Portfolio, Asset Selection, and Valuations module (BU31016)

​​Every investor faces the challenge of balancing risk and return. This module gives you the theoretical and technical tools to tackle that challenge. 

​You'll start with expected utility theory, exploring how investors make choices when returns are uncertain. From there, you'll study two-asset and many-asset portfolio allocation, examining how diversification reduces risk and how mean-variance analysis guides investment decisions. 

​The module then turns to the Capital Asset Pricing Model. You'll explore the CAPM's key results, including the Capital Market Line and the Security Market Line, and see how they apply to stock pricing and portfolio formation. You'll also work with performance metrics, including the Sharpe Ratio, Treynor Ratio, and Jensen's Alpha. 

​Finally, you'll be introduced to the Stochastic Discount Factor as a contemporary research tool, and consider empirical evidence that challenges some of the CAPM's predictions. 

​What you will learn 

​In this module, you will: 

• ​Understand expected utility theory and how investors make decisions with uncertain returns 
• ​Explore how diversification reduces risk in two-asset and many-asset portfolios 
• ​Study mean-variance analysis and efficient portfolio frontiers 
• ​Understand the CAPM, including the Capital Market Line and Security Market Line 
• ​Apply CAPM-based performance metrics, including the Sharpe Ratio, Treynor Ratio, and Jensen's Alpha 

​By the end of this module, you will be able to: 

• ​Explain expected utility theory, mean-variance analysis, and the implications of diversification 
• ​Describe the key assumptions and predictions of the CAPM and their relevance for asset pricing 
• ​Apply mean-variance and CAPM frameworks to assess portfolio risk-return trade-offs and stock pricing 
• ​Analyse CAPM-based performance metrics and critically evaluate the CAPM's empirical validity 
• ​Use quantitative reasoning to support investment decision-making and communicate complex financial concepts clearly​

Assignments / assessments

​​Coursework (40%) 

• ​A coursework/test to be submitted in Reading week 

​Written exam (60%) 

• ​Two-hour exam 
• ​Includes essay-based and technical questions covering all learning outcomes​

Teaching methods / timetable

• ​​Weekly lectures starting from Week 2 to Week 9, covering expected utility, asset allocation, and asset pricing models 
• ​Tutorials with problem-solving exercises and discussion 

​This module is a foundation for the Level 4 Asset Pricing module.​