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Investment Analysis

Module Code: EC3050

Module Title: Investment Analysis

  • ECTS Weighting: 10
  • Semester/Term Taught: Michaelmas Term & Hilary Term
  • Contact Hours: 44 hours of lectures and 8 hours of tutorials
  • Module Personnel: Lecturer - Professor Davide Romelli (MT) / Lecturer - Professor Eleanor Denny (HT)

Module Learning Aims

This module analyses, at both a practical and theoretical level, the process of investment in financial markets. The first half of the module explores how financial markets operate and how securities are bought and sold. The trade-off between higher average returns and more `risky' pay-offs is then discussed. The problem of determining an optimal investment strategy, given beliefs about the probability distribution of returns, is also addressed. Other issues considered include the informational efficiency of financial markets and systematic pricing failures, the role of behavioural biases, and the relative usefulness of fundamental analysis and technical analysis in predicting price movements. This module does not assume previous knowledge of financial economics and for the most part the level of mathematics and statistics does not extend beyond SF Maths and Stats. Students should note, however, that this is an analytical economics module that makes constant use of tools derived from mathematical and statistical concepts.

The second half of the module aims are to introduce students to the various types of financial instruments in common use, to the economic theories that explain how they are priced, to the risks factors which affect their pricing and to the markets in which they are traded. The types of securities considered include interest-bearing securities and derivatives (options, futures, etc.). Students are also required to complete a project involving the collection and analysis of financial data.

Learning Outcomes

On successful completion of this module, you will be able to:

  • Explain the theory underlying portfolio theory
  • Explain and critique the Capital Asset Pricing Model (CAPM)
  • Contrast the Arbitrage Pricing Theory and Capital Asset Pricing Model
  • Explain the Efficient Market Hypothesis and discuss the issues of behavioural finance
  • Explain the components of bond pricing and interpret the factors influencing bond risk
  • Discuss measures of bond price sensitivity and relate risk factors to the current situation in the bond markets
  • Understand how asset backed securities are structured and their role in the financial crisis
  • Describe the main features of futures, forwards, swaps and credit derivatives
  • Outline the payoffs of various option strategies
  • Illustrate the uses of derivatives for risk management

Module Content

Michaelmas Term:

  • Introduction and Diversification
  • The Efficient Frontier and The Single Index Model
  • Capital Asset Pricing Model (CAPM)
  • Zero-Beta CAPM
  • Empirical Tests of CAPM
  • Arbitrage Pricing Theory (APT)
  • Debt and Equity, Efficient Market Hypothesis (EMH) and Technical Analysis
  • Behavioural Finance

Hilary Term:

  • Bond prices and yields
  • Term structure of interest rates
  • Managing bond portfolios
  • Introduction to options
  • Futures and forwards
  • Swaps and credit derivatives

Recommended Reading List

Primary Text:

  • Investments, Zvi Bodie, Alex Kane and Alan J. Marcus, 10th edition, London : McGraw-Hill/Irwin, 2016. (Earlier editions will also suffice).  Numerous copies available in the library

Supplementary Texts:

  • Options, Futures and Other Derivatives, John Hull, 6th edition, London: Prentice Hall, 2006

Module Pre Requisite

EC2010, EC2040

Assessment Details

Michaelmas Term: Assignment worth 15% of overall module marks
Hilary Term: Project worth 15% of the overall module marks
Annual Exam: 70% of the overall module marks

Module Website

Blackboard