Investment and Portfolio Management
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SYLLABUS
INVESTMENTS AND PORTFOLIO MANAGEMENT
PURPOSE
The purpose of this course is to introduce students to the areas of investments and
portfolio management, which are sub-disciplines in the filed of Corporate Finance. The
course investigates in detail the investment environment in which different types of
securities are traded, as well as the intricacies of the investment process itself. The
course strikes a balance between theory and practice, and is based on the assumption that
all firms are combinations of investments and/or portfolios which involve different levels
of risk and return. The study of investments and portfolio management has many
similarities to that of economics, which examines the ways in which individuals seek to
maximise their utility levels through the optimal use of scarce resources. It should be
noted that the use of mathematics in some parts of the course is meant to clarify the
issues being explained, not to confuse the students.
OBJECTIVES
After completing this course, students should be able to:
 understand the role of investment decisions and portfolio management in the context
of Corporate Finance
 understand the workings of the long-term capital markets and short-term money
markets
 carry out the valuation of risk-free and risky securities
 explain the term structure of interest rates
 understand the role of the efficient set in portfolio analysis and selection
 have a detailed knowledge of bond analysis and bond portfolio management
 carry out a meaningful analysis of company financial statements
 understand the relationship between capital budgeting and portfolio management
 understand the investment portfolio decisions of multinational companies.
PRESCRIBED MATERIAL
IAC Study pack
RECOMMENDED MATERIAL
(i)
Investments-6th International Edition (1999) Prentice Hall Inc
by W.F. Sharpe, G.J. Alexander & J.V. Bailey
(ii)
Financial Markets and Corporate Strategy by M.Grinblatt & S.Titman
(iii) Principles of Management Finance – 8th Edition (1997)
Addison – Wesley Longman Inc.By L.J. Gitman
Investment and Portfolio Management
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DETAILED SYLLABUS
Section One Overview of Investments and Portfolio Management (5%)
 Review of the duties of the financial manager i.e investing, financing and distribution
(dividend) decisions
 The investment environment
long-term and short-term securities
the stock exchange and the investment mechanism
 Asset allocation decisions
 Initial consideration of risk, return and diversification
 The role of institutional investors and market makers
Section Two The Investment Process (5%)
 Investment policy
 Security analysis
 Portfolio construction
 Portfolio revision
 Portfolio performance evaluation
 Active and passive investment strategies
Section Three
The Efficient Markets Hypothesis (5%)
 Competition as a source of efficiency
 Versions of the efficient markets hypothesis
 Extensions of the efficient markets hypothesis
 Tests of markets efficienty
Section Four Money and Capital Markets (10%)
 Types and characteristics of money market securities
Treasury bills
Bankers’ acceptances
Negotiable certificates of deposit
Commercial paper
Repurchase agreements
Unit trusts
 Types and characteristics of capital market securities
Ordinary shares
Preference shares
Bonds
 Methods of raising equity capital
Offers for sale
Private placing
Sale by tender
Right issue
Investment and Portfolio Management
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Initial public offerings
Organised securities markets
Section Five Portfolio Analysis (25%)
 The relationship between risk and return
 Diversification and portfolio risk
 Expected returns and probabilities
 Measurement and significance of beta
 Correlation and covariance
 The capital asset pricing model (CAPM)
 Characteristics of efficient portfolios
 Mean-variance analysis
 Combining risk-free securities with risky securities
Section Six Bond Analysis
(25%)
 Bond characteristics
 Treasury, local authority and private company bonds
 Bond risk management
 Bond pricing
 Bond yields
Yield to maturity
Yield to call
Yield to maturity and default risk
Holding period returns
 Bond duration and convexity
 Bond immunization
 The term structure of interest rates
Section Seven
Stock Market Analysis
 The determination of value in stock markets
 The role of earnings
 Dividend models and the information content of dividends
 Earnings growth models
 Financial analysts and management forecasts of future earnings
 The calculation of stock market indices
 Technical analysis
 Fundamental analysis
Section Eight
Capital Investment Appraisal
 Identification of long term projects
 Basic investment criteria
 Non-discounted cash flow methods of appraisal
 Discounted cash flow (DCF) methods of appraisal
Discounted payback
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Investment and Portfolio Management
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Net present value
Internal rate of return
Profitability index
Assessment of methods
Replacement of fixed assets
The effects of inflation and taxation on investment appraisal
Consideration of risk in investment appraisal
Section Nine Derivative Securities (10%)
 Derivative securities as contingent claims
 European and American options
 Put and call options
 Valuation of options
The Black-Scholes model
The Binomial model
 Equity as a call option on the firm’s assets
 Warrants and convertibles
Valuation of warrants and convertibles
Factors affecting warrant prices
Conversion ration for convertible securities
Section Ten Investment Management (10%)
 Measuring investment returns
 Risk adjusted measures of performance
Risk adjustments with changing portfolio composition
 Determining the composition of the optimal portfolio
 Market timing
 Performance attribution
 The active manager portfolio selection problem
Section Eleven
International Investment Portfolio Decisions
 Gains from international diversification
 International investment risks
Currency risk
Political risk
Taxes
Limited size and/or depth of foreign markets
 International bond markets
 Foreign direct investment
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(5%)