Module Specifications..
Current Academic Year 2023 - 2024
Please note that this information is subject to change.
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Description 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 | |||||||||||||||||||||||||||||||||||||||||
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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. | |||||||||||||||||||||||||||||||||||||||||
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 |
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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 TheoryExpected 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 TheoryInvestment RiskDefinition 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 TheoryAssumptions, 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 ReturnsMacroeconomic, 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 Modelassumptions, 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 SecuritiesArbitrage, 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. | |||||||||||||||||||||||||||||||||||||||||
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Indicative Reading List
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Other Resources None | |||||||||||||||||||||||||||||||||||||||||
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| Date of Last Revision | 27-JAN-12 | ||||||||||||||||||||||||||||||||||||||||
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