Security Analysis and Portfolio Theory

(Not available to Erasmus/Socrates students)

The module aims to provide an understanding of the pricing models and risks associated with various financial assets including bonds, equities, options, and futures and their uses in forming/modifying  portfolios.  Portfolio theory is introduced and the benefits of diversification demonstrated using mean-variance optimisation both with and without the presence of a risk free asset.  The limitations of simple mean variance optimisation are discussed and other methods of asset allocation reviewed.  Market efficiency and behavioural finance developments are explained and their implications for portfolio investment reviewed. Duration and convexity are explained as measures of the price sensitivity of bonds to small changes in interest rates. The capital asset pricing model and the arbitrage model are discussed. International investment is illustrated and the hedging of currency exposure discussed using forward contracts discussed.  Derivatives – options and futures – are explained and their role in hedging risks, altering exposures and asset allocations illustrated.  The final topic deals with portfolio performance evaluation. 

Method of Assessment

A 2000 word assignment dealing with the optimisation of a selected mix of stock market indices (30%) and a three hour examination (70%)