Module Identifier AC30420  
Module Title INVESTMENTS  
Academic Year 2006/2007  
Co-ordinator Professor Owain M Ap Gwilym  
Semester Semester 2 (Taught over 2 semesters)  
Pre-Requisite AC10410 , AC10710 , AC32820 , AC32810 or, AC10310  
Course delivery Lecture   20 Hours.  
  Seminars / Tutorials   8 Hours.  
Assessment TypeAssessment Length/DetailsProportion
Semester Exam3 Hours  80%
Semester Assessment 2,000 word essay20%
Supplementary Exam3 Hours  100%

Learning outcomes

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


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.

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, the theory of bond 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, 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.

Reading Lists

** Recommended Text
Bodie, Z and Merton, R (2000) Finance Prentice Hall
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