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Investments and Risk Management Study materials
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Exported on April 16th 2015 at 05:59 PM Warwick Business School
Study materials Investments and Risk Management
Introduction
The objective of this module is to provide an in-depth introduction into the theory and practical applications of assetmanagement and risk management. The fundamental problem of asset management is the choice of an optimalinvestment strategy within the framework of specific objectives and constraints. As illustrated in recent periods, thiscan be a challenging task. To start, successful investment management requires an understanding of thecharacteristics of different classes of financial assets and the mechanics of the markets in which they are traded.These assets are contracts, and we will focus on understanding the contract between seller and investor. The modulewill also discuss the basic theory that can help understand and analyse the optimal investment decision, based on ourknowledge of the risk and return characteristics of the available assets and the investor's risk and return preferences.
Once an investment strategy is chosen, the question naturally arises as to how to assess the success of the strategybeing implemented. The module will introduce a range of different measures of portfolio performance, such as Sharperatio, Jensen's alpha and tracking error and it will discuss their respective strengths and limitations. One of the keydeterminants of the optimal investment decision is risk. It is therefore necessary not only to establish methods tomeasure the relevant risk factors but also to develop techniques to manage (i.e., reduce, eliminate, or magnify) risk.The module will discuss duration and value-at-risk as 'industry standards' for measuring market risk and show howthese methods can be implemented in practice. Once the necessary tools to measure risk have been developed, thefocus will be on the management of risk, such as the use of derivatives to alter the risk profile of portfolios. Themodule will also discuss some of the benefits and risks involved in international portfolio investing. Finally, it will coveractive investment management in general and hedge funds in particular.
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Module outline Investments and Risk Management
Module delivery
The module introduces and applies well-established methods and ideas, and discusses the most recent developmentsin the field. Theoretical concepts will be developed by means of practical examples, using cases and market data.Ideas are first introduced in the lectures and reinforced in case study discussions and syndicate workgroups.Necessary mathematical tools are reviewed throughout the module.
Students will benefit from a calculator for the module. It is therefore recommended that participants purchase the'Texas Instruments BAII Plus' calculator. This calculator can also be purchased as an application for smart phones(such as your iPhone), which might be a cost effective and convenient alternative.
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Module outline Investments and Risk Management
A word about mathematics
Finance is a quantitative subject, and risk management even more so. It cannot be done without some level ofmathematics. Although we will review the necessary mathematical tools, a strong set of quantitative skills is a definiteadvantage . Concepts you need to know include basic calculus, variance, standard deviation, covariance andcorrelation, and properties of normal and non-normal distributions. Prior knowledge of time-value of money will beextremely useful.
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Module outline Investments and Risk Management
Learning outcomes
After completing this module, students will understand:
the characteristics of different classes of financial securities and the mechanics of the markets in which thesesecurities are traded
the basic valuation techniques for cash instruments such as equities and bonds and derivative securities suchas options and futures
the trade-off between risk and expected return, and be able to form a portfolio by mixing a given fund withcash to achieve a given risk target
the concept of diversification, and be able to form a portfolio with an optimal risk-return trade-off from a givenset of base assets
and be able to implement different measures of portfolio performance, and understand their respectivestrengths and limitations
the various types of risk an investor or corporation is exposed to, and the reasons why it is important toactively manage these risks
the measurement of risk using VaR and other methods
derivative securities to manage various types of risk
the benefits and risk of investing internationally
how to evaluate the performance of active investment strategies.
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Module outline Investments and Risk Management
Module outline
The following is a preliminary list of topics covered in this module.
Financial markets and instruments
markets and instruments, asset classes
money markets (T-bills, CDs, commercial paper, LIBOR, etc.)
capital markets (equity, sovereign and corporate bonds, asset-backed debt, preferred and commonstock)
investment companies
mechanics of trading
Portfolio theory
risk, return, investor preferences and risk premium
diversification
optimal asset allocation
Asset pricing models
Capital asset pricing model
multifactor models
market efficiency
behavioral finance
Security valuation
valuation of debt instruments
valuation of stocks
Risk management
types of risk
risk management tools
interest rate risk (duration, gap management, caps/floors, swaps)
measuring and managing market risk (VaR)
international investing
forwards and futures
options
Active investment management
portfolio performance measurement and attribution
active management (the 'search for alpha').
