Security Analysis and Portfolio Theory

Credits: 10

Introduction and module objectives

The module aims to provide an understanding of returns and risks associated with different types of financial securities and, which in the case of equities, are characteristics used to illustrate the diversification benefits of combining assets to form portfolios. The latter forms the basis for discussing asset allocation in general, using mean-variance optimisation both without, and in the presence of a risk free asset. Practical difficulties with simple mean variance optimisation are reviewed and other methods of asset allocation presented. The capital asset pricing and arbitrage pricing models are reviewed. The valuation of equities is presented both from domestic and international markets standpoints. Bond valuation and price sensitivity to interest rates changes are discussed using the concepts of bond duration and convexity. Market efficiency and behavioural finance developments are reviewed.

An introduction to derivatives focuses on the pricing of futures contracts and models for pricing of options and illustrations of their potential use for hedging portfolio risks and changing portfolio exposures to asset types, currencies and markets are provided. The final section of the module deals with various methods employed to evaluate portfolio performance.

Learning outcomes

By the end of the module students should be able to:

  • Demonstrate a broad and in-depth knowledge of portfolio theory;
  • Critically analyze the construction of asset portfolios;
  • Display a detailed understanding of advanced security analysis;
  • Appraise and synthesise the relevant literature explaining how theories have been tested and the results obtained.

Method of Assessment

  • 2,000 word assignment (20%)
  • Two hour unseen written examination (80%)