ØKB3101 Managing Financial Risk

Contents and structure

The course gives an account of the functioning of financial markets and how financial risk might be managed. Two main types of financial markets and their instruments are covered: (1) the equity capital market and (2) the interest rate market (obligations and certificates). The course begins by discussing what is meant by financial risk and how this can be reduced through portfolios. This is followed by a discussion of what determines the price of various market instruments (CAPM and APT). Key elements here are economic reasoning connected to efficient markets and the absence of arbitrage possibilities. For the interest rate markets, the main emphasis is on calculating different interest rates and managing interest-related risk. The course also covers efficient markets and behavior-based finance.

Learning Outcome

Knowledge

The Student:

• Will be able to give an account of the differences between real and financial assets.
• Will be able to give an account of different classes of financial assets and their characteristics, how these asset classes are traded and how the trading is organized in some of the most important market places.
• Will be able to give an account of different types of mutual funds and advantages/disadvantages with different management strategies.
• Will be able to give an account of risk aversion and how it can be accounted for using a utility score.
• Will be able to give an account of Portfolios, diversification, systematic risk, efficient/non-efficient portfolios, the portfolio frontier, and the capital allocation line.
• Will be able to give an account of how the degree of risk aversion will influence the choice of the optimal portfolio.
• Will be able to give an account of simple index models.
• Will be able to give an account of the Capital Asset Pricing Model (including the zero-beta version) and its implications.
• Will be able to give an account of Arbitrage Pricing Theory and factor models.
• Will be able to give an account of the efficient market hypothesis and its implications for a choice of investment strategy.
• Will be able to give an account of the main points of the behavioral critique and also the main principles behind technical analysis.
• Will be able to give an account of the main empirical findings for the models mentioned above.
• Will be able to give an account of the main characteristics of a bond, i.e., theoretical value, different return concepts, the handling of option elements, credit risk, etc.
• Will be able to give an account of the construction of the yield curve and different theories of the term structure.
• Will be able to give an account of the main principles for bond portfolio management, i.e., interest rate risk, reinvestment risk, duration, immunization, etc.

Skills

The student:

• Knows how to do simple scenario analysis for risky investments.
• Knows how to calculate expected return and standard deviation for risky portfolios.
• Knows how to solve exercises that illustrate the theories listed above.
• Knows how to do portfolio optimization in spreadsheets, with and without short sales.
• Knows how to do the calculations required for an immunization strategy for bond portfolios.
• Knows how to justify a proposed investment strategy.

General competence

The student:

• Has acquired a basic understanding of the important balancing of risk and return.
• Has acquired sound scepticism regarding promises of extraordinary high return.
• Has acquired enough knowledge to be able to formulate critical questions regarding different investment strategies.
• Has acquired enough knowledge to be able to do an ethical evaluation of the same strategies.

Entry requirements

None

Recommended previous knowledge

ØKB2104 Investments and Finance

Teaching methods

Lectures and solving exercises.

Compulsory learning activities

Hand-in assignments(specified in the semester plan at the beginning of the semester).

Assessment

Written exam, 5 hours, 100%

Grade Scale A-F

Examination support material

The University College's standard calculator (Texas TI 84) will be handed out

More about examination support material