# 2022/2023  KAN-CFSMO1122U  Financial Markets & Instruments

 English Title Financial Markets & Instruments

# Course information

Language English
Course ECTS 7.5 ECTS
Type Mandatory
Level Full Degree Master
Duration One Semester
Start time of the course Autumn
Timetable Course schedule will be posted at calendar.cbs.dk
Study board
Course coordinator
• Claus Munk - Department of Finance (FI)
• Finance
Teaching methods
• Blended learning
Last updated on 24-06-2022

Learning objectives
The course aims at providing students with the institutional information, the models, and the computational methods relevant for a systematic approach to investment decisions. The overall goals are:

(1) Explain and discuss the concepts, theories, models, and methods for portfolio selection, risk measurement and management, and the pricing of stocks and bonds as discussed during the course.
(2) Apply the theories and models to realistic problems.
(3) Implement relevant models using Excel or similar computational tools.

More specific goals may include:
• Explain, apply, and relate various return concepts; make relevant return calculations involving different investment horizons, probability distributions, moments, Sharpe ratios, and tail risks. Estimate means, variances, covariances, and correlations of returns from historical data.
• Explain relevant calculations of portfolio returns and their moments using vectors and matrices, and implement such calculations in Excel - and explain the mechanism of risk diversification.
• Explain, apply, and implement relevant concepts, theories, models, and methods relevant for prices and risk measures of bonds such as: no-arbitrage relations among bonds; yields, yield curves, and forward rates; duration, convexity, and immunization.
• Explain, apply, and implement relevant concepts, theories, models, and methods relevant for prices and risk measures of stocks such as: dividend discount models; price-dividend ratios and price-earnings ratios; equity duration.
• Explain and implement (in Excel) Markowitz' mean-variance model of portfolio choice both without constraints (using closed-form expressions for the relevant portfolios) and with constraints (using the Solver in Excel). Discuss the validity of the model assumptions and practical issues in its implementation.
• Explain how portfolio rebalancing, time-varying investment opportunities, human capital, and housing considerations affect optimal investment decisions. Apply and implement Merton's basic model for long-term investments as well as the extension of the mean-variance model to human capital and housing.
• Explain and apply the CAPM, the APT, and leading multi-factor pricing models - including their implications for portfolio decisions. Estimate betas and other parameters using historical data. Describe stylized facts on historical returns on stocks and discuss how these stylized facts fit with the pricing models.
• Explain and discuss the role of capital markets and market efficiency as well as non-classical theories of investor behavior and their influence on asset prices.
• Explain how derivative securities can be used for hedging and speculation. Explain, apply, and implement basic models for the pricing of forwards, futures, swaps, and options.
• Carry out relevant mathematical derivations similar to those seen in the course.
Examination
 Financial Markets & Instruments: Exam ECTS 7,5 Examination form Written sit-in exam on CBS' computers Individual or group exam Individual exam Assignment type Written assignment Duration 4 hours Grading scale 7-point grading scale Examiner(s) One internal examiner Exam period Autumn Aids Open book: all written and electronic aids, including internet access Read more here about which exam aids the students are allowed to bring and will be given access to : Exam aids and IT application package Make-up exam/re-exam Same examination form as the ordinary exam If the number of registered candidates for the make-up examination/re-take examination warrants that it may most appropriately be held as an oral examination, the programme office will inform the students that the make-up examination/re-take examination will be held as an oral examination instead.
Course content, structure and pedagogical approach

The course develops a deep understanding of financial markets and how investors use the securities traded in financial markets. The course covers the following topics:

• Measuring risks and returns over different investment horizons
• Fixed income securities, bond pricing, the term structure of interest rates, and interest rate risk management
• Basic stock pricing models
• Portfolio theory and, in particular, mean-variance analysis
• CAPM, factor models and consequences for portfolio choice
• Introduction to utility functions and risk aversion
• Introduction to multi-period investment strategies and life-cycle investments
• Stylized empirical facts about returns on financial assets
• Pricing anomalies, market efficiency, and behavioural finance
• The use and valuation of derivative securities
• Excel is used throughout the course wherever relevant
Description of the teaching methods
Lectures, videos, exercises
Feedback during the teaching period
Online and in-class quizzes are offered throughout the course with the purpose of giving the students a quick indication of their understanding of each topic.

Students may be offered a voluntary assignment with feedback on each student's understanding.

Solutions to the exercises discussed in the exercise session are available to students giving them a chance to check their ability to solve relevant problems.

Students are encouraged to take active part in both lectures and exercises by contributing with questions and comments. The teachers will do their best to provide useful immediate feedback.

Students can meet the teacher for a one-to-one discussion during the weekly office hours.