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Investment management FN3023

This course is designed to introduce students to the investment environment in the role of a private or professional investor.

Prerequisites / Exemptions

If taken as part of a BSc degree courses which must be passed before this course can be attempted:

  • FN1024 Principles of banking and finance. 

Co-requisites

Students can only take FN3023 Investment management at the same time as or after FN3092 Corporate finance, not before.

Topics covered

Financial markets and instruments

  • money and bond markets
  • equity markets
  • derivative markets
  • managed funds
  • margin trading
  • regulation of markets.

History of financial markets

  • historical and recent financial innovation
  • historical equity and bond market returns
  • equity premium puzzle.

Fund management and investment

  • historical mutual fund performance
  • market efficiency and behavioural finance
  • return based trading strategies
  • hedge funds.

Market microstructure

  • types of markets
  • bid-ask bounce – the Roll model
  • Glosten-Milgrom model
  • Kyle model
  • discrete version of the Kyle model
  • limit order markets
  • statistical arbitrage (algorithmic trading, program trading)
  • why market microstructure matters.

Diversification

  • expected portfolio return and variance
  • definition of risk premium
  • asset allocation – two assets: mean-variance preferences
  • optimal asset allocation with a risk free asset
  • CARA utility and normal returns
  • portfolio frontier
  • expected return relationships
  • estimation issues
  • diversification – the single index model
  • Treynor-Black model
  • factor models
  • statistics of asset allocation.

Portfolio immunisation

  • bond math
  • term structure
  • duration
  • numerical examples
  • immunisation of bond portfolios
  • convexity and immunisation
  • immunisation of equity portfolios.

Risk and performance management

  • types of risk
  • risk decomposition
  • hedge ratios
  • Value-at-Risk
  • Sharpe ratio
  • Treynor’s ratio
  • more portfolio performance measures
  • Sharpe vs Treynor
  • portfolios with changing risk
  • market timing
  • non-linear payoffs
  • extreme risk.

Risk management

  • risk management for investors
  • risk management for corporations
  • risk management for banks
  • delta hedging
  • put option protection
  • put protection vs VaR
  • portfolio insurance with calls
  • hedging credit risk
  • hedging volatility
  • risk capital allocation.

Learning outcomes

If you complete the course successfully, you should be able to:

  • List given types of financial instruments and explain how they work in detail
  • Contrast key characteristics of given financial instruments
  • Briefly recall important historical trends in the innovation of markets, trading and financial instruments
  • Name key facts related to the historical return and risk of bond and equity markets
  • Relate key facts of the managed fund industry
  • Define market microstructure and evaluate its importance to investors
  • Explain the fundamental drivers of diversification as an investment strategy for investors
  • Aptly define immunisation strategies and highlight their main applications in detail
  • Discuss measures of portfolio risk-adjusted performance in detail and critically analyse the key challenges in employing them
  • Competently identify established risk management techniques used.

Assessment

Unseen written exam (3 hrs).

Essential reading

  • Bodie, Z., A. Kane and A.J. Marcus Investments. Boston, Mass.; London: McGraw-Hill Irwin
  • Fabozzi, F. J. and H. M. Markowitz (eds) The Theory and Practice of Investment Management. Hoboken, NJ: John Wiley & Sons.

Course information sheets

Download the course information sheets from the LSE website.