|| AC30420 |
|| INVESTMENTS |
|| 2006/2007 |
|| Professor Owain M Ap Gwilym |
|| Semester 2 (Taught over 2 semesters) |
|| AC10410 , AC10710 , AC32820 , AC32810 or, AC10310 |
| Course delivery
|| Lecture || 20 Hours. |
|| Seminars / Tutorials || 8 Hours. |
|Assessment Type||Assessment Length/Details||Proportion|
|Semester Exam||3 Hours ||80%|
|Semester Assessment|| 2,000 word essay||20%|
|Supplementary Exam||3 Hours ||100%|
Learning outcomesOn successful completion of this module students should be able to:
measure and evalute risk and return;
distinguish between individual asset r isk 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 analysis options and other derivative assets, and to conduct basic analysis of the term structure of interest rates.
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, the theory of bond and term structure of interest rates.
Sharpe, chapter 1, Merton, chapter 1, Elton & Gruber, chapter 2.
Key concepts: risk and return, mean and variance, correlation coefficient, diversification principle, risk-return trade-off lines, minimum variance portfolio, the tangency portfolio, utility of wealth, expected utility, risk aversion, indifference curve, 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, Put-Call Parity, 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, forward rates, yield curves, theories of interest rate.
Readings: Sharpe, chapters 13, 14, 15; Merton, chapter 8; Elton & Gruber, chapter 20.
** Recommended Text
Bodie, Z and Merton, R (2000) Finance
Elton, E and Gruber, M (2003) Modern Portfolio Theory and Investment Analysis
6th edition. John Wiley, or alternatively (1995) 5th edition
Sharpe, W, Alexander, G and Bailey, J (1999) Investments
6th edition. Prentice Hall
** Supplementary Text
Blake, D (2000) Financial Market Analysis
2nd edition. Wiley
Brealey, R and Myers, S (2003) Principles of Corporate Finance
7th edition. McGraw-Hill
Pike, R and Beale, B (2003) Corporate Finance and Investment
4th edition. FT Prentice Hall
Ross, S, Westerfield, R and Jaffe, J (2005) Corporate Finance
7th edition International. McGraw-Hill
This module is at CQFW Level 6