Faculty of Business: Finance and Economics
Credit points: 6 cp

Subject level: Undergraduate

Result Type: Grade and marks

Handbook description

This subject introduces the foundations of modern portfolio theory and how it is applied. Topics covered include: theory of choice; mean-variance criterion; capital market equilibrium; capital asset pricing model and arbitrage pricing theorem; and equilibrium evaluation of derivative securities.

Subject objectives/outcomes

On successful completion of this subject, students should:

1. Have a broad overview of the main issues in the theory of financial choice under uncertainty
2. Have a detailed understanding of, and competency in manipulating, the mean-variance criterion
3. Have a detailed understanding of the theory and application of the capital Asset Pricing Model (CAPM) and Arbitrage Pricing Model (APT) as tools for the management of portfolios
4. Have an understanding of the main issues in the theory of the functioning of the financial market
5. Be able to apply capital market equilibrium arguments to value derivative securities.

Contribution to graduate profile

This course deals with the theory of investment decisions under uncertainty. Its purpose is to provide the foundations for the study of modern financial economics. It focuses on the rational investors consumption and portfolio decisions under uncertainty and their implications for the valuation of securities. The main ideas used in this course are optimality, equilibrium and arbitrage. These are indeed the concepts upon which much of modern financial economic theory is built.

Teaching and learning strategies

Lectures held once a week. Assignments to develop problem solving skills.

Content

• The theory of choice
• Consumption and investment with capital markets
• The mean-variance criterion
• Capital market equilibrium CAPM and APT
• Aggregation in securities markets
• Equilibrium valuation of complex securities.

Assessment

Assignments	20%
Two assignments – one reflecting the practical and applied nature of the course will develop problem solving skills and the other requiring a report on one of the papers of the key topic areas. Assignments thus assure objectives 1-5.
Mid-Semester Examination	30%
Students will be required to demonstrate an understanding of financial decision making. The mid semester exam assures objectives 1-5.
Final Examination	50%
The final examination will test students understanding of the course material. It will enable students to demonstrate they have met objectives 1-5.

The final examination will be conducted under University examination conditions, and hence thoroughly address concerns regarding secure assessment. The assignments will be secured through a combination of updating of assessment tasks across semesters and/or plagiarism detection software.

Recommended text(s)

Since there is no textbook which covers the course material at the requisite level, a set of detailed notes will be issued. The notes are based on the texts in the references.

Indicative references

Levy, M, Levy, H. and Solomon S. (2000). Microscopic Simulation of Financial Markets: From Investor Behavior to Market Phenomena. Academic Press: Sydney.