of latest academic research with an applied pitch

Interdisciplinary

The module is not interdisciplinary in the traditional definition, though it covers and connects many areas of financial economics

International

The investment exercise uses an international investment universe. Many concepts, such as portfolio diversification, are applied internationally. Various elements such as international investing, currency hedging, etc. originate from an international perspective

Subject specific skills

Evaluate the performance of active investment strategies
Form a portfolio with an optimal risk-return trade-off from a given set of base assets
Implement different measures of portfolio performance, and understand their respective strengths and limitations

Transferable skills

All key skills will be covered in this module (written and oral communication, working with others, IT, problem solving, numeracy, personal effectiveness and change management).

Study time

Type	Required
Lectures	27 sessions of 1 hour (27%)
Private study	43 hours (43%)
Assessment	30 hours (30%)
Total	100 hours

Private study description

Private Study and preparation for lectures.

Costs

No further costs have been identified for this module.

You do not need to pass all assessment components to pass the module.

Assessment group A2

	Weighting	Study time	Eligible for self-certification
Assessment component
Individual Assignment	80%	24 hours	Yes (extension)
Reassessment component is the same
Assessment component
Group Presentation Slides	20%	6 hours	No
Group presentation slides (max 15)
Reassessment component is the same

Feedback on assessment

Feedback via My.WBS

Pre-requisites

To take this module, you must have passed:

Any of

Courses

This module is Optional for:

Year 2 of TIBS-N1Q1 Postgraduate Business Administration (Executive) London
Year 2 of TIBS-N1Q4 Postgraduate Business Administration (Executive) London
Year 2 of TIBS-N1Q5 Postgraduate Business Administration (Executive) London
Year 1 of TIBS-N1P2 Postgraduate Taught Business Administration
TIBS-N1PW Postgraduate Taught Business Administration (Distance Learning)
- Year 2 of N1PW Business Administration (Distance Learning)
- Year 3 of N1PW Business Administration (Distance Learning)
Year 2 of TIBS-N1Q2 Postgraduate Taught Business Administration (Distance Learning)
Year 2 of TIBS-N1S5 Postgraduate Taught Business Administration (Distance Learning) (London)
Year 2 of TIBS-N1S4 Postgraduate Taught Business Administration (Distance Learning) (Warwick)
Year 2 of TIBS-N1Q9 Postgraduate Taught Business Administration (Distance Learning) London
Year 2 of TIBS-N1Q3 Postgraduate Taught Business Administration (Executive)
Year 2 of TIBS-N1S2 Postgraduate Taught Business Administration (Executive) (London) Daytime
Year 2 of TIBS-N1S3 Postgraduate Taught Business Administration (Executive) (London) Evening
Year 2 of TIBS-N1S1 Postgraduate Taught Business Administration (Executive) (Warwick)