Principles of Finance

EMEC018S5 (30 credits)

Lecturer: Khaled Soufani

Aims

This course is designed to introduce the basic principles of finance and investment analysis. It deals with modern portfolio theory, examining how the characteristics of portfolios are significantly different from those of the individual securities from which they are formed. It is concerned with a discussion of equilibrium in capital markets, develops the capital asset pricing model and shows how portfolio theory can be used to infer what equilibrium returns and prices will be for individual securities. It also seeks to develop an understanding of fixed income securities and equities prices and introduces options.

Objectives

On successful completion of this course, students should:

• understand the importance of efficient and competitive markets;
• be able to describe how discount rates are determined by financial markets;
• understand the concept of the time value of money;
• understand the economic theory of choice as it applies to portfolio structuring and to be able to define the key characteristics of the portfolio opportunity set under risk;
• demonstrate that they are able to derive the capital asset pricing model and understand the application in the construction of optimal portfolios;
• be able to describe the efficient markets hypothesis;
• understand the characteristics of bonds and shares;
• understand the characteristics of options.

Reading

Main text:

Bodie, Z, A Kane and A Marcus, Investments, 6th Edition 2004, McGraw-Hill Irwin.

Supplementary texts

Bodie, Z, A Kane and A Marcus, Essentials of Investment, 5th Edition 2004, McGraw-Hill Irwin.

Elton, E, M Gruber, S Brown and W Goetzmann, Modern Portfolio Theory and Investment Analysis, 6th edition, Wiley.

Assessment

In June, there will be a three-hour final examination based on the overall syllabus, which will count for 80% of the course unit mark. The remaining 20% of the assessment will be in the form of written class-tests.

Teaching Arrangements

During the course, there will be lectures combined with classes in which students present their solutions to that week's problem set.

Lecture Schedule

• Prices, Portfolios and Indices
• Interest rates and discounting
• Risk and Efficient Markets
• Mean–variance analysis
• Capital Asset Pricing Model
• Arbitrage Pricing Model
• Bonds and Equities
• Options