DCU Home | Our Courses | Loop | Registry | Library | Search DCU

Module Specifications..

Current Academic Year 2023 - 2024

Please note that this information is subject to change.

Module Title Financial Economics I
Module Code MS427
School School of Mathematical Sciences
Module Co-ordinatorSemester 1: Kwok Chuen Wong
Semester 2: Kwok Chuen Wong
Autumn: Kwok Chuen Wong
Module TeachersKwok Chuen Wong
Mingchuan Zhao
NFQ level 8 Credit Rating 7.5
Pre-requisite None
Co-requisite None
Compatibles None
Incompatibles None
Repeat the module

MS427 provides students with a foundation in modelling financial markets in order to make investment decisions using both economic and equilibrium models. The basic concepts of derivative pricing are also introduced. The module will introduce students to constructing financial models in Excel. MS427 covers units 1-3 and syllabus objectives 4.1-4.3 and 6.1.1-6.1.3 of IFoA subject CM2. These topics will also be discussed from a real-world financial markets perspective Students will participate in the following learning activities: Lectures: Students will attend a series of lectures designed to cover the syllabus objectives of subject CM2 of the Institute of Actuaries (along with MS428). Tutorials: Tutorials will cover working through past exam papers and will also cover Excel skills

Learning Outcomes

1. Describe the theories underlying the efficiency of financial markets, how rational consumers make investment decisions and how human biases and errors influence investment decisions.
2. Select and calculate an appropriate risk measure in line with various definitions of risk. Discuss insurance companies’ roles in reducing or removing risk for consumers.
3. Describe and discuss the principal results of Mean-Variance Portfolio Theory and its role as a basis for the Capital Asset Pricing Model.
4. Describe and construct multi-factor models of asset returns and the influence of systematic and specific risk on investment returns and asset valuations.
5. Demonstrate knowledge of stochastic models of security prices, accumulated values and discounted values
6. Demonstrate knowledge of financial derivatives and derive general results for their price.

Workload Full-time hours per semester
Type Hours Description
Lecture36No Description
Tutorial12Presenting tutorial questions which have been solved by the group
Independent Study140No Description
Total Workload: 188

All module information is indicative and subject to change. For further information,students are advised to refer to the University's Marks and Standards and Programme Specific Regulations at: http://www.dcu.ie/registry/examinations/index.shtml

Indicative Content and Learning Activities

Efficient Market Hypothesis (EMH)
Strong, Semi-Strong and Weak forms of the EMH, evidence for and against each form and each form’s implications for managing investments.

Utility Theory
Expected Utility Theorem, underlying axioms and limitations. Using utility functions to: express and measure investors’ economic characteristics; analyse simple insurance problems; and compare investment opportunities. Absolute, first-order and second-order stochastic dominance, Prospect Theory

Investment Risk
Definition and calculation of: Variance of Return, Downside Semi-Variance of Return, Shortfall Probabilities, Value at Risk and Tail Value at Risk. Relationship between risk measures and investors’ utility functions. Influence of the distribution of returns and thickness of tails. Insurers’ role in reducing or removing risk, moral hazard and anti-selection.

Mean-Variance Portfolio Theory
Assumptions, necessary conditions to select the optimum portfolio, calculating expected return and variance of a portfolio given the expected returns and variances of the constituent securities, benefits of diversification and role of covariance.

Single and Multifactor Models of Asset Returns
Macroeconomic, fundamental factor and statistical factor models as types of multi-factor models. Single Index Model. Diversifiable and non-diversifiable risk. Constructing multi-factor models.

Capital Asset Pricing Model
assumptions, main results, limitations and uses. Estimating parameters for asset pricing models.

Stochastic Models of Interest Rates and Security Prices:
Stochastic models and their distinction from deterministic models. Mean value and variance of the accumulated value of a single and annual premium. The lognormal model, empirical evidence for and against the model and the distribution function of the accumulated value of a single premium and present value of an amount due.

Introduction to the Valuation of Derivative Securities
Arbitrage, factors affecting option prices, valuing forward contracts, developing upper and lower bounds for European and American call and put options, the put-call parity relationship.

Assessment Breakdown
Continuous Assessment25% Examination Weight75%
Course Work Breakdown
TypeDescription% of totalAssessment Date
Practical/skills evaluationCarrying out financial economics calculations in MS Excel and to producing an associated discussion25%Week 11
Reassessment Requirement Type
Resit arrangements are explained by the following categories;
1 = A resit is available for all components of the module
2 = No resit is available for 100% continuous assessment module
3 = No resit is available for the continuous assessment component
This module is category 1
Indicative Reading List

  • Edwin J. Elton, Martin J. Gruber, Stephen J. Brown, and William N. Goetzmann: 2007, Modern Portfolio Theory and Investment Analysis, 7th, John Wiley & Sons, New York,
  • M.S. Joshi, J.M. Paterson: 0, Introduction to Mathematical Portfolio Theory.,
Other Resources

Programme or List of Programmes
ACMBSc in Actuarial Mathematics
AFUAge Friendly University Programme
BSSAStudy Abroad (DCU Business School)
BSSAOStudy Abroad (DCU Business School)
FIMB.Sc. Financial Mathematics
HMSAStudy Abroad (Humanities & Soc Science)
HMSAOStudy Abroad (Humanities & Soc Science)
IESAStudy Abroad (Institute of Education)
IESAOStudy Abroad (Institute of Education)
SHSAStudy Abroad (Science & Health)
SHSAOStudy Abroad (Science & Health)
Date of Last Revision27-JAN-12

My DCU | Loop | Disclaimer | Privacy Statement