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Module outline Investments and Risk Management
Monday
Monday 18 May 2015
09.30-10.00 Arrival and coffee
10.00-12.15 Introduction and layout of the moduleMarkets, instruments and asset classesInvestment companiesMechanics of trading
12.15 Lunch
13.15-15.00 StockTrak (lab session)
15.00-15.15 Break
15.15-17.00 Risk and returnPortfolio diversification
EVENING Case preparation: Harvard Management CompanyRead: Introduction to Portfolio TheoryRefresh: Bodie et al.: Chapters 6 and 7
All sessions will be led by Söhnke Bartram.
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Programme Investments and Risk Management
Tuesday
Tuesday 19 May 2015
09.00-09.30 Review/questions
09.30-10.45 Optimal asset allocation
10.45-11.00 Break
11.00-12.15 Optimal asset allocation (continued)
12.15 Lunch
13.15-15.00 Case study: Harvard Management Company
15.00-15.15 Break
15.15-17.30Asset pricing modelsFinancial calculus
EVENINGCase preparation: Dimensional Fund AdvisorsRead: Bodie et al.: Chapters 8-11
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Programme Investments and Risk Management
Wednesday
Wednesday 20 May 2015
09.00-09.30 Review/questions
09.30-10.45 Market efficiency
10.45-11.00 Break
11.00-12.15 Market efficiency (continued)
12.15 Lunch
13.15-15.00 Case study: Dimensional Fund Advisors
15.00-15.15 Break
15.15-17.00 Valuation of debt instruments
EVENINGCase Preparation: Numeric InvestorsRead: Bodie et al.: Chapters 13 and 17
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Programme Investments and Risk Management
Thursday
Thursday 21 May 2015
09.00-09.30 Review/questions
09.30-10.45 Valuation of stocks
10.45-11.00 Break
11.00-12.15 Valuation of stocks (continued)
12.15 Lunch
13.15-15.00 Case study: Numeric Investors
15.00-15.15 Break
15.15-17.00Risk managementForwards and swaps
EveningCase preparation: Walt Disney Company's Yen FinancingRead: Foreign Currency SwapsRead: Bodie et al.: Chapter 15
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Programme Investments and Risk Management
Friday
Friday 22 May 2015
09.00-09.30 Review/questions
09.30-10.45 Futures
10.45-11.00 Break
11.00-12.15 Futures (continued)
12.15 Lunch
13.15-15.00 Case study: Walt Disney Company's Yen Financing
15.00-15.15 Break
15.15-17.00OptionsActive portfolio managementModule evaluation
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Programme Investments and Risk Management
Module assessment
Assessment for this module is based on one individual written assignment, counting 80% towards the overall grade,and four assessed syndicate group assignments, collectively counting for 20% towards the overall grade.
You will have already received detailed information on the nature of the individual assignment, and the preparationneeded to complete it, as part of the buy-in document which was emailed to you.
SUBMISSION DEADLINE: Monday 29 June 2015 17.30 (UK time)
The submission deadline is precise and uploading of the document must be completed before 17.30 (UK time) on thesubmission date. Any document submitted even seconds later than 17.30 precisely will be penalised for latesubmission in line with WBS policy. Please consult your student handbook on my.wbs for more detailed information.
The online assignment submission system will only accept documents in portable documents format (PDF) files.Please note that we will not accept PDF files of scanned documents. You should create your assignment in yourchosen package (for example, Word), then convert it straight to PDF before uploading. Please place your student IDnumber, NOT YOUR NAME, on the front of your submission as all submissions are marked anonymously.
All the scripts should also have the following paragraph included on the front page:
This is to certify that the work I am submitting is my own. All external references andsources are clearly acknowledged and identified within the contents. I am aware of theUniversity of Warwick regulation concerning plagiarism and collusion.
No substantial part(s) of the work submitted here has also been submitted by me in otherassessments for accredited courses of study, and I acknowledge that if this has been donean appropriate reduction in the mark I might otherwise have received will be made.
