Portfolio and Fund Management

This module examines the principles and practice of portfolio management, from the perspective of the individual investor, and the professional fund manager employed by an institutional investor, such as a mutual fund, pension fund, or hedge fund. Over a period of decades there has been rapid and far-reaching change in the investments industry. Deregulation and financial liberalisation, and developments in information and communications technology, have contributed to a massive expansion of financial markets and the development of new trading strategies. The downside of these developments was a financial crisis in the late 2000s of a magnitude not seen previously since the 1920s and 1930s. Several of the causes of this crisis can be traced directly to innovations in security design, trading strategies fuelled by leverage, a lack of transparency, and a widespread attitude of complacency towards risk among investors, financial intermediaries, and regulators.

The module uses and discusses several of the most important building blocks of financial economics theory, including the capital asset pricing model and the efficient markets hypothesis. A core principle running through the module is that investment decisions are taken in a context where higher returns can only be earned at a cost of accepting greater risk. To make good investment decisions, the individual or professional investor needs to consider their financial objectives or goals, their time horizons, and their willingness to tolerate risk. The trade-off between reward and risk is a recurring theme. We measure reward as the expected return on a security, and risk is measured using the variance or the standard deviation of returns.

Learning outcomes

When you have completed your study of this module, you will be able to:

• demonstrate knowledge of the types and functions of financial instruments, financial intermediaries and financial markets
• explain the use of Markowitz portfolio theory in constructing an investment portfolio that delivers an investor’s preferred combination of expected return and risk, and assess the limitations of portfolio theory as a practical tool for portfolio optimisation
• identify patterns of trading and asset prices that are inconsistent with the predictions of rational behaviour and the efficient markets hypothesis, and critically evaluate the explanation of these inconsistencies provided by behavioural finance
• explain the main tools of technical analysis and evaluate investment strategies derived from technical analysis
• discuss the distinction between passive and active investment styles, and critically evaluate the usefulness of the Treynor-Black and Black-Litterman models as practical tools for active investment
• assess the applicability of performance measures; attribute investment performance to components deriving from asset allocation, security selection and market timing; and explain the use of style analysis to identify a fund’s investment style.

Tuition and assessment

Students are individually assigned an academic tutor for the duration of the module, with whom you can discuss academic queries at regular intervals during the study session.

You are required to complete two Assignments for this module, which will be marked by your tutor. Assignments are each worth 15% of your total mark. You will be expected to submit your first assignment by the Tuesday of Week 6, and the second assignment at the end of the module, on the Tuesday after Week 10. Assignments are submitted and feedback given online. In addition, queries and problems can be answered through the Virtual Learning Environment.

You will also sit a three-hour examination on a specified date in September/October, worth 70% of your total mark. An up-to-date timetable of examinations is published on the website in July each year.

Study resources

• Study guide: The module study guide is carefully structured to provide the main teaching, defining and exploring the main concepts and issues, locating these within current debate and introducing and linking the assigned readings.
• Key texts: Bodie Z, A Kane and AJ Marcus (2018) Investments. 11th Edition. McGraw-Hill.
• Module readings: We also provide you with access to academic articles and other reports and material that are assigned as core readings in the Study Guide. You are expected to read them as an essential part of the module. We have selected articles and reports which reinforce your understanding of the material in the Study Guide and textbook, and which also demonstrate how the methods you are studying are applicable and relevant in the investment industry.

Study calendar 2022/23

Study calendars are subject to change.

Module overview

Unit 1 Financial Planning, Financial Instruments, Risk and Return

• 1.1 Introduction
• 1.2 Financial Objectives, Time Horizons and Risk Tolerance
• 1.3 Money Market Securities
• 1.4 Bonds
• 1.5 Equity
• 1.6 Derivatives
• 1.7 Property and Commodities
• 1.8 Rates of Interest and Rates of Return
• 1.9 Measuring Reward and Risk
• 1.1 Treasury Bills, Government Bonds and Equities: The Historical Record
• 1.11 Conclusion

Unit 2 Financial Intermediaries and Investment Companies

• 2.1 Introduction
• 2.2 Financial Intermediaries
• 2.3 Types of Investment Company
• 2.4 Specialised Investment Companies and Vehicles
• 2.5 Pension Funds
• 2.6 Conclusion

Unit 3 Stock Markets and Benchmarks

• 3.1 Introduction
• 3.2 Privately-Held and Publicly-Held Companies
• 3.3 Primary Securities Markets
• 3.4 Secondary Securities Markets
• 3.5 Special Types of Transaction on Secondary Markets
• 3.6 The World’s Major Stock Exchanges
• 3.7 Regulation of Financial Markets
• 3.8 Leading Stock Market Indexes
• 3.9 Conclusion

Unit 4 Optimal Portfolio Selection

• 4.1 Introduction
• 4.2 Risk Aversion, and a Risk Adjusted Performance Measure
• 4.3 Probability Distributions for Returns
• 4.4 Portfolio Theory I: Portfolios Containing One or Two Risky Securities
• 4.5 Portfolio Theory II: Optimal Portfolio Selection for Portfolios of Many Risky Securities
• 4.6 Conclusion

Unit 5 Behavioural Finance

• 5.1 Introduction
• 5.2 Formation of Beliefs
• 5.3 Investor Preferences
• 5.4 Limits to Arbitrage
• 5.5 Applications of Behavioural Finance I: Aggregate Stock Market Puzzles
• 5.6 Applications of Behavioural Finance Ii: The Cross-Section of Stock Returns
• 5.7 Critique of Behavioural Finance
• 5.8 Conclusion

Unit 6 Technical Analysis

• 6.1 Introduction
• 6.2 Historical Foundations of Technical Analysis
• 6.3 Tools of Technical Analysis
• 6.4 Technical Trading Rules and Systems Based on Charts and Moving Averages
• 6.5 Evaluation of Technical Analysis
• 6.6 Conclusion

Unit 7 Passive and Active Portfolio Management

• 7.1 Introduction
• 7.2 Strategic and Tactical Asset Allocation
• 7.3 Fundamental Analysis
• 7.4 The Treynor–Black Single Index Model: Introduction
• 7.5 The Treynor–Black Model as a Tool for Portfolio Optimisation
• 7.6 The Black–Litterman Model
• 7.7 Conclusion

Unit 8 The Evaluation of Portfolio Performance

• 8.1 Introduction
• 8.2 Performance Evaluation: The Sharpe, Jensen and Treynor Measures
• 8.3 Performance Evaluation: Other Performance Measures
• 8.4 The Contribution of Market-Timing Ability to Performance
• 8.5 Performance Attribution
• 8.6 Style Analysis
• 8.7 Performance Evaluation for Hedge Funds
• 8.8 Conclusion

Module samples

• M487 Module introduction (PDF)
• M487 Specimen examination (PDF)
• M487 Unit 1 (PDF)

Disclaimer

Important notice regarding changes to programmes and modules