Module Information

Module Identifier
Module Title
Academic Year
Semester 2 (Taught over 2 semesters)
Other Staff

Course Delivery

Delivery Type Delivery length / details
Lecture 20 Hours.
Seminars / Tutorials 8 Hours.


Assessment Type Assessment length / details Proportion
Semester Exam 3 Hours   Unseen written examination  80%
Semester Assessment 2,000 word essay  20%
Supplementary Exam 3 Hours   Unseen written examination  100%

Learning Outcomes

On successful completion of this module students should be able to:

  • Measure and evalute risk and return

* Distinguish between individual asset risk and systematic risk

* Apply key analytical techniques for investment analysis

* Evalute the practical relevance of classic theories of investment

* Analyse options and other derivative assets

* Analyse fixed income securities and the term structure of interest rates


The module aims to equip you with the necessary tools for quantitative analysis of financial markets. It will enable you to evaluate personal and institutional investments, to analyse options and other derivative assets, and to conduct basic analysis of the term structure of interest rates.

Brief description

Together with AC32820 (Financial Markets and Institutions) and AC30520 (Corporate Finance), this module forms part of modern finance. This module emphasises analytical aspects of the subjects and is quantitative. It introduces the three classic models: model of portfolio selection, the capital asset pricing model and option pricing model. In addition, it covers part of fixed-income theory, ie, bond pricing and term structure of interest rates.


Sharpe, Chapter 1, Merton, Chapter 1, Elton & Gruber, Chapter 2.

Portfolio Theory
Key concepts: risk and return, mean and variance, correlation coefficient, diversification principle, risk-return trade-off lines, minimum variance portfolio, the tangency portfolio, optimal portfolio.
Readings: Sharpe, Chapters 6, 7, 8; Merton, Chapters 10.1, 10.7, 11.10, 12; Elton & Gruber, Chapters 4, 5, 6 and 10.

Capital Asset Pricing Model (CAPM)
Key concepts: market portfolio, capital market line, security market line, covariance, Beta.
Readings: Sharpe, Chapter 9; Merton, Chapter 13; Elton & Gruber, Chapter 13.

Option Pricing Theory
Key concepts: Call, put, American (European) options, option payoff diagrams, one-period binomial model, The Black-Scholes model for European call option.
Readings: Sharpe, Chapters 19 & 20; Merton, Chapters 14 & 15; Elton & Gruber, Chapters 22 & 23.

Bond and Term Structure Theories
Key concepts: Spot rates, yield curves theories, bond pricing, duration
Readings: Sharpe, Chapters 13, 14, 15; Merton, Chapter 8; Elton & Gruber, Chapter 20.

Reading List

Recommended Text
Bodie, Zvi. (2000.) Finance /Zvi Bodie, Robert C. Merton. Prentice Hall Primo search Elton, E, M Gruber, S Brown and W Goetzmann (2007) Modern Portfolio Theory and Investment Analysis Or alternatively 5th or 6th editions 7th edition Wiley Primo search
Supplementary Text
Blake, David (2000.) Financial market analysis /David Blake. 2nd ed. Wiley Primo search Brearley, R and S Myers (2003) Principles of Corporate Finance 7th edition McGraw-Hill Primo search Ross, Stephen A. (c2005.) Corporate finance /Stephen A. Ross, Randolph W. Westerfield, Jeffrey Jaffe. 7th ed McGraw-Hill/Irwin Primo search Rutterford, Janette (June 2007) An Introduction to Stock Exchange Investment 3rd ed.,Revised Palgrave Macmillan Primo search Sharpe, William F. (1999.) Investments /William F. Sharpe, Gordon J. Alexander, Jeffrey V. Bailey. 6th ed. Prentice-Hall Primo search


This module is at CQFW Level 6