PLEASE ENSURE YOU KEEP A SECURITY COPY OF YOUR ASSESSMENT
Please ensure that any work submitted by you for assessment has been correctly referenced as WBS expects allstudents to demonstrate the highest standards of academic integrity at all times and treats all cases of poor academicpractice and suspected plagiarism very seriously. You can find information on these matters on my.wbs, in yourstudent handbook and on the University's library web pages here.
The University's Regulation 11 clarifies that '…'cheating' means an attempt to benefit oneself or another by deceit orfraud. This includes reproducing one's own work…' It is important to note that it is not permissible to re-use work whichhas already been submitted by you for credit either at WBS or at another institution (unless you have been explicitlytold that you can do so). This is considered self-plagiarism and could result in significant mark reductions.
Upon submission of assignments, students will be asked to agree to one of the following declarations:
Individual work submissions:
I declare that this work is entirely my own in accordance with the University's Regulation11 and the WBS guidelines on plagiarism and collusion. All external references andsources are clearly acknowledged and identified within the contents. No substantialpart(s) of the work submitted here has also been submitted by me in other assessmentsfor accredited courses of study, and I acknowledge that if this has been done it may resultin me being reported for self-plagiarism and an appropriate reduction in marks may bemade when marking this piece of work.
Group work submissions:
I declare that this work is being submitted on behalf of my group, in accordance with theUniversity's Regulation 11 and the WBS guidelines on plagiarism and collusion. All
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Assessment Investments and Risk Management
University's Regulation 11 and the WBS guidelines on plagiarism and collusion. Allexternal references and sources are clearly acknowledged and identified within thecontents. No substantial part(s) of the work submitted here has also been submitted inother assessments for accredited courses of study and if this has been done it may resultin us being reported for self-plagiarism and an appropriate reduction in marks may bemade when marking this piece of work.
By agreeing to these declarations (when the message pops up on submission) you are acknowledging that you haveunderstood the rules about plagiarism and self-plagiarism and have taken all possible steps to ensure that your workcomplies with the requirements of WBS and the University.
You should only indicate your agreement with the relevant statement, once you have satisfied yourself thatyou have fully understood its implications. If you are in any doubt, you must consult with the ModuleOrganiser or Named Internal Examiner of the relevant module, because, once you have indicated youragreement, it will not be possible to later claim that you were unaware of these requirements in the event thatyour work is subsequently found to be problematic in respect to suspected plagiarism or self-plagiarism.
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Assessment Investments and Risk Management
Teaching faculty
Prof. Dr. Söhnke M. Bartram - Module Coordinator - Professor of Finance
Söhnke is a Professor in the Department of Finance at Warwick Business School. Prior tojoining Warwick University, he held faculty positions at Lancaster University andMaastricht University. He is also a Charter Member of Risk Who's Who and a member ofan international think tank for policy advice to the German government. His immediateresearch activities centre around issues in international finance, corporate finance andfinancial markets, especially financial risk management. Söhnke's work has beenpresented at conferences organised by the NBER, CEPR, the American FinanceAssociation, and the Western Finance Association, and published in the Journal ofFinance, the Journal of Financial Economics, the Review of Financial Studies and the Journal of Financial and Quantitative Analysis, and included in testimony before the U.S.Congress House Financial Services Committee. Various organisations and funding bodieshave granted financial support for his research activities in the area of international andcorporate finance, such as the U.S. Federal Deposit Insurance Corporation, thePricewaterhouseCoopers Global Competency Centre, the Leverhulme Trust, the BritishAcademy, the Institute for Quantitative Investment Research, Netspar, and theInternational Centre for Research in Accounting. In 2003, the Federation of EuropeanSecurities Exchanges awarded the Josseph de la Vega Prize for his work on derivativesmarket microstructure. In 2006, the Journal of Empirical Finance awarded its 3rd BiannualBest Paper Award for his work on foreign exchange rate exposure. In 2010, FinancialManagement awarded its 2nd Biannual Pearson/Prentice Hall Best Paper Award for hiswork on the use of derivatives by non-financial firms, which also received the Citations ofExcellence Award by Emerald in 2013. Dr. Bartram has been awarded a higher doctorate,the degree of Doctor of Science (DSc), by the University of Warwick. He is currently on theEditorial Board of the Journal of Banking and Finance.
