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.
Students can only take FN3023 Investment management at the same time as or after FN3092 Corporate finance, not before.
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.
- 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.
- 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.
- bond math
- term structure
- numerical examples
- immunisation of bond portfolios
- convexity and immunisation
- immunisation of equity portfolios.
Risk and performance management
- types of risk
- risk decomposition
- hedge ratios
- 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 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.
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.
Unseen written exam (3 hrs).
- 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.