Investments (BSc)

Latest update: February 19, 2024.

Office: D521 (Building 2)

Office hours: by appointment

Course Description

Understand the trading, valuation and risk management mechanisms for the bond market:
- Estimate and interpret an yield curve;
- Read and interpret the technical details of a bond issue;
- Value and formulate a trading decision for bond;
- Compute the rate of return of an investment in the bond market;
- Manage and characterise the interest rate risk exposure of a portfolio.
Analyse the efficiency, performance, and risk profile of a portfolio allocation.
Identify the main sources of value for a stock.

The course description is also available in a pdf.

Assessment

The final grade is computed as follows:

Mid-term exam: 40%
Second exam: 60%

In each exam students must have a minimum grade of 7.5. The rate of class attendance must be at least 80%! Due to the pandemic situation, attendance is controlled by logins to the Zoom sessions.

Grades above 16 in online exams must be defended in an oral session, either online or face-to-face.

Students that fail in the regular grading system have two additional moments to pass: first and second season exams, each accounting for 100% of the final grade.

Students that pass in the regular grading system can try to improve their grade only in the second exam. If they prefer to enrol in the first exam they must inform their teacher by a writing form and they lose the grade they already have.

In any of the evaluation systems (regular or exams) it is considered that a student has course approval if (s)he has a grade equal or above 9.5 points.

All exams are closed-book and closed-notes and should be done individually. Students are required to conduct with honour and honesty.

A mock mid-term exam (with solutions) is available here: pdf. Two mock end-term exams (with detailed solutions for version 1, and only the right answers for version 2) are available here: version 1, version 2.

Syllabus

Financial Markets (slides)
1. Real Assets Versus Financial Assets
2. The Money Market
3. The Stock Market
4. The Bond Market
5. Derivatives
6. Short Selling
Bonds (slides)
1. Bond Characteristics
2. The Term Structure of Interest Rates
  - The Yield Curve
  - Spot Interest Rates
  - Forward Interest rates
3. Bond Pricing and Yields
  - Bond Pricing
  - Bond Yields
  - Floating-Rate Bonds
4. Rates of Return
  - Yield to Maturity
  - Realised Rate of Return
5. Ratings and Credit Risk
6. Duration and Convexity
Asset Pricing Models (slides)
1. Portfolio Theories
  - Diversification Effect
  - Markowitz' Efficient Frontier
  - Global Efficient Frontier
  - Risk Aversion and Optimal Portfolio
  - Separation Theorem
2. Capital Asset Pricing Model (CAPM)
  - Capital Market Line
  - Security Market Line and Beta
  - Market Model: Systematic and Specific Risks
  - Performance Valuation: Alpha, Treynor and Sharpe indices
Stock Valuation (slides)
1. Stock Valuation through Dividends: Constant Growth Model (Gordon-Shapiro)
2. Stock Valuation through Multiples
  - Price-Earnings Ratio
  - Price-to-Book Ratio

Course Material

For the main sections I provide problem sets we solve in the classes. In addition, some Excel files are also available to illustrate specific calculations.

Bonds: problem set (pdf); notes on calendar base (pdf); flat and invoice prices (xls), yield to maturity (xls), bootstrap (xls), duration (xls), convexity (xls).
Asset pricing models: problem set (pdf); return calculation (xls), portfolio return and risk (xls), SML (xls), example on portfolio choice (xls).
Stock valuation: problem set (pdf).
Past exams (zip).

Textbooks

The main textbook for the course is

Bodie, Kane and Marcus, 2010, Investments (10th Ed.), McGraw Hill.