Several institutions in the USA invited Söhnke as a Visiting Scholar, including the OhioState University, the University of North Carolina, and the University of Texas at Austin. Hewas also a Fulbright Visiting Scholar at the University of California at Los Angeles, and aVisiting Researcher at the Kiel Institute for the World Economy, and a Visiting Fellow at theLondon School of Economics.
Söhnke has also worked for several years in quantitative investment research for StateStreet Global Advisors. As Head of the London Advanced Research Centre (ARC) andEuropean Equities Research he was responsible for the research pertaining to returnforecasting, portfolio construction and risk modelling for SSGA's active European equityinvestment products, such as long and long-short investment strategies in the UK andpan-European small and large cap universes.
Room: B2.30Phone: +44 (24) 7657 4168E-mail: [email protected]
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Teaching Faculty Investments and Risk Management
Readings
The core textbook provided for this module is:
Bodie, Z.; Kane, A. and Marcus, A.J. (2012)Essentials of Investments (9th edn)Maidenhead, Berks: McGraw-Hill Irwin
There is also a more comprehensive version of this textbook:
Bodie, Z.; Kane, A. and Marcus, A.J. (2011)Investments and Portfolio Management (9th edn)Maidenhead, Berks: McGraw-Hill Irwin
You are safe to use this version as it provides a superset of the material covered in Essentials of Investments.
The following is a very relevant book written by a practitioner on investments - slightly more technical in parts, but veryapplied:
Peterson, S. (2012)Investment Theory and Risk ManagementHoboken: Wiley
Pre-reading
Since there will not be much time for reading assignments during the module week, it would be desirable for allstudents to read the first 10 chapters of the BKM text before the start of classes on 18 May 2015. Chapters 7-9 aretheoretical and a bit technical. A less intense reading of this material (looking for the important concepts) would beacceptable.
Also, please read
Learning by the Case Method
Bumpy Market Reminds Investors to Assess their Risk Tolerance and take the risk tolerance assessment.
Finally, the individual assignment is a case using StockTrak. Therefore, it will be important for you to familiariseyourself with this online trading simulation and gain some experience before your trading results start to count. Allaccounts will be reset after the face-to-face sessions, so you can freely experiment and learn how the system worksbefore then.
The readings in this module are divided into pre-readings, essential readings and further readings.
Completing as much of the pre-reading and essential reading as possible before you attend will provide you with awider understanding of the topics to be discussed during the module and therefore enhance your contribution to theclass.
However, we understand that many of you will find it difficult to complete all of the reading due to other commitments,so have classified the readings as follows:
Pre-readings are included in the online materials; you should read these in advance of the session to whichthey relate. Unless specified, you should treat ALL case studies as required pre-reading.
Essential readings are also included in the online materials. In order to complete the module and theassignment successfully you should complete this reading when you have time, either during or after themodule.
Further readings are intended for those who may wish to widen and deepen their understanding of particularissues now or in the future. You will have to use your own library skills to obtain these.
Case studies
We are providing links to case studies which have been purchased from the Case Centre and are provided for your
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Readings Investments and Risk Management
personal use on this module, for which you are registered. You may download and print one copy of each for yourpersonal use.
The case studies will expire on 22 June 2015 and will not be available to you after this. We recommend that youdownload themimmediately. When you have taken your copy of a case study you may not make further copies, sharethem with or sell the materials to any other person or use them for any purpose not connected with your studies forthis MBA module. Failure to follow these terms and conditions of use may result in disciplinary action.
