Module Outline

The course carefully examines the basic building blocks of modern finance theory and focuses on the theoretical and analytical cornerstones on which the building blocks are placed. We study how these building blocks can, in certain cases, help us identify potentially optimal decisions now, even though the future consequences of those decisions are yet uncertain.

A common feature of finance is the need to make good use of and where possible best use of limited resources; constrained optimization techniques can often guide us in this need. Basic concepts in probability are used in finance to describe the inevitable uncertainty regarding the future. Most of us dislike risk and prefer to avoid risk, though only if the price for avoiding that risk is acceptable. We study how expected utility theory helps us measure how averse we are to taking such risks.

We then proceed to use these building blocks to examine several concepts: choice under uncertainty, maximizing returns and minimizing risk subject to constraints, mean-variance analysis and net present value.

Module Aim

The aim of this module is to familiarize you with the basic mathematical tools and the analytical skills necessary to understand modern finance theory.

Module Outcomes

On completion of the module you should be able to:

Apply basic mathematical techniques and tools used in modern finance.
Describe and evaluate measures of risk aversion using expected utility theory.
Understand the concept of ‘efficient frontier’ when investing in risky assets.
Evaluate choices using the net present value approach.

Teaching Delivery

Lectures

There will be one lecture per week, each of two hours duration, for ten weeks. The primary function of the lecture is to introduce a topic and the main ideas and issues relating to the topic. Lectures are not the venues for describing computational details (for that we use classes).You are expected to do the relevant reading before the lecture. It is strongly recommended, however, that this should not be the only time you stumble on to the relevant material.The likely lecture program is described below.

Classes

There will be one class per week associated with each lecture, each of one-hour duration, for ten weeks. The class will lag the corresponding lecture by one week. There are weekly class exercises, which will normally be released before the relevant class but after the associated lecture. You are advised to make an attempt at all the exercises. Class work will need to be handed in each week but are neither marked nor evaluated.

Examination: 55% and Coursework: 45%

Assessment

One examination and a compulsory coursework component are the means of assessment on the course. The coursework component carries 45% of the weight and the examination component carries 55% of the weight. The final examination is in the summer term and a resit examination is held later for those that fail the summer examination. The details of the coursework will be distributed during the term. The coursework is compulsory and is not optional. Coursework consists of two assignments and two tests (tests are without advance notice). The best three out of the total four pieces of work will count equally towards the coursework mark. The tests usually cover material taught up to the prior week’s class. The assignments will cover a wider array of contexts than finance and will require of you an ability to apply the material covered on the course. The various deadlines for the online and the hard copy submissions are as noted in the EBS Hand in Schedule for undergraduate courses, a copy of which you should get from the EBS administration office.

Please refer to Moodle for specific information regarding dates for submitting coursework online to FASer. A watermarked paper copy must also be handed in to the EBS office (Room 5N.5.6) by 3pm on the date of the online submission.

Additional Support

Dedicated support is available to help you maximise your learning and to help overseas students adapt quickly to UK academic requirements. Bev Jackson, the Learning Support Coordinator at EBS provides support for all students at the School. You can use this for feedback on assignments, a general discussion on practical study techniques or to talk through any difficulties that are hindering your success. You can contact Bev Jackson, Learning Support Coordinator on 01206 872314 or bjackson@essex.ac.uk

Syllabus for the Closed Book Examination

The lecture program together with the associated reading, the class exercises and coursework material form the bulk of the syllabus for the closed book written examination for this module. From time to time, additional material may be made available via Moodle, which is (if provided) part of the syllabus for the final examination.

General

You may also want to bear in mind that in assessing the module, the standard of the assignments and the answers to the examination questions will be expected to reflect the effort that comes from allocating eight hours a week to this module. The final examination, tests and assignments are set on the assumption that you will have spent sixty hours on your own for the module. You can either allocate the sixty hours of self-study spread out over several weeks of the term or all at the end of the year, a few weeks before the final examination. The choice is yours. No marks if you know the less risky choice!

If you have any difficulties with either a class assignment or any of the material covered in the lectures or classes or any of the assigned reading, you should see me. My office is in room 5NW.4.11 in the new building off square four. My office hours will be listed on my door.