ECOM050 Module Outline PDF

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Description

2018-2019: MODULE DESCRIPTION Module

Investment Management

Module code

ECOM050

Credit value

15

Module convenor:

Dr. Alfonsina Iona [email protected] GC516 Graduate Centre

Formal assessment

20% coursework 80% final exam The coursework will be submitted at the end of term 1 (last week)

Other assessment

None

Teaching arrangements Lectures (2 hours, weekly)

Support classes (1 hour, weekly)

Tuesday 4-6pm, Tuesday 7-9pm, Wednesday 1-3pm, Wednesday 4-6 pm, Wednesday 6-8pm – students will be assigned a lecture at the start of term. Students will be assigned to a support class at the start of term.

Teaching team and contact details

Konstantina Mari

[email protected]

Tomasz Mlynowski

[email protected]

Module Overview

The aim of this course is to provide a rigorous training in the modern theory of investment and capital markets and a good understanding of its central concepts. More specifically, its purpose is to show how firms, individuals, institutions and more generally speaking financial markets take decisions about Page 1 of 5

optimal investment. We will mainly study two areas of finance, Investments and Capital Markets. Investments concern the optimal decision making process of individuals or firms in choosing optimal portfolios of securities. Capital Markets concern securities, bonds and stocks. On completing this course, students are expected to be able to: 1. 2. 3. 4. 5. 6. 7.

Evaluate investment projects; Evaluate stocks and bonds based on economic fundamentals; Understand the concept of risk and diversification; Construct optimal portfolios hedged against different sources of risk; Understand the most important models of asset returns Undertake portfolio performance analysis and evaluation Construct optimal complete portfolios

Reading List Required: 1.

[BKM] Bodie, Z., Kane, A., and Marcus, A. (2014), Investments, 10E Global Edition, McGraw Hill.

Other Useful books: 2. [BMA] R.A., Brealey, S.C., Myers and F. Allen (2014), Principles of Corporate Finance, 11E Global Edition, McGraw Hill. 3. Copeland T. E. and Weston J. F. (1992), Financial Theory and Corporate Policy, Pearson-Adison Wesley

Module weekly syllabus Week 1 How to evaluate Bonds and Stocks and Financial Statement Analysis [BKM 18-19]

This lecture discusses the process of valuation of bonds and common stock. It describes the relationships between intrinsic value and market and book values. Also, we discuss the basic financial statements, the differences between accounting and economic income, return on equity (ROE), the decomposition of the ROE into component ratios for the purpose of financial analysis, other ratios relevant for financial analysis, and financial statement comparability problems.

Week 2 Risk, Risk Management and the Relationship between Risk and Return (BKM 5)

We introduce the concepts of risk and risk aversion. We see how to calculate the expected return and the risk of a portfolio; we introduce the concept of beta as a measure of risk. We also introduce and

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study the relationship that exists among risk and return.

Week 3 Capital Allocation to Risky Assets (BKM 6)

We see how wealth should be allocated between the risky and the risk-free assets. We see in details the elements that contribute to such allocation of wealth. We also introduce the idea of passive strategies and that of capital market line.

Week 4 Optimal Risky Portfolios (BKM 7)

We introduce the concept of diversification, and we study how risk may be reduced through the portfolio diversification. We also study how assets should be allocated with stocks, bonds in an optimal risk portfolio.

Week 5 The Capital Asset Pricing Model (BKM 9)

We present the Capital Asset Pricing Model and its implications for the incorporation of risk into investment appraisal for projects and securities. One of the most common and important application of the CAPM involves estimation of the company cost of capital and required return for projects. We also see how estimation of betas for companies using market information is performed.

Week 6 Reading Week

Week 7 Index Models, Arbitrage pricing theory and Multifactor Models (BKM 8 and-10 )

The single-factor index model is introduced; this model predicts stock returns based upon both the firm specific and market risks of the security. Using the single-factor model allows the risk to be decomposed into systematic and unsystematic components and reduces the number of inputs required to diversify in an efficient manner. Then we extend the analysis of the index model to develop multifactor models and the arbitrage-pricing framework. The arbitrage-pricing framework

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rules out the possibility of arbitrage profits, that is, the exploitation of mispriced securities.

Week 8 Empirical Evidence on Security Returns [BKM 13] This lecture revisits literature on empirical tests of security returns. Tests of the CAPM and the APT are introduced in the first section. The lecture then describes the method of testing and presents summary of results noting the problems associated with measuring variables. Various multifactor models are presented and analysed.

Week 9 Efficient Market Hypothesis, Behavioral Finance and Technical analysis [BKM 11 and 12] This lecture examines the concept of market efficiency— securities are fairly priced and an investor cannot expect to outperform the market. The implications of market efficiency for investors and studies of the efficient capital hypothesis are presented in detail. Also, the lecture examines Behavioural Finance which presents an argument that prices may not be efficient by questioning investor rationality. Evidence exists that individuals do not always react rationally. Limits to arbitrage may lead to mispricing on securities. The lecture presents evidence uncovered by psychologists that show errors made by individuals in processing information and biases observed in human behaviour. The chapter also examines technical analysis and relates it to behavioural finance

Week 10 Portfolio Performance Evaluation [BKM 24] This lecture discusses and calculates various return measures and risk-adjusted return measures that are used for portfolio evaluation. The process of decomposing portfolio returns into the various components of the portfolio-building process is presented. Week 11 Hedge Funds and Active Portfolio Management (BKM 26-27) This lecture discusses the various hedge fund strategies devoting a great deal of attention to marketneutral or hedged strategies. It describes the evidence on hedge fund performance and the difficulties in evaluating its performance. The lecture also presents the implication of hedge funds’ unusual fee structure for investors and managers. Finally, we discuss the theory of active portfolio management.

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Other advice about the module

There will be a 2 hour lecture every week. For each lecture students will be given hand-outs. Also, a sample of exercises will be shown during the lecture. Students are advised of not missing the Support Classes, where a Class Teacher will develop a wider range of exercises. Recall that the practice on these exercises is going to be crucial for the final exam. Office hours are at GC516, on Mondays from 10am to 1pm For a special meeting, please contact by email. PLEASE COME AND SEE ME FOR ANY COURSE-RELATED PROBLEM YOU MAY EXPERIENCE.

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