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Readings Investments and Risk Management
Monday readings
Monday 18 May 2015
Pre-reading: Bodie et al.: Chapters 1-10
Learning by the Case MethodRef.: 9-376-241
Jordan, B.; Miller, T. and Dolvin, S. (2011)'Bumpy Market Reminds Investors to Assess their Risk Tolerance'in Fundamentals of Investments (6th edn)Maidenhead: McGraw-HillThis reading is attached below, with kind permission of McGraw-Hill
Bodie, Z. and Merton, R.C. (2000)'The Time Value of Money and Discounted Cash Flow Analysis'in FinanceLondon: Prentice Hall
Essential reading: Harvard Management CompanyRef.: 9-201-129
Introduction to Portfolio TheoryRef.: 9-185-066
Geer, C.T. (2012)'How Much Risk Can you Manage'Wall Street Journal, 18 March
Thaler, R.H. (2011)'Deer in the Headlights, Financially Speaking'The New York Times, 19 October
Sullivan, P. (2011)'Hidden Dangers in Safe Havens'The New York Times, 20 August
Bernard, T.S. (2012)'When "For Richer or Poorer" is Put to the Test'The New York Times, 31 March
The Economist (2013)'The Economist valuables index: Fruits of Passion'August 17, pp. 62-63
The Economist (2013)'Leaders: The Rise of BlackRock'December 7
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Readings Investments and Risk Management
Tuesday reading
Tuesday 19 May 2015
Essential reading: Bodie et al.: Chapter 11
Dimensional Fund AdvisorsRef.: 9-203-026
Sullivan, P. (2012)'A Forecast for Low Returns and Advice for Investors'The New York Times, 17 March
Lieber, R. (2011)'Crises Reach Across Borders: Resisting the Urge to Run Away From Home'The New York Times, 6 August
Bernard, T.S. (2012)'Why Panic? A Couple's Nest Egg Better Left Alone'The New York Times, 22 March
Blumenthal, K. (2012)'Guide to Starting Fresh: Four Really Costly Myths about Credit Cards'Wall Street Journal, 18 March
Bernard, T.S. (2012)'Portfolio a little Off Kilter? Could be Time to Rebalance it'The New York Times, 24 March
The Economist (2013)'Home on the Range: Buttonwood'26 January
The Economist (2013)'Beware of the Bias: Buttonwood'9 February, p. 70
The Economist (2013)'Home Truths: Global House Prices'12 January, pp. 61-62
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Readings Investments and Risk Management
Wednesday readings
Wednesday 20 May 2015
Essential reading: Bodie et al.: Chapters 13 and 17
Numeric InvestorsRef.: 9-298-012
Sommer, J. (2009)'In this 10 Year Bond Race, Bonds Win by a Mile'The New York Times, 25 October
Sullivan, P. (2012)'Want an Active Investment Manager, Here's What to Look For'The New York Times, 31 March
The Economist (2013)'The Best, The Worst and the Ugly: Buttonwood'12 January, p. 62
The Economist (2013)'Commerce and Conscience: Social-impact Bonds'23 February, p. 71
The Economist (2013)'Methods for all Moments: Free Exchange'October 19, p. 81
The Economist (2013)'Sound the Retweet: Buttonwood'October 12
The Economist (2013)'Computer says No: "Quant" hedge funds'30 November
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Readings Investments and Risk Management
Thursday readings
Thursday 21 May 2015
Essential reading: Bodie et al.: Chapter 15
Walt Disney Company's Yen FinancingRef.: 9-287-058
Foreign Currency SwapsRef.: 9-292-043
Arends, B. (2012)'Emerging Markets - It's a Jungle Out There'Wall Street Journal, 18 March
Sommer, J. (2012)'Stocks and the Economy Singing Different'The New York Times, 22 April
The Economist (2013)'Going Cheep?: Twitter's IPO'November 2, 73
The Economist (2013)'Margin for Error: Buttonwood'November 2, 78
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Readings Investments and Risk Management
Friday readings
Friday 22 May 2015
Essential reading: Morgenson, G. (2012)'Anger at Goldman Still Simmers'The New York Times, 25 March
'Goldman Sachs' Response to March 25, 2012 New York Times Article "Anger at GoldmanStill Simmers"'ENP Newswire, 26 March 2012
Bodie, Z and Taqqu, R. (2012)'Why Stocks are Riskier Than You Think'Wall Street Journal, 12 March
The Economist (2013)'Derivatiff: Interest-rate Swaps in India'16 February, p. 74
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Readings Investments and Risk Management