Investment Analysis
Module Code: EC3050
Module Title: Investment Analysis
- ECTS Weighting: 10
- Semester/Term Taught: Michaelmas + Hilary Term
- Contact Hours: 44 hours of lectures and 10 hours of tutorials
- Module Personnel: Lecturer - Silvia Calo
Learning Outcomes
On successful completion of this module, you will be able to:
- 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
- Outline the payoffs of various option strategies and assess the complexities of option pricing
- Illustrate the use of options and futures in risk management
- 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
Module Learning Aims
This module analyses, at both a practical and theoretical level, the process of investment in financial markets. Its aims are to introduce students to the various types of financial instruments in common use and to the economic theories that explain how they are priced. The types of securities considered include interest-bearing securities, equities and derivatives (options, futures, etc.). The focus for the first half of the module will be on fixed income securities and derivatives. As we will see, the principles to be discussed and the analytical tools to be presented have a much wider application in making decisions under conditions of uncertainty. Students are also required to complete a project involving the collection and analysis of financial data. The second 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. Students interested in working
Module Content
Michaelmas Term:
- Bond prices and yields
- Term structure of interest rates
- Managing bond portfolios
- Introduction to Option markets
- Option valuation
- Futures markets
- Futures, swaps, CDOs, asset backed securities
Hilary 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
Recommended Reading List
Primary Text:
- Investments, Zvi Bodie, Alex Kane and Alan J. Marcus, 7th edition, London : McGraw-Hill/Irwin, 2008. (Earlier editions will also suffice)
Supplementary Texts:
- Modern Portfolio Theory and Investment Analysis, Edwin J. Elton, Martin J. Gruber, Stephen J. Brown and William N. Goetzmann, 7th edition, New York : John Wiley and Sons, 2007.
- Mathematics for Economics and Business, Ian Jacques, 4th edition, London : Prentice Hall, 2003. (Chapter three for elementary financial mathematics.)
- Options, Futures and Other Derivatives, John Hull, 6th edition, London: Prentice Hall, 2006
Module Pre Requisite
EC2010, EC2040
Assessment Details
Michaelmas Term: Project worth 15% of overall module marks
Hilary Term: Assignment worth 10% and tutorial attendance worth 5% of the overall module marks
Annual Exam: 70% of the overall module marks
Module Website
Blackboard