Department of Management

Principles of Investment Management

Module Outline
2018-2019

Lecturers:
Code: {{module code}}
Code: BUMN072H7 Term: Dr. Ellen Yu (convenor)
{{term}}
Term: Autumn term
Time: {{day/s}}
Day: Wednesdays Dr. Karin Shields
6.00pm to 9.00pm
Time: 6pm to 9pm
R o o m : {{room}}
Room:
Table of Contents
Module Overview..................................................................................................................................2
Aims and Objectives..............................................................................................................................2
Learning Outcomes................................................................................................................................2
Key Readings.........................................................................................................................................2
Required Reading..............................................................................................................................2
Recommended Reading.....................................................................................................................2
Journal Articles..................................................................................................................................2
Module Structure..................................................................................................................................3
Autumn term
Week 1...............................................................................................................................................3
Week 2...............................................................................................................................................3
Week 3...............................................................................................................................................4
Week 4...............................................................................................................................................4
Week 5...............................................................................................................................................4
Week 6...............................................................................................................................................5
Week 7...............................................................................................................................................6
Week 8...............................................................................................................................................6
Week 9...............................................................................................................................................6

Module Assessment............................................................................................................................10
Module Overview
This module is part of the curriculum for the MSc Accounting and Financial Management
and MSc Investment Management. The module provides the required knowledge of
investment management and a base for more advanced modules in investment such as
portfolio management and valuation analysis and risk management.

Aims and Objectives

This module aims to inform participants about investment decisions by providing a
foundation of core investment concepts tools. It introduces students to the required
information for implementing and monitoring a successful investment decisions.

Learning Outcomes
By the end of this module students will:

o Understand the basic concepts of investment.

o Understand the importance of bonds and stocks.
o Understand risk, return, and portfolio performance evaluation.

Key Readings
Required Reading
o Bodie, Z. Kane, A., Marcus, A.J., Investments, McGraw-Hill, 10th Edition, 2014, 1080
pages. ISBN: 0077161149.

Recommended Reading
Please refer to each section below and students are encouraged to consult the leading academic
journals in the field.
Module Structure

Autumn term

Week 1

Lecture: “Investing in Fixed Income Securities” and “Interest Rate Risk Management”
Supplementary reading:

Bodie, Z. Kane, A., Marcus, A.J. (2014), Investments, McGraw-Hill, 10th Edition, Chapter 14

and 16. ISBN: 0077161149.
Seminar: proper class exercises provided by the lecturer.

We begin our discussion with an analysis of the sensitivity of bond prices to interest rate
fluctuations. This sensitivity is measured by the duration of the bond, and we denote
considerable attention to what determines bond duration. We discuss several passive
investment strategies and show how duration matching techniques can be used to
immunize the holding-period return of a portfolio from interest rate risk.

Week 2

Lecture: The mean-variance approach and “Introduction to Bloomberg terminal.”

Essential reading: Bodie, Z. Kane, A., Marcus, A.J. (2014), Investments, Chapter 6 and 7,
McGraw-Hill, 10th Edition, Chapter 7. ISBN: 0077161149.

Seminar: Bloomberg terminal and relevant class exercises provided by the lecturer.

This session has three main aims: (a) to present the main ideas and methods used in the
analysis of portfolios of financial securities (b) to explain how rational investors can measure
the risks involved with alternative investment strategies, and (c) to show how they could
select a strategy for the management of their assets.

Week 3
Lecture: Portfolio Performance Evaluation

Essential reading: Bodie, Z. Kane, A., Marcus, A.J. (2014), Investments, McGraw-Hill,

10th Edition, Chapter 24. ISBN: 0077161149.
Seminar: proper class exercises provided by the lecturer.

We begin with the measurement of portfolio returns. From there we move on to

conventional approaches to risk adjustment. We identify the problems with these
approaches when applied in various real-life situations. We then turn to some practical
procedures for performance evaluation in the field such as style analysis and in-house
performance attribution.

Week 4
Lecture: Value at Risk and Monte Carlo simulations

Essential reading: Chapter 16 from Hull, John C. (2016) Fundamentals of Future and Option
Markets, Pearson.

Supplementary reading:

Saunders, Anthony and Cornett, Marcia M. (2014) Financial Institutions Management: A Risk
Management Approach, McGraw Hill International Edition.

Seminar: proper class exercises provided by the lecturer.

In this session, we explain the VaR measure and describe the two main approaches for calculating it.
These are known as the historical simulation approach and the model-building approach. Both are
widely used by both financial and nonfinancial companies. There is no general agreement on which
of the two is best.

Week 5
Date: Wednesday 31 October 2018

Lecture: Capital Asset Pricing Model

This session discusses a seminal part of modern financial economics, namely the Capital Asset Pricing
Model (CAPM). We discuss the relationship between risk and return and the model’s ability to give
us a benchmark rate of return to evaluate investments.

Seminar: Using CAPM for portfolio management

The first part of the seminar focuses on coursework question d. You will learn how to work out the
portfolio beta of your five-asset portfolio by first obtaining the beta for its component securities. The
second part of the seminar focuses on numerical problem solving to further examine the
relationship between risk and return and fully understand the components of the CAPM model.
Finally, we will write a brief reflection on the use of CAPM
Solutions to the seminar questions will be posted on Moodle after the class.
Essential Reading:
Perold, A.F., 2004. The capital asset pricing model. The Journal of Economic Perspectives, 18(3), pp.3-
24.

Da, Z., Guo, R.J. and Jagannathan, R., 2012. CAPM for estimating the cost of equity capital:
Interpreting the empirical evidence. Journal of Financial Economics, 103(1), pp.204-220.

Additional Reading:
Bodie, Z. Kane, A., Marcus, A.J. (2014), Investments, McGraw-Hill, 10th Edition, Chapter 9. ISBN:
0077161149.

Recommended additional material:

2 Videos:

http://www.investopedia.com/terms/m/modernportfoliotheory.asp

http://www.investopedia.com/terms/b/beta.asp
Week 6
Date: Wednesday 7 November 2018

Lecture: Arbitrage Pricing Theory

We continue our discussion of risk and return by introducing the no arbitrage condition.

Seminar: Testing the theory!

In the seminar, we will test Fama and Frenchs’ three factor model by downloading share prices for a
company, working out monthly returns and the security’s risk premium. Data for General Electrics
can be found here:

https://uk.finance.yahoo.com/q/hp?s=GE&b=03&a=00&c=2012&e=8&d=08&f=2016&g=m

We will also download risk premiums associated with the three factors: market risk premium, small-
minus-big and high-minus-low. This data is available from Kenneth French’s website:
http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html#Research

We will then regress the security’s risk premium on the three factors, obtain the coefficients and
discuss the implications and relationship to theory of the output and estimated beta coefficients.

In addition, numerical questions will be uploaded to Moodle and solutions will be uploaded after the
class. These will be indicative of numerical exam questions on this topic.

Essential reading:
Bodie, Z. Kane, A., Marcus, A.J. (2014), Investments, McGraw-Hill, 10th Edition, Chapter 10. ISBN:
0077161149.

Additional reading:
Ross, S.A., 1976. The arbitrage theory of capital asset pricing. Journal of economic theory, 13(3),
pp.341-360.

Fama, E.F. and French, K.R., 1996. Multifactor explanations of asset pricing anomalies. The journal of
finance, 51(1), pp.55-84.

Carhart, M.M., 1997. On persistence in mutual fund performance. The Journal of finance, 52(1),
pp.57-82

Recommended additional material:

2 Videos:

https://www.youtube.com/watch?v=-0EgQ97whWg

https://www.youtube.com/watch?v=m1ARi6pPSGw
Week 7
Date: Wednesday 14 November 2018

Lecture: Equity Valuation

This session will introduce dividend discount models of equity valuation and their relationship to
price-earnings ratios and growth prospects of the firm.

Seminar: Numbers and evidence!

In the seminar we will go through some numerical examples applying the theory presented in the
lecture.

We will then move on to using academic articles to structure an argument regarding the value of
some equity valuation model. This part of the seminar is intended to enhance skills of using
academic research as a basis for answering exam, coursework or even dissertation questions. It is
also intended to allow you to reflect on how you learn; i.e. how you gather information and make
sense of it.

Essential reading:
Bodie, Z. Kane, A., Marcus, A.J. (2014), Investments, McGraw-Hill, 10th Edition, Chapter 18. ISBN:
0077161149.

Additional reading:
Bergstresser, D. and Philippon, T., 2006. CEO incentives and earnings management. Journal of
financial economics, 80(3), pp.511-529.

Cheng, Q. and Warfield, T.D., 2005. Equity incentives and earnings management. The accounting
review, 80(2), pp.441-476.

Cohen, D.A., Dey, A. and Lys, T.Z., 2008. Real and accrual-based earnings management in the pre-and
post-Sarbanes-Oxley periods. The accounting review, 83(3), pp.757-787

Recommended additional material:

2 Videos:

https://www.youtube.com/watch?v=cN-sVL7OWcY

https://www.youtube.com/watch?v=iiiK4ydrYPo
Week 8
Date: Wednesday 21 November 2018

Lecture: Efficient market hypothesis and Behavioural Finance!

In this lecture we introduce the underlying theory and research paradigm that has been underlying
the models we have discussed so far, namely Efficient Market Hypothesis. We will also do a brief
introduction to the discipline of behavioural finance and we look at anecdotal and academic
evidence as well as some fun in-class exercises of rationality in order to evaluate the theory.

Seminar: Guest Speaker!

We invite a senior investment professional to discuss the role of all the concepts that we have
worked with during the course. This is a chance to ask questions about the industry as a whole as the
professional has vast experience and have worked in different roles in several institutions.

Essential reading:
Bodie, Z. Kane, A., Marcus, A.J. (2014), Investments, McGraw-Hill, 10th Edition, Chapter 11 ISBN:
0077161149.
Additional reading:

Bodie, Z. Kane, A., Marcus, A.J. (2014), Investments, McGraw-Hill, 10th Edition, Chapter 12 ISBN:
0077161149.

Malkiel, B.G. and Fama, E.F., 1970. Efficient capital markets: A review of theory and empirical work.
The journal of Finance, 25(2), pp.383-417.

Maloney, M.T. and Mulherin, J.H., 2003. The complexity of price discovery in an efficient market: the
stock market reaction to the Challenger crash. Journal of corporate finance, 9(4), pp.453-479.

Lo, A.W., 2012. Adaptive Markets and the New World Order (corrected May 2012). Financial
Analysts Journal, 68(2), pp.18-29.

Additional material:

This is a debate between Gene Fama and Richard Thaler, both from Booth School of Business at the
University of Chicago in economics and finance. Both winners of Nobel Memorial Prize in Economic
Sciences.

http://review.chicagobooth.edu/economics/2016/video/are-markets-efficient

Module Assessment
The module will be assessed as follows:

(1) A group coursework (50%)

 (2) Unseen final exam – 2 hours (50%) – Exam to cover all the topics discussed in
this module.

Deadline: One two-hour unseen final exam to be held during week 11 in the autumn